April 23, 2010
As the details of the Patient Protection and Affordable Care Act (PPACA) emerge, we will update you, through the HR Benefits Authority, on selected provisions that affect employers and employer-sponsored group health plans.
Specific Topics. In this issue, we take a closer look at PPACA provisions that are effective in 2013:
- Limit on Contributions to Health Flexible Spending Accounts, which caps the amount an individual may contribute to a health flexible spending account to $2,500 per year;
- Elimination of the Deduction for the Medicare Part D Drug Subsidy, which will have an immediate (i.e., 2010) financial reporting impact for employers who currently receive the subsidy;
- New Medicare Tax on the Highly Paid, which will add an additional tax of 0.9% on incomes above a specific threshold and 3.8% on unearned income above that threshold; and
- Notification of Coverage Options, which requires employers to notify employees of available coverage options under the health benefit exchanges at least 10 months before the exchanges become available.
Limit on Contributions to Health Flexible Spending Accounts (FSAs). Contributions to and benefits payable under a health FSA will be limited to $2,500 per employee for any taxable year. The cap will be indexed for inflation for years starting after December 31, 2013.
Since the $2,500 limit applies on a per employee basis, the cap for an employee with family coverage is the same as an employee with single coverage. However, a married couple may be eligible to contribute up to $5,000 if (i) the husband and wife are both employed, and (ii) each are eligible for a health FSA from their employer.
Elimination of Deduction for the Medicare Part D Drug Subsidy. The tax deduction for employers who receive Medicare Part D retiree drug subsidy payments will be eliminated for taxable years beginning in 2013. As noted in an earlier HR Benefits Authority, this has an immediate financial accounting impact for public companies receiving the subsidy. The background and effect are as follows:
- Current Tax Treatment. Under the Medicare Modernization Act of 2003 (MMA), employers providing prescription drug benefits to Medicare-eligible retirees, which are equal to, or better than, the minimum benefits under Part D, are eligible to receive a subsidy from the federal government. The purpose of the subsidy is to provide a financial incentive for employers to maintain their retiree prescription drug benefits. The subsidy is currently tax deductible.
- Widely Used. A recent national survey indicates that three-quarters of employers that provide health coverage to post-65 retirees continue to deliver prescription drug benefits through group health plans that are eligible for this subsidy.
- Elimination of Tax Deduction. PPACA eliminates the special tax treatment for the subsidy. While employers may continue to receive the Medicare Part D subsidy, effective for taxable years beginning after December 31, 2012, employers will no longer receive a tax deduction for the subsidy amount.
- Immediate Financial Accounting Impact. Although the actual change in tax treatment does not take effect until 2013, generally accepted accounting principles require accrual accounting for retiree health benefits. Therefore, the elimination of the tax deductibility of the subsidy must be immediately recognized on company’s financial statements.
Medicare Part A Tax. The hospital insurance tax rate on wages is increased from 1.45% to 2.35% on earnings over $200,000 for individual taxpayers and $250,000 for married couples filing jointly. The additional 0.9% tax is assessed on employee wages and is not matched by employers. The employer will be responsible for withholding and reporting the hospital insurance tax, but the employer is not required to obtain the spouse’s income to determine the amount of the tax.
There is also a new tax of 3.8% on unearned income (e.g., dividends, interest, and capital gains) that applies to earnings in excess of the above thresholds.
Notification of Coverage Options. Employers must notify current employees no later than March 1, 2013, and new employees hired after March 1, 2013, of the following:
- The existence of the health benefit exchange, the services provided by the exchange, and the manner in which they may contact the exchange;
- If the employer’s share of the total cost of health benefits is less than 60%, the employee may be eligible for a premium tax credit or cost sharing reduction;
- The employee will lose the employer’s contribution to any health benefits offered by the employer if the employee purchases coverage through the exchange; and
- The employer’s contributions are excluded from income for federal income tax purposes.
The Secretary of Labor has been directed to issue regulations on these notices. We will continue to follow the legislation and developing interpretations closely to provide you with updates as well as our analysis of what it means to you.
Contact Information. For additional information or for questions regarding these new changes, please contact Leslie Schneider (770.863.3617), Amy Heppner (404.888.8825), Kelly Meyers (404.888.8838), or Angela Roberts (404.888.8822).
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