October 10, 2013

The Affordable Care Act, along with the Healthcare and Education Reconciliation Act, represents the most significant regulatory overhaul of the U.S. healthcare system since the passage of Medicare and Medicaid in 1965.

Stethoscope on dollar sign

Aimed at lowering the number of Americans who are uninsured and reducing the overall cost of health care, the legislation, often called Obamacare, provides a combination of mandates, subsidies, taxes and credits to both employers and individuals to increase the insurance coverage rate.

Although nonprofits are subject to the same provisions of the act as for-profits, there are a few exceptions. A few significant tax provisions will take place in 2013 and 2014.

Many people are aware of the Medicare payroll tax and the surtax on net investment income, but there are additional provisions that may affect nonprofits. These provisions are meant to alleviate the Medicare system’s financial difficulties as well as offset the cost of healthcare legislation.


Effective Jan. 1, 2013


Medical loss ratio rebate

Insurance companies are required to calculate the portion of premiums directly attributable to the cost of care: the medical loss ratio. If the ratio of medical care to premium payments falls below 80 percent, the insurer must rebate the difference either in cash, as a premium reduction for the following year, or both.

Employers (including nonprofits) who receive a cash rebate for group health insurance premiums must further determine whether the rebate becomes plan assets or employee distributions. ERISA rules will guide the decision.

Medical device tax

This excise tax of 2.3 percent is levied on medical device manufacturers or importers on the sale of any taxable medical device. It doesn’t apply to over-the-counter medical devices, such as eyeglasses, contact lenses, hearing aids and, in general, other personal medical devices bought at retail.

The tax applies mostly to medical devices used for personal use by medical professionals. The manufacturer or importer of the device is responsible for paying the tax using Form 720, Quarterly Federal Excise Tax Return, which is due at the end of the month following the last month of the calendar quarter. Semimonthly tax deposits may be due if the tax exceeds $2,500 for the quarter. This tax also applies to nonprofits.

Medicare payroll tax increase and surtax

The Medicare Part A (hospital insurance) tax rate on wages will be increased by 0.9 percent (from 1.45 percent to 2.35 percent) on earnings over $200,000 for individual taxpayers and $250,000 for married couples filing jointly. The increased tax will be withheld by employers, similar to the existing Medicare tax. This tax applies to employees of nonprofits as well.

In addition, a 3.8 percent surtax will be imposed on net investment income if the taxpayer’s modified adjusted gross income exceeds $200,000 for individual taxpayers and $250,000 for married couples filing jointly. Net investment income includes interest, dividends, annuities, royalties, rents and capital gain income.

Capital gain includes the gain from the sale of a principal residence but only for that portion of the gain above the existing exclusion. Capital gains associated with an asset used in a business are not included in the definition of investment income.

Net investment income also includes trade or business income from a “passive activity.” Some rental activities engaged in by a real estate professional may not be considered passive activities.

The 3.8 percent surtax also applies to trusts and estates on income in excess of approximately $12,000.

Limit on flexible spending contribution

A new cap of $2,500 will apply to contributions by employees to a flexible spending account. The annual $2,500 cap will be indexed for cost-of-living adjustments for plan years beginning after Dec. 31, 2013.

Under previous law, no limit applied to an employee’s contribution amount unless the employer imposed one. This limit applies to employees of nonprofits as well.

Loss of employer retiree drug subsidy deduction

The federal tax deduction for employers who receive the Medicare Part D retiree drug subsidy coverage is eliminated. The retiree drug subsidy was established by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 to encourage employers to continue offering prescription drug benefits to their retirees.

Employers who received the subsidy were allowed to deduct the entire cost of the benefits. The healthcare act retains the drug subsidy but eliminates the employer’s ability to deduct the amount of the subsidy.

Medical itemized deduction threshold increased

The adjusted gross income threshold for claiming medical expenses increases from 7.5 percent to 10 percent for taxpayers 64 and under. Taxpayers 65 and older can continue to use the 7.5 percent threshold through 2016.


Effective Jan. 1, 2014


Penalty for not having medical insurance

Health insurance exchanges must be available by Jan. 1, 2014. Nonprofits with at least one employee and $500,000 or more in annual dollar volume of business were required by federal law to provide notification to their employees of coverage options available through the exchanges no later than Oct. 1, 2013. Annual dollar volumne does not include tax-deductible charitable contributions.

For individuals who do not have health insurance coverage, a penalty will be assessed at the greater of $95 a year or up to 1 percent of income. The penalty increases to the greater of $325 or 2 percent of income by 2015, and the greater of $695 or 2.5 percent of income by 2016.

For families, the penalty will be capped at 300 percent of the annual flat dollar amount.

The requirement can be waived for several reasons, including financial hardship or religious beliefs. If the insurance would exceed 8 percent of your income (in 2014), you are exempt. Some religious groups are also exempt.

The penalty cannot exceed the cost of a “bronze plan” bought on the exchange.

While some states, including Alabama, Wyoming and Montana, have passed laws to block the requirement to carry health insurance, those provisions do not override federal law.

Enhanced small business health insurance credit

For nonprofits with fewer than 25 employees that pay an average wage to their employees of less than $50,000 per year and pay for more than 50 percent of the employees’ health insurance premiums, a credit is currently allowed equal to 25 percent of the cost of the health insurance (currently down to 16.3 percent under sequestration).

Starting in 2014, the credit jumps to 35 percent for nonprofit employers who participate in a health exchange.

Contraceptive coverage delayed for religiously affiliated nonprofits

Certain religiously affiliated hospitals and universities may be able to delay providing contraceptive coverage at no cost to the participant until the plan year beginning on or after Jan. 1, 2014.

W-2 reporting for nonprofit employers with more than 250 W-2’s

Nonprofit employers who issued more than 250 W-2s in 2012, will be required to report on the 2013 W-2 the value of each employee’s health insurance coverage.


Effective Jan. 1, 2015


For businesses with more than 50 full-time employees who do not offer health insurance coverage to all employees, a penalty of $2,000 per employee will be assessed after Jan. 1, 2015. The first 30 employees are not counted in calculating this penalty.

This article was originally posted on October 10, 2013 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at marketing@grfcpa.com.