Tax changes triggered by federal health reform

How the 2010 federal health reform laws changed the taxation of health benefits, health insurance and related benefit plans

Health care reform legislation passed in 2010 added new taxes and changed other aspect of tax law. This article summarizes the federal tax-related items from the health care reform legislation. Note that not all of the tax changes relate directly to health insurance or health benefits but were still included as part of the 2010 health reform laws. This article does not address state tax changes that followed as a result of the federal law.

Tax changes effective in 2010

Sec. 40 – Change to cellulosic biofuel producer credit

Excludes fuels that are more than 4% (determined by weight) water and sediment in any combination or have an ash content of more than 1% from the definition of cellulosic biofuel.

Sec. 45R – Small business tax credit

Small businesses with 25 or fewer employees and average annual wages of $50,000 or less would be eligible for a credit of up to 50% of nonelective contributions the business makes on behalf of their employees for health insurance.

Sec. 105(b) – Excluding from income amounts received under a health insurance plan

The definition of “dependent” now includes any child of the taxpayer who has not yet reached age 27.

Sec. 162(l)(1) Self-employed health insurance deduction

The definition of “dependent” now includes any child of the taxpayer who has not yet reached age 27.

Sec. 401(h) Benefits for retirees

The definition of “dependent” now includes any child of the taxpayer who has not yet reached age 27.

Sec. 501(c)(9) Benefits provided to members of a VEBA

The definition of “dependent” now includes any child of the taxpayer who has not yet reached age 27.

Secs. 501(r) – Charitable hospitals

New requirements for hospitals operating under Sec. 501(c)(3)

, also affects Section 6033(b)(15).

Sec. 5000B – Tax on indoor tanning services

A new 10% tax on amounts paid for indoor tanning services.

Sec. 6103 – Return information disclosure

Allows the IRS to disclose certain taxpayer return information if the taxpayer’s income is relevant in determining the amount of the tax credit or cost-sharing reduction, or eligibility for participation in the specified state health subsidy programs.

Sec. 7701(o) – Codification of the economic-substance doctrine

Creates the economic-substance doctrine under the law and makes underpayments due to transactions that do not have economic substance subject to the Sec. 6662 accuracy-related penalty.

Adoption credit and credit for adoption-assistance programs

Maximum adoption credit was increased and, for adoption-assistance programs, the maximum exclusion was increased. Expired at end of 2012.

Tax changes effective in 2011

Sec. 125 – SIMPLE cafeteria plans for small business

An eligible small employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan.

Sec. 223 – Tax on health savings account (HSA) distributions

The tax on distributions from an HSA or an Archer medical savings account (MSA) that are not used for qualified medical expenses is increased to 20% of the disbursed amount.

Sec. 223 – Restrictions on use of HSA and FSA Funds

Amounts paid for over-the-counter medications will no longer be reimbursable from HSAs, Archer MSAs, health FSAs, or health reimbursement arrangements.

Annual fee on pharmaceutical manufacturers and importers

Fee on each covered entity engaged in the business of manufacturing or importing branded prescription drugs for sale to any specified government program or pursuant to coverage under any such program.

Tax changes effective in 2012

Sec. 501(c)(3) – Community health needs assessment

New requirements applicable to hospitals, regarding conducting a community health needs assessment, adopting a written financial-assistance policy, limitations on charges, and collection activities. Also affects Section 6033(b)(15).

Sec. 4375 – Fees on health plans

A fee is imposed on each specified health insurance policy.

Sec. 6051(a)(14) – Information reporting

Employers must disclose¬†the value of the employee’s health insurance coverage sponsored by the employer on each employee’s annual Form W-2. The effective date was later delayed until 2013 for most employers.

Tax changes effective in 2013

Sec. 139A – Deductions for federal subsidies for retiree prescription plans

Eliminates the rule that the exclusion for subsidy payments is not taken into account for purposes of determining whether a deduction is allowable for retiree prescription drug expenses.

Sec. 125(i) – Health flexible spending arrangements (FSAs)

The maximum amount available for reimbursement of incurred medical expenses under a health FSA for a plan year can not exceed $2,500.

Sec. 213 – Medical care itemized deduction threshold

Threshold for the itemized deduction for unreimbursed medical expenses is increased from 7.5% of adjusted gross income (AGI) to 10% of AGI for regular income tax purposes. This change is delayed until 2017 for certain taxpayers.

Sec. 1411 – Medicare tax on investment income

Imposes a tax on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified AGI exceeds a threshold amount.

Sec. 3101 – Additional hospital insurance tax on high-income taxpayers

Employee portion of the Medicare hospital insurance tax part of FICA is increased by 0.9% on wages that exceed a threshold amount.

Sec. 4191 – Excise tax on medical device manufacturers

A tax equal to 2.3% of the sale price is imposed on the sale of any taxable medical device by the manufacturer, producer, or importer of the device.

Tax changes effective in 2014

Time for payment of corporate estimated taxes for 2014

Corporations with assets of at least $1 billion,had estimated tax payments due in July

, August, or September 2014 increased.

Expanded 1099 reporting

This change was repealed by the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, P.L. 112-9.

Sec. 36B – Premium-assistance credit

Refundable tax credits that eligible taxpayers can use to help cover the cost of health insurance premiums for individuals and families who purchase health insurance through a state health benefit exchange.

Sec. 125 – Cafeteria plans

A qualified health plan offered through a health insurance exchange is a qualified benefit under a cafeteria plan of a qualified employer.

Sec. 4980H – Employer responsibility for insurance

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 with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee.

Sec. 6055 – Reporting requirements

Requires insurers and employers who self-insure that provide minimum essential coverage to employees to report certain health insurance coverage information to both the covered individual and to the IRS.

Tax changes effective in 2018

Sec. 4980I – Excise tax on high-cost employer plans

The “Cadillac tax” is an excise tax on coverage providers if the aggregate value of employer-sponsored health insurance coverage for an employee (including, for purposes of the provision, any former employee, surviving spouse, and any other primary insured individual) exceeds a threshold amount.

Other resources:

Taxation of amounts received through health plans (2012)


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