On March 30, 2010, President Barack Obama signed into law the Health Care and Education Reconciliation Act of 2010 (H.R. 4872), amending the comprehensive health care reform legislation enacted on March 23, 2010 (i.e., the Patient Protection and Affordable Care Act).  Many of the specifics associated with the new legislation remain unclear. Further guidance will become available as clarifying regulations are made to address how the law is to be implemented. Until then, the impact certain aspects of the Acts will have on benefits plans and financial statements will have to be estimated and monitored as guidance is provided. 

The Acts are far reaching and too voluminous to fully summarize here, however highlights of certain provisions of the Act include:

PROVISIONS TARGETING HIGH INCOME INDIVIDUALS

Beginning in 2013, the Act imposes an additional 0.9 percentage Medicare Hospital Insurance tax (HI tax) on self-employed individuals and employees with respect to earnings and wages received during the year above specified thresholds.  This additional tax applies to earnings of self-employed individuals or wages of an employee received in excess of $200,000.  If an individual or employee files a joint return, then the tax applies to all earnings and wages in excess of $250,000 on that return.  The Act does not change the employer HI tax.  Self-employed individuals are not permitted to deduct any portion of the additional tax.

If a self-employed individual also has wage income, then the threshold above which the additional tax is imposed is reduced by the amount of wages taken into account in determining the taxpayer’s liability for the additional tax on wages.  For example, assume a taxpayer had self-employment income of $500,000 and also received wage income of $75,000.  In determining the additional self-employment tax, the threshold would be reduced from $200,000 to $125,000.

For wage earners, the Act requires the employer to withhold the employee’s tax from wages paid to the employee in excess of $200,000.  In determining its withholding obligation, the employer is not required to consider wages that may be received by the employee’s spouse that would be subject to this tax.  As a result, some married couples may have liability for the additional HI tax that is not satisfied by withholding.

OTHER INDIVIDUAL PROVISIONS

The Act generally requires that all individuals either obtain health insurance or pay a penalty on their federal tax return beginning in 2014.  The penalty is not an insurance premium, and paying it does not entitle the individual to any health insurance coverage.

To encourage individuals to obtain health insurance rather than pay the penalty, the Act includes a number of provisions intended to increase the availability and affordability of coverage. Most of these provisions are designed to help small employers and individuals who, unlike large employers, generally have little bargaining power in the market for health insurance and sometimes find insurance prohibitively expensive or completely unavailable due to prior or existing health problems.  To avoid the penalty, individuals will need to obtain and maintain “minimum essential coverage” for themselves and their dependents.  “Minimum essential coverage” includes coverage under any employer-provided plan, governmental programs (for example, Medicare and Medicaid), and any plan offered in the individual market.

FUTURE CONSIDERATIONS

The Act and the Reconciliation Agreement will end the national health care reform debate. Many observers believe that this legislation does not address the lingering challenge posed by the expansion of health care costs as the retirement of the baby-boom generation shifts more and more of these costs onto Medicare. Future Congresses will return to health care reform to address the cost of medical care, the benefits provided under various federal health care programs, and the taxes needed to support those government commitments.

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