There is a tremendous amount of information about the Patient Protection and Affordable Care Act (ACA) and it is difficult to understand what the tax implications are.  Essentially under the ACA, health insurance is now tied to taxes.  There are two important tax implications of the ACA to individuals: 1) there is a tax credit to help pay for insurance premiums if one qualifies and 2) there are tax penalties if one does not have health insurance. For employers, the same basic principal applies and the tax implications vary depending upon whether the employer is small or large.


Beginning in 2014, ACA provides a Premium Tax Credit, which is a refundable credit to help offset the cost of health insurance premiums for qualifying taxpayers.  A qualified taxpayer can take an advance payment of the advanced credit based upon his/her estimated income and family size for the year.  An equal portion of the estimated credit is paid directly to the insurance company each month during the tax year.

When filing his/her tax return, the taxpayer must compare the prepaid credit against the actual credit allowed.  If there is a difference in the prepayments and the actual credit, the taxpayer could be owed more Premium Tax Credit or alternatively, the taxpayer could be required to repay the IRS the amount of any excess prepaid credit.  A qualified individual could also choose to pay premiums out-of-pocket each month and collect the full credit when he/she files taxes.

The amount of credit available for prepayment is calculated by the Health Insurance Marketplaces, known as the Exchanges.  During enrollment through the Marketplace, using information that the taxpayer provides about his/her projected income and family composition for 2014, the Marketplace will estimate the amount of the Premium Tax Credit he/she will be able to claim for the 2014 tax year that he/she will file in 2015.  It is important to report changes and income to the Marketplace through the year.  Reporting changes will help assure a taxpayer that they will have the accurate amount of credit.  Changes in family size can include the birth or adoption of a child, a child moving out of the household, parents moving into the household, marriage or divorce.

The Premium Tax Credit is not allowed if the taxpayer files using the Married Filing Separately status, if they are eligible for coverage under their state’s Medicaid program (which is free), or if they are enrolled in an insurance plan through their employer.

If a taxpayer does not have insurance after February 15, 2014, he/she may be assessed a tax penalty under the Shared Responsibility Provision, which allows a penalty assessment on certain taxpayers and qualified employers who do not offer insurance.  In 2014, the penalty is either $95 for adults and $47.50 for children or one percent of taxable income, whichever is greater.  The penalty will increase annually and by 2016, it will be the greater of $695 or 2.5 percent of the total household’s taxable income, whichever is greater. The penalty will show up as tax owed when the taxpayer files his/her income tax return.

For tax year 2013, contributions to flexible spending accounts are limited to $2,500, which previously had no cap.  However, employers can offer employees a choice between rolling over up to $500 to use in the next year or a 2.5 month grace period to spend it.  In 2014 and after, the contribution cap will increase with inflation.

For those who itemize deductions for out-of-pocket medical expenses, the expenses must total 10 percent of their adjusted gross income, which is up from 7.5 percent in prior years.  There is an exception until 2016 for taxpayers age 65 and older or if one spouse reaches age 65 for married couples filing jointly.

Furthermore, there is an additional 0.9 percent Medicare tax for married couples filing jointly earning above $250,000, $200,000 for single filers, and $125,000 for married couples filing separately. This applies to wages, compensation and self-employment income.

For high income taxpayers, there is an additional 3.8 percent net investment income tax, which includes interest, dividends, and rental income.  Tax is owed if the taxpayer has net investment income and modified adjusted gross income over $250,000 (married filing jointly); $125,000 (married filing separately); $200,000 (single); $200,000 (head of household with a qualifying person); and $250,000 (qualifying widow or widower with a dependent child).  It applies only to net profits that exceed $500,000 for married couples filing jointly and $250,000 for single filers.

Small Employers

Small employers are defined as fewer than 50 full-time employees or equivalents.  Fewer than 25 full-time equivalent employees may be eligible for a Small Business Health Care Tax Credit to help cover the cost of providing coverage.  Generally, employers with 50 or fewer employees may be eligible to buy coverage through the Small Business Health Options Program (SHOP).  Small businesses may be eligible for tax credits up to 50 percent of their cost of employee premiums through the SHOP.

Large Employers

For large employers, who are generally defined as those with 50 or more full-time time equivalent employees, effective for calendar year 2015, they may be subject to a non-deductible excise tax under Internal Revenue Code §4980H.  Full-time employee is defined as an employee who is employed on average 30 hours of service per week, per month.

Although the ACA does not require an employer to offer coverage to its employees, a large employer can be subject to the excise tax if at least one full-time employee receives a premium tax credit for Exchange coverage, and the employer:

•    Fails to offer coverage to full-time employees and their dependents (tax equals $2,000 times the total number of full-time employees)


•    Offers coverage to full-time employees that does not meet the law’s affordability or minimum value standards (tax equals $3,000 times the number of full-time employees receiving tax credits for Exchange coverage) To be considered affordable, an employee’s share of the self-only premium for the employer’s lowest-cost plan that provides minimum value cannot exceed 9.5 percent of household income, or the employee may be eligible for a premium tax credit to purchase health insurance exchange coverage. The Treasury Department has proposed a safe harbor based on the employee’s current W-2 wage.
Employers also will face a host of new reporting requirements to the IRS under the ACA in order to demonstrate the value of coverage offered to employees, communicate to employees’ their coverage options, and certify compliance with the employer coverage provisions. Large employers will need to file an annual return reporting whether and what health insurance they offered employees. In addition, they are subject to the Employer Shared Responsibility provisions.  Many employers are undertaking compliance reviews to have their health plan offerings audited and certified to mitigate the potential risk for tax penalties.

 By Pamela Tahim of Tredway, Lumsdaine & Doyle