The far-reaching Patient Protection and Affordable Care Act (the Act) is now law. Because the Act will affect almost all individuals and businesses in the country, a brief review of some of its major provisions might be useful.

Individuals’ Requirements

The Act requires most U. S. citizens and legal residents to maintain at least a minimum level of “essential health care coverage” or face penalties for failing to do so. Lower-income individuals will be entitled to receive tax credits and cost-shifting reductions to pay for the coverage. They can obtain coverage through their employer, or, if their employer does not offer health insurance, they can buy it through new market places or "exchanges." Failure to maintain health insurance will result in a penalty beginning in 2014 that will increase and be fully phased in by 2016. After full phase in, the penalty is $695 for each uninsured family member up to a maximum of $2,085 or, if less, 2.5 percent of adjusted household income. Exempt persons (that is, those not required to have insurance) include those with certain religious objections, American Indians, illegal immigrants, and people in prison.

Employers’ Requirements

The Act also contains numerous provisions adversely affecting employers, on whose shoulders

most of the cost will fall.

Essential Health Coverage. While the Act does not require, in those exact words, that employers provide minimum “essential health coverage” to employees, it effectively does just that by imposing penalties on those who do not so provide.

Employer Penalty. Larger employers (those with at least 50 full-time employees during the prior year) who fail to provide “adequate” coverage will be assessed a penalty of $2,000 per full-time employee per year if the employer does not offer minimum essential coverage to employees and if at least one employee receives a premium tax credit or cost-shifting reduction. The Act excludes the first 30 employees from the penalty. For those employers offering coverage that the government deems “unaffordable” or “inadequate,” a penalty will apply if at least one employee receives a premium tax credit or cost-shifting reduction. The penalty is the lesser of $3,000 for each employee receiving the credit or reduction or $2,000 multiplied by the total number of full-time employees. Employers with fewer than 50 full-time employees are exempt from this penalty assessment. The number of full-time employees is determined by aggregating all employees within an affiliated service or controlled group. Thus, employers with fewer than 50 employees will not be exempt if they are a part of an affiliated or controlled group that has more than 50 employees overall.

SHOP Exchanges. The Act creates state-based exchanges (known as Small Business Health Options Program (SHOP) Exchanges) through which small businesses (up to 100 full-time employees) can buy health care insurance coverage for employees.

Small Employer Tax Credit. The Act provides an income tax credit to small employers (generally those with no more than 25 full-time employees and paying average annual wages of no more than $50,000 per employee) that purchase health insurance coverage for employees. A transitional credit is available in 2010, and an enhanced version of the credit takes effect in 2014. To receive the credit, the employer must pay at least 50 percent of the total premium cost of coverage, and only that amount paid by the employer is counted in calculating the credit. All premiums paid (including those prior to the enactment of the new law) in 2010 are counted in calculating the credit.

Premiums paid and counted in calculating the credit cannot exceed the average premium for the small group market in the employer's state. The maximum credit cannot exceed 35 percent of the employer's premium expense that counts towards the credit. The amount of the credit is limited to the amount of the Medicare tax, both employee and employer portions, and the required income tax withholding. The credit is also reduced if the average number of full-time equivalent employees exceeds 10 or if the average annual wages exceed $25,000 per employee and is fully phased out when the average number of employees exceeds 25. The tax deduction for the health insurance premiums paid by the employer is reduced by the credit allowed.

Free Choice Vouchers. Employers that offer coverage to their employees will be required to provide a “Free Choice Voucher” to certain employees. The voucher is generally equal to an amount the employer would have paid to cover the employee under the employer’s plan.

Grandfathered Coverage. The Act allows personal or employer-provided health benefit coverage existing at the time of enactment to stay in place under a grandfather provision. The Act generally considers the grandfathered coverage to meet the law’s individual coverage mandate, if certain requirements are met.

Medicare Tax Increases

The Act imposes additional Medicare tax on higher-income taxpayers.

Additional Medicare Tax on Earnings. Single taxpayers who earn more than $200,000 a year, married taxpayers filing jointly who earn more than $250,000 (married filing separately - $125,000) will have to pay an additional Medicare tax equal to 0.9 percent of their wages over the threshold amounts described above. Self-employed individuals will be liable for an additional tax of 0.9 percent on self-employment income over certain thresholds. The additional self-employment tax is not deductible in computing income tax.

Surtax on Investment Income. A surtax (for tax years beginning after December 31, 2012) of 3.8 percent will be imposed on the investment income (dividends, interest, rents, royalties, annuities, and capital gains) of higher-income individuals, estates, and trusts. For individuals, the tax is equal to 3.8 percent of the lesser of

net investment income for the year or
the amount by which modified adjusted gross income exceeds the annual earnings threshold amounts described above

The threshold amounts are not inflation-adjusted. The 3.8 percent surtax does not apply to qualified retirement plan and individual retirement account distributions.

Decreased Medical Expense Deduction .

For taxable years beginning after 2012, the threshold of non-deductible medical expense increases from 7.5 percent to 10 percent of adjusted gross income.

For More Information

The new law contains many more provisions that probably affect you and your business adversely. The “good” news is that, while some provisions of the Act take effect in 2010, the most burdensome of the provisions (for example, the 3.8 percent surtax on investment income) go into effect only after the 2012 elections. We will be happy to consult with you on what the new law means to you — today and tomorrow. Please let us know if we can be of assistance.