August 2010

August 2010 - WHAT YOU NEED TO KNOW: The New Health Care Plan

Author: Lew Wessel | Photographer: Photography by Anne

Officially, it’s known as the “Patient Protection and Affordable Care Act (PPACA)” as amended by The Health Care and Education Reconciliation Act of 2010.

Or, as most of us call it, “ObamaCare.”

I used to object to the latter title, but we’ve all been calling the Economic Growth and Tax Relief Reconciliation Act of 2001, the “Bush tax cuts” for a decade, so what the heck?

Got an opinion on this PPACA thing? Of course you do. A strong opinion, I’ll bet. Read it? Know what it actually mandates? Uh… Okay, I haven’t read the entire thing either (hey, for that matter, show me a CFO who has read every page of his 10K); but I have spent over a dozen hours reading analyses of it and have sat through a couple of excellent webinars on the subject, and I think I’ve got somewhat of a handle on the facts. Here’s what you need to know.

Something Big Is Coming…But Not Yet
Whether for political reasons or because they actually got it right, the major changes to the health care system and most of the major new taxes to pay for it as prescribed in the PPACA don’t go into effect until 2013 and 2014. This delay will hopefully give us breathing room to adjust ourselves to the new rules and avoid the economic jolt like the one that accompanied the Tax Reform Act of 1986. Here is a chronology of the changes in the law:

First Signs of Change
The biggest thing happening in 2010 is a very generous tax credit to incentivize small businesses to pay for health insurance for their employees or to reward the small businessperson who has already done so. The credit—up to 35 percent of premiums paid—is available now through 2013 to companies that pay at least 50 percent of their employees’ health premiums. Eligible companies are those with up to 25 employees making an average of less than $50,000 per year. The credit goes up to 50 percent in 2014 and 2015 for small companies purchasing health care insurance through the “Exchanges” (see below).

Other important mandated changes to health care plans, most taking effect on September 23 of this year, are removal of annual and lifetime limits, restricting rescission rights(as in cancelling your health insurance because you get sick), and extension of dependent coverage up to age 27.

The most immediate change, schedule for July 1, 2010, is enactment of a 10 percent excise tax on tanning salon services. I have some very good friends who are upset about this one, but hopefully they won’t notice it until October. Seems to me anyone going to a tanning salon on Hilton Head Island during the summer deserves to be taxed.

Politics Prevail
Not a whole lot is going to happen due to the PPACA in 2011 and absolutely nothing in the 2012 election year—duh.

Fire Up The Engine
Here’s where the big stuff starts. Obama said he was going to pay for this thing, and so, in addition to direct fees on health insurance companies, manufacturers of prescription drugs and medical devices and the tan tax described above, there will be some new taxes on high-income individuals.

NEW 0.9 Percent Medicare Tax on Wages of High-Income Employees. Beginning in 2013, wages and self-employment income in excess of $250,000 for a couple and $20,0000 for an individual will be subject to an extra 0.9 percent tax. This means that a couple earning $350,000 in combined wages will pay an extra $900 per year. This additional tax is assessed only to the employee; unlike other FICA assessments, there is no employer match.

NEW 3.8 Percent Medicare Tax On Investment Income of High Earners. Also beginning in 2013, there will be a new 3.8 percent tax on net investment income of those earning over a threshold income amount of $250,000 per couple or $200,000 for an individual. This is historic, as it is the first time unearned income has been tapped to help fund Medicare. The tax will be on the LESSER of net investment income or modified adjusted gross income (MAGI) in excess of the threshold amount. As an example, if the Jones’ have total income of $300,000 and investment income of $20,000, they will pay an extra $760 in tax (3.8 percent times $20,000, because it is less than the $50,000 their income exceeds the threshold.) Investment income includes interest, dividends, annuities, rents and passive income, but does NOT include withdrawals from retirement accounts such as IRAs or “401Ks. It also does not include municipal bond interest or “active” income from Sub S corporations or partnerships.

Note that anyone earning under the threshold amounts of $200,000 for individuals and $250,000 for a couple is NOT subject to either new tax. Also in 2013, medical expenses are only deductible on Schedule A if they exceed 10 percent of AGI instead of the current 7.5 percent, although, just to further complicate things, this change is delayed till 2017 for anyone age 65 or older.

BLAST OFF!! “Socialism” or “Shared Responsibility”
Here’s the deal: Every state must establish health insurance “Exchanges” by 1/1/2014 that make qualified plans available to individuals and small businesses (under 100 employees). These exchanges will be Internet-based and “Navigator” sites, such as ones established now for Medicare Part D, will be available for assistance in choosing between plans. Qualified plans will be offered from Bronze to Platinum levels, but all will be required to include a basic range of comprehensive medical services, including emergency room services. Qualified plans cannot discriminate based on age, disability or life expectancy; i.e. the age of denial of benefits based on pre-existing conditions ends.

Starting in 2014, every U.S. citizen will be required to have “minimum essential health coverage” or pay a penalty. Coverage can be a government plan such as Medicare or Medicaid, a grandfathered group or individual health plan (a plan you were on as of 3/23/2010) or an eligible group or individual plan purchased through an Exchange. Some citizens are exempt, including those below the tax-filing income threshold (currently $9,350 for an individual) and Native Americans. In addition, short-term lapses in coverage will not be penalized.

Penalties to individuals for non-coverage begin at $95 per person per year in 2014 and grow to $695 per year in 2016. The IRS will administer the penalty but has virtually no tools to do so. It can’t file a tax lien or reduce your refund. Why such an anemic penalty system? Probably a result of poor politics, but perhaps the point is to just make someone think twice and at least check out the Exchanges before they decide to show up in the emergency room without insurance.

On the incentive side, a refundable Premium Assistance Credit (PAC) and cost-sharing reduction payments (help with co-pays, etc.) are available to individuals with household incomes ranging from 100 to 400 percent of the federal poverty level (FPL). Contrary to rumor, this assistance is only available to citizens or legal aliens. The assistance levels are on a sliding scale and are based on the percentage the insurance premium represents of an individual or a household’s total income. These assistance payments will be made directly from the Treasury to the insurance companies on behalf of individuals who have enrolled in a plan offered in the Exchange.

Companies with 50 or more employees may incur significant penalties if they do not offer their employees at least minimum coverage that is affordable. (Note: seasonal employees will NOT be included in the employee count). The penalty is assessed if two conditions apply: 1) Even just one employee has to buy insurance on an Exchange due to no coverage or “unaffordable” coverage available through the large employer and 2) that employee qualifies for a PAC or cost-sharing reduction.
Unlike the individual penalties described above, the penalties to a business are steep (up to $3,000 annually per employee) and will be a strong incentive to comply with the PPAPC.

In this day and age, it seems almost quaint to learn the facts about an issue when just making up stuff and getting loud is so much easier and more fun. The fact is, the health care bill does not mandate “death panels” nor does it kick you off of your current health care plan—these plans are specifically grandfathered in the bill. The fact also is that the PPACA is far from perfect and is, in many ways, downright weird.

Something had to be done. Our health care system was, and still is, wildly inefficient at best, just plain “broken” at worst. The PPACA is a first wobbly step to fix it, and it’s a messy hodgepodge of mandates, subsidies and revenue raisers. But, what more can we expect with a Congress made up of an intransigent Republican party determined to undermine any “win” by a Democratic president and a panicked Democratic party desperate to prove it can pass a bill…any bill. Until the shouting dies down, this is, unfortunately, the best we’ll be able to do. Might as well learn what’s in the thing and deal with it.

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