health care excise tax

The Health Care Law Giveth and Taketh

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The recently upheld health care law giveth by providing a tax credit to those who purchase health insurance through a state exchange.  The health care law taketh by imposing an excise tax on uninsured individuals.  This article will explain both the tax subsidy and the excise tax.

The Tax Law Giveth–Premium Assistance Credit

Beginning January 1, 2014, a refundable tax credit is available for people who buy health insurance through a state exchange.  A person can enroll in a plan offered through an exchange and report his/her income to the exchange.  Eligibility for the premium assistance credit is based on the individuals income for the year ending two years prior to enrollment (e.g., if someone enrolls in coverage in 2014, the credit is based on the person’s income for 2012.)

The credit is available for individuals (single or joint filers) with household incomes between 100% and 400% of the federal poverty level who do not receive health coverage through an employer or through a spouse’s employer.

The amount of the credit is determined by the secretary of Health and Human Services, based on the excess of premiums over a threshold amount—2% of income for those at 100% of the poverty level to 9.5% of income for those at 400% of the poverty level.

Example:  John and Jane, who have one child, have income at 100% of the federal poverty level.  Their  income is $18,310.  They buy health insurance through a state exchange and pay $4,000 in premiums.  The credit is the amount by which their premiums ($4,000) exceeds 2% of their income, or $366.20 ($18,310 * .02).  Their credit is $3,633.80 ($4,000 minus $366.20).

Example 2: Same as above except John and Jane have income at 400% of the poverty level.  Their income is $73,240.  To claim the credit, their health insurance premium has to exceed 9.5% of their income, or $6.957.80 ($73,240 * .095).  Since their premiums of $4,000 are less than 9.5% of their income, they cannot claim a credit.

The poverty level is based on the number of people in the family, so if John or Jane have more or fewer children, the amount of the credit will change.

The Department of Treasury will pay the credit to the state exchange, and taxpayers will be liable for the balance of the insurance premium.  Alternatively, taxpayers may pay the full premium to the state exchange, and then claim the credit on their income tax returns.

The Tax Law Taketh—Excise Tax on Uninsured Individuals

Beginning January 1, 2014 the evil twin of the Premium Assistance Credit, the excise tax on uninsured people, begins.  The excise tax is phased in during 2014 and 2015.

When the excise tax is fully phased in during 2016, individuals who do not have minimum essential coverage will be subject to a penalty equal to the GREATER of :

  • 2.5% of the amount by which the taxpayer’s household income for the year exceeds the threshold amount of income required for filing a tax return
    • The “threshold amount of income required for filing a tax return” is based on filing status.  If your income is below these amounts, you generally do not need to file a tax return.  For 2009, examples of some of the thresholds were:
      • Single                                 $ 9,350
      • Married Filing Joint             $18,700
      • Married Filing Separate      $  3,650
  • $695 per uninsured adult in the household.

Example:  Joan is single and has $60,000 of income and does not have health insurance.  The filing threshold for a single person is $9,350.  Her excise tax equals the greater of:

  • 2.5% of her income over her filing threshold=.025 * ($60,000 minus $9.350) = $1,266.25 or
  • $695.

Joan must pay an excise tax of $1,266.25. 

The filing thresholds in the example are for 2009, they will be different in 2014 when the excise tax takes effect.

The excise tax is phased in during 2014 to 2015 as follows:

2014:  greater of 1% of income over filing threshold or $95

2015:  greater of 2% of income over filing threshold or $325

According to the statute, the IRS cannot enforce collection by lien or seizure, and noncompliance will not be subject to criminal penalty.  Regardless, if you don’t pay the excise tax, expect some nasty collection letters and expect the IRS to reduce any federal tax refunds by the unpaid excise tax.

If you have any questions on how this applies to your business, please feel free to give us a call.

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

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