Health care reform adds new taxes.

• Author: Beavers, James A.

The Patient Protection and Affordable Care Act (the Patient Protection Act) and the Health Care and Education Reconciliation Act of 2010 (the Reconciliation Act) add a number of new taxes and make various other revenue-increasing changes to the Code in order to help finance health care reform. Among the other provisions, the acts codify the economic substance doctrine, fix an unintended consequence of the cellulosic biofuel producer credit, modify the itemized deduction for medical expenses, repeal the deduction for federal subsidies for certain retiree prescription drug plans, and modify the time for payment of corporate excise taxes in 2014.

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In addition to imposing new taxes, the acts make several health care--related changes to the Code that benefit certain taxpayers, including a credit to offset part of the costs of health insurance for low-to middle-income individuals and families and a credit to offset part of the costs to small businesses of providing health insurance for their employees.

Tax on Individuals Without Essential Coverage

Beginning in January 2014, the Patient Protection Act requires nonexempt U.S. citizens and legal residents to maintain minimum essential coverage. This includes government-sponsored programs, eligible employer-sponsored plans, plans in the individual market, grandfathered group health plans, and other coverage as recognized by the secretary of Health and Human Services (HHS) in coordination with Treasury.

Individuals who fail to maintain minimum essential coverage in 2016 are subject to a penalty equal to the greater of:

* 2.5% of household income in excess of the taxpayer's household income for the tax year over the threshold amount of income required for income tax return filing for that taxpayer under Sec. 6012(a)(1); or

* $695 per uninsured adult in the household.

The fee for an uninsured individual under age 18 is one-half the fee for an adult. The total household penalty may not exceed 300% of the per-adult penalty. The total annual household payment may not exceed the national average annual premium for a "bronze level" health plan offered through the taxpayer's state exchange that year for the taxpayer's household size. (Bronze is the lowest level of coverage qualified health plans are required to offer in the insurance exchanges that states must establish under the act.) Individuals are subject to a reduced annual penalty amount in 2014 and 2015. Taxpayers with income below the income tax filing threshold and all members of Indian tribes are exempt from the penalty.

The penalty is assessed through the Code and is accounted for as an additional amount of federal tax owed. However, the use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty, and noncompliance is not subject to criminal penalties.

Penalty on Employers Not Providing Employee Coverage

Under the Patient Protection Act, an applicable large employer that does not offer coverage for all its full-time employees, offers minimum essential coverage that is unaffordable, or offers minimum essential coverage that consists of a plan under which the plan's share of the total allowed cost of benefits is less than 60% is required to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange for which a tax credit or cost-sharing reduction is allowed or paid to the employee.

Applicable large employer: An employer is an applicable large employer for any calendar year if it (or its predecessor employer) employed an average of at least 50 full-time employees during the preceding calendar year. In counting the number of employees for purposes of determining whether an employer is an applicable large employer, a full-time employee (meaning, for any month, an employee working an average of at least 30 hours or more each week) is counted as one employee and all other employees are counted on a prorated basis in accordance with regulations that will be issued. The aggregation rules of Code Secs. 414(b), (c), (m), and (o) apply in determining whether an employer is an applicable large employer. The determination of whether an employer that was not in existence during the preceding calendar year is an applicable large employer is made based on the average number of employees that it is reasonably expected to employ on business days in the current calendar year.

Penalty for employer without coverage: An applicable large employer that fails to offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan for any month is subject to a penalty if at least one of its full-time employees is certified to the employer as having enrolled in health insurance coverage purchased through a state exchange for which a premium tax credit or cost-sharing reduction is allowed or paid to such employee or employees. The penalty equals the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by one-twelfth of $2,000.

Penalty for employer with coverage: An applicable large employer that offers, for any month, its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan is subject to a penalty if any full-time employee is certified to the employer as having enrolled in health insurance coverage purchased through a state exchange for which a premium tax credit or cost-sharing...