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Senate Health Bill Would Revamp Medicaid, Alter ACA Guarantees, Cut Premium Support

The Senate has just released their version of the American Health Care Act (AHCA).  Here is a great article by Julie Rovner from Kaiser Health News detailing what the Senate's version of the AHCA legislation means for Americans.

Republicans in the U.S. Senate on Thursday unveiled a bill that would dramatically transform the nation’s Medicaid program, make significant changes to the federal health law’s tax credits that help lower-income people buy insurance and allow states to water down changes to some of the law’s coverage guarantees.

The bill also repeals the tax mechanism that funded the Affordable Care Act’s benefits, resulting in hundreds of billions of dollars in tax cuts for the wealthy and health care industry.

Most senators got their first look at the bill as it was released Thursday morning. It had been crafted in secret over the past several weeks. Senate Majority Leader Mitch McConnell (R-Ky.) is seeking a vote on the bill before Congress leaves next week for its Fourth of July recess.

Senators had promised that their ACA replacement would be very different than the version that passed the House in May, but the bill instead follows the House’s lead in many ways.

At lightning speed and with a little over a week for wider review, the Republicans’ bill could influence health care and health insurance of every American. Reversing course on some of the more popular provisions of the Affordable Care Act, it threatens to leave tens of millions of lower-income Americans without insurance and those with chronic or expensive medical conditions once again financially vulnerable.

Like the House measure, the Senate bill, which is being called a “discussion draft,” would not completely repeal the ACA but would roll back many of the law’s key provisions. Both bills would also — for the first time — cap federal funding for the Medicaid program, which covers more than 70 million low-income Americans. Since its inception in 1965, the federal government has matched state spending for Medicaid. The new bill would shift much of that burden back to states.

The bill would also reconfigure how Americans with slightly higher incomes who don’t qualify for Medicaid would get tax credits to help pay insurance premiums, eliminate penalties for those who fail to obtain insurance and employers who fail to provide it, and make it easier for states to waive consumer protections in the ACA that require insurance companies to charge the same premiums to sick and healthy people and to provide a specific set of benefits.

“We agreed on the need to free Americans from Obamacare’s mandates, and policies contained in the discussion draft will repeal the individual mandate so Americans are no longer forced to buy insurance they don’t need or can’t afford; will repeal the employer mandate so Americans no longer see their hours and take-home pay cut by employers because of it,” McConnell said on the floor of the Senate after releasing the bill. He also noted that the bill would help “stabilize the insurance markets that are collapsing under Obamacare as well.”

It is not clear that the bill will make it through the Senate, however, or that all of it will even make it to the Senate floor. The Senate (like the House) is operating under a special set of budget rules that allow it to pass this measure with only a simple majority vote and block Democrats from dragging out the debate by using a filibuster. But the “budget reconciliation” process comes with strict rules, including the requirement that every provision of the bill primarily impact the federal budget, either adding to or subtracting from federal spending.

For example, the legislation as released includes a one-year ban on Medicaid funding for Planned Parenthood. That is a key demand of anti-abortion groups and some congressional conservatives, because Planned Parenthood performs abortions with non-federal funding. But it is not yet clear that the Senate parliamentarian will allow that provision to be included in the bill.

Also still in question is a provision of the Senate bill that would allow states to waive insurance regulations in the Affordable Care Act. Many budget experts say that runs afoul of Senate budget rules because the federal funding impact is “merely incidental” to the policy.

Drafting the Senate bill has been a delicate dance for McConnell. With only 52 Republicans in the chamber and Democrats united in opposition to the unraveling of the health law, McConnell can afford to lose only two votes and still pass the bill with a tie-breaking vote from Vice President Mike Pence. McConnell has been leading a small working group of senators — all men — but even some of those have complained they were not able to take part in much of the shaping of the measure, which seems to have been largely written by McConnell’s own staff.

So far, McConnell has been fielding complaints from the more moderate and more conservative wings of his party. And the draft that has emerged appears to try to placate both.

For example, as sought by moderates, the bill would phase down the Medicaid expansion from 2020 to 2024, somewhat more slowly than the House bill does. But it would still end eventually. The Senate bill also departs from the House bill’s flat tax credits to help pay for insurance, which would have added thousands of dollars to the premiums of poorer and older people not yet eligible for Medicare.

A Congressional Budget Office report estimating the Senate bill’s impact on individuals and the federal budget is expected early next week. The House bill, according to the CBO, would result in 23 million fewer Americans having health insurance over 10 years.

For conservatives, however, the Senate bill would clamp down even harder on Medicaid in later years. The cap imposed by the House would grow more slowly than Medicaid spending has, but the Senate’s cap would grow even more slowly than the House’s. That would leave states with few options, other than raising taxes, cutting eligibility, or cutting benefits in order to maintain their programs.

Defenders of the health law were quick to react.

Sen. Ron Wyden (D-Ore.) complained about changes to coverage guarantees in the ACA.

“I also want to make special note of the state waiver provision. Republicans have twisted and abused a part of the Affordable Care Act I wrote to promote state innovation, and they’re using it to give insurance companies the power to run roughshod over individuals,” he said in a statement issued shortly after the bill was released. “This amounts to hiding an attack on basic health care guarantees behind state waivers, and I will fight it at every turn.”

“The heartless Senate health care repeal bill makes health care worse for everyone — it raises costs, cuts coverage, weakens protections and cuts even more from Medicaid than the mean House bill,” said a statement from Protect Our Care, an umbrella advocacy group opposing GOP changes to the health law. “They wrote their plan in secret and are rushing forward with a vote next week because they know how much harm their bill does to millions of people.”

See the original article Here.


Rovner J. (2017 June 22). Senate health bill would revamp medicaid, alter ACA guarantees, cut premium support [Web blog post]. Retrieved from address

How Affordable Care Act Repeal and Replace Plans Might Shift Health Insurance Tax Credits

Find out how your health insurance tax credits will be impacted with the repeal of the ACA in this great article by Kaiser Family Foundation.

An important part of the repeal and replacement discussions around the Affordable Care Act (ACA) will involve the type and amount of subsidies that people get to help them afford health insurance.  This is particularly important for lower and moderate income individuals who do not have access to coverage at work and must purchase coverage directly.

The ACA provides three types of financial assistance to help people afford health coverage: Medicaid expansion for those with incomes below 138% of poverty (the Supreme Court later ruled this to be at state option); refundable premium tax credits for people with incomes from 100% to 400% of the poverty level who purchase coverage through federal or state marketplaces; cost-sharing subsidies for people with incomes from 100% to 250% of poverty to provide lower deductibles and copays when purchasing silver plans in a marketplace.

This analysis focuses on alternative ways to provide premium assistance for people purchasing individual market coverage, explaining how they work, providing examples of how they’re calculated, and presenting estimates of how assistance overall would change for current ACA marketplace enrollees.  Issues relating to changing Medicaid or methods of subsidizing cost-sharing will be addressed in other analyses.

Premium Tax Credits Under the ACA and Current Replacement Proposals

The ACA and leading replacement proposals rely on refundable tax credits to help individual market enrollees pay for premiums, although the credit amounts are set quite differently.  The House Leadership proposal released on March 6, the American Health Care Act, proposes refundable tax credits which vary with age (with a phase-out for high-income enrollees) and grow annually with inflation.  The tax credits under the ACA vary with family income and the cost of insurance where people live, as well as age, and grow annually if premiums increase.

These various tax credit approaches can have quite different implications for different groups of individual market purchasers.  For example, the tax credits under the ACA are higher for people with lower incomes than for people with higher incomes, and no credit is provided for individuals with incomes over 400% of poverty.  The current replacement proposal, in contrast, is flat for incomes up to $75,000 for an individual and $150,000 for a married couple, and so would provide relatively more assistance to people with upper-middle incomes.  Similarly, the ACA tax credits are relatively higher in areas with higher premiums (like many rural areas), while the replacement proposal credits do not vary by location.  If premiums grow more rapidly than inflation over time (which they generally have), the replacement proposal tax credits will grow more slowly than those provided under the ACA.

What is a Tax Credit, and How is it Different from a Deduction?

A tax credit is an amount by which a taxpayer can reduce the amount they owe in federal income tax; for example, if a person had a federal tax bill of $2,500 and a tax credit of $1,000, their tax liability would be reduced to $1,500.  A refundable tax credit means that if the amount of the tax credit is greater than the amount of taxes owed, the taxpayer receives a refund of the difference; for example, if a person had a federal tax bill of $1000 and a tax credit of $1,500, they would receive a refund of $500.  Making the credit refundable is important if a goal is to assist lower-income families, many of whom may not owe federal income tax. An advanceable tax credit is made available at the time a premium payment is owed (which similarly benefits lower-income families so that they can receive the financial assistance upfront). The ACA and a number of replacement proposals allow for advance payment of credits.

A tax credit is different from a tax deduction.  A deduction reduces the amount of income that is taxed, while a credit reduces the amount of tax itself.  For example, if a person has taxable income of $30,000, a $500 deduction reduces the amount of taxable income to $29,500.  If the person’s marginal tax rate is 15%, the deduction reduces the person’s taxes by 15% of $500, or $75. Because people with lower incomes have lower marginal tax rates than people with higher incomes – and, typically don’t itemize their deductions – tax credits are generally more beneficial to lower income people than deductions.

The next section describes the differing tax credit approaches in more detail and draws out some of the implications for different types of purchasers.

How the Different Tax Credits Are Calculated

The ACA provides tax credits for individuals with family incomes from 100% to 400% of poverty ($11,880 to $47,520 for a single individual in 2017) if they are not eligible for employer-provided or public coverage and if they purchase individual market coverage in the federal or a state marketplace.  The tax credit amounts are calculated based on the family income of eligible individuals and the cost of coverage in the area where the live. More specifically, the ACA tax credit for an eligible individual is the difference between a specified percentage of his or her income (Table 1) and the premium of the second-lowest-cost silver plan (referred to as the benchmark premium) available in the area in which they live.  There is no tax credit available if the benchmark premium is less than the specified percentage of premium (which can occur for younger purchasers with relatively higher incomes) or if family income falls outside of the 100% to 400% of poverty range.  For families, the premiums for family members are added together (including up to 3 children) and compared to specified income percentages. ACA tax credits are made available in advance, based on income information provided to the marketplace, and reconciled based on actual income when a person files income taxes the following.

Take, for example, a person age 40 with income of $30,000, which is 253% of poverty.  At this income, the person’s specified percentage of income is 8.28% in 2017, which means that the person receives a tax credit if he or she has to pay more than 8.28% of income (or $2,485 annually) for the second-lowest-cost silver premium where he or she lives.  If we assume a premium of $4,328 (the national average benchmark premium for a person age 40 in 2017), the person’s tax credit would be the difference between the benchmark premium and the specified percentage of income, or $4,328 – $2,485 = $1,843 (or $154 per month).

The American Health Care Act takes a simpler approach and specifies the actual dollar amounts for a new refundable tax credit that could be used to purchase individual market coverage.  The amounts vary only with age up until an income of $75,000 for a single individual, at which point they begin to phase out. Tax credits range from $2,000 for people under age 30, to $2,500 for people ages 30 to 39, $3,000 for people age 40 to 49, $3,500 for people age 50 to 59, and $4,000 for people age 60 and over starting in 2020. Eligibility for the tax credit phases out starting at income above $75,000 for single individuals (the credit is reduced, but not below zero, by 10 cents for every dollar of income above this threshold, reaching zero at an income of $95,000 for single individuals up to age 29 or $115,000 for individuals age 60 and older). For joint filers, credits begin to phase out at an income of $150,000 (the tax credit is reduced to zero at an income of $190,000 for couples up to age 29; it is reduced to zero at income $230,000 for couples age 60 or older; and it is reduced to zero at income of $290,000 for couples claiming the maximum family credit amount). People who sign up for public programs such as Medicare, Medicaid, public employee health benefit programs, would not be eligible for a tax credit. The proposal further limits eligibility for tax credits to people who do not have an offer available for employer-provided health benefits.

Table 2 shows how projected ACA tax credits in 2020 compare to what would be provided under the American Health Care Act for people at various incomes, ages, and geographic areas. To show the ACA amounts in 2020, we inflated all 2017 premiums based on projections for direct purchase spending per enrollee from the National Health Expenditure Accounts. This method applies the same premium growth across all ages and geographic locations.  Note that the table does not include cost-sharing assistance under the ACA that lowers deductibles and copayments for low-income marketplace enrollees. For example, in 2016, people making between 100 – 150% of poverty enrolled in a silver plan on received cost-sharing assistance worth $1,440; those with incomes between 150 – 200% of poverty received $1,068 on average; and those with incomes between 200 – 250% of poverty received $144 on average.

Under the ACA in 2020, we project that a typical 40-year-old making $20,000 per year would be eligible for $4,143 in premium tax credits (not including the additional cost-sharing subsidies to lower his or her deductibles and copayments), while under the American Health Care Act, this person would be eligible $3,000. For context, we project that the average ACA premium for a 40-year-old in 2020 would be $5,101 annually (meaning the tax credit in the ACA would cover 81% of the total premium) for a benchmark silver plan with comprehensive benefits and reduced cost-sharing. A $3,000 tax credit for this same individual under the American Health Care Act would represent 59% of the average 40-year-old benchmark silver premium under the ACA.

Generally, the ACA has higher tax credit amounts than the replacement plan for lower-income people – especially for those who are older and live in higher-cost areas – and lower credits for those with higher incomes. Unlike the ACA, the replacement plan provides tax credits to people over 400% percent of the poverty level (phasing out around 900% of poverty for a single person), as well as to people current buying individual market coverage outside of the marketplaces (not included in this analysis).

While replacement plan tax credits vary by age – by a factor of 2 to 1 for older adults relative to younger ones – the variation is substantially less than under the ACA. The big differences in ACA tax credits at different ages is due to the fact that premiums for older adults can be three times the level of premiums for younger adults under the ACA, but all people at a given income level are expected to pay the same percentage of their income towards a benchmark plan. The tax credit fills in the difference, and this amount is much higher for older adults. These differences by age would be even further magnified under the American Health Care Act (which permits premiums to vary by a factor of 5 to 1 due to age). Before the ACA, premiums for older adults were typically four or five times the premiums charged to younger adults.

The tax credits in the ACA vary significantly with premium costs in an area (see Table 2 and Figure 2). At a given income level and age, people receive bigger tax credits in a higher premium area like Mobile, Alabama and smaller tax credits in a lower premium area like Reno, Nevada. Under the ACA in 2017, premiums in Mobile, Alabama and Reno, Nevada approximately represent the 75th and 25th percentile, respectively.

The disparities between the ACA tax credits and those in the American Health Care Act will therefore vary noticeably across the country. For more on geographic differences between the ACA and the replacement plan, see Tax Credits under the Affordable Care Act vs. the American Health Care Act: An Interactive Map.

The same general pattern can be seen for families as individuals, with lower-income families – and particularly lower-income families in higher-cost areas – receiving larger tax credits under the ACA, while middle-income families in lower-cost areas would receive larger tax credits under the American Health Care Act (Figure 3).

Figure 4 below shows how tax credits under the ACA differ from those in the American Health Care Act for a couple in their 60’s with no children. In this scenario, because premiums for older adults are higher and the ACA ties tax credits to the cost of premiums, a 60-year-old couple would receive larger tax credits under the ACA than the American Health Care Act at lower and middle incomes, but would receive a larger tax credit under the American Health Care Act at higher incomes.

Estimates of Tax Credits Under the ACA and the American Health Care Act Over Time

We estimated the average tax credits that current ACA marketplace enrollees are receiving under the ACA and what they would qualify for if the American Health Care Act were in place.

The average estimated tax credit received by ACA marketplace enrollees in 2017 is $3,617 on an annual basis, and that this amount will rise to $4,615 by 2020 based on projected growth rates from the Congressional Budget Office. This includes the 81% who receive premium subsidies as well as the 19% who do not.

We estimate – based on the age distribution of marketplace enrollees – that current enrollees would receive an average tax credit under the American Health Care Act of $2,957 in 2020, or 36% less than under the ACA (see Table 3 and Figure 3). While many people would receive lower tax credits under the Affordable Health Care Act, some would receive more assistance, notably the 19% of current marketplace enrollees who do not qualify for ACA subsidies.

While ACA tax credits grow as premiums increase over time, the tax credits in the American Health Care Act are indexed to inflation plus 1 percentage point. Based on CBO’s projections of ACA tax credit increases and inflation, the disparity between the average credits under the ACA and the two replacement plans would widen over time. The average tax credit current marketplace enrollees would receive under the American Health Care Act would be 41% lower than under the ACA in 2022 and 44% lower in 2027.


Like the ACA itself, the American Health Care Act includes refundable tax credits to help make premiums more affordable for people buying their own insurance. This might seem like an area where a replacement plan could preserve a key element of the ACA. However, the tax credits are, in fact, structured quite differently, with important implications for affordability and which groups may be winners or losers if the ACA is repealed and replaced.

For current marketplace enrollees, the American Health Care Act would provide substantially lower tax credits overall than the ACA on average. People who are lower income, older, or live in high premium areas would be particularly disadvantaged under the American Health Care Act. People with incomes over 400% of the poverty level – including those buying individual market insurance outside of the marketplaces – do not get any financial assistance under the ACA but many would receive tax credits under the replacement proposal.

The underlying details of health reform proposals, such as the size and structure of health insurance tax credits, matter crucially in determining who benefits and who is disadvantaged

See the original article Here.


Cox C., Claxton G., Levitt L. (2017 March 10). How affordable care act repeal and replace plans might shift health insurance tax credits [Web blog post]. Retrieved from address

11 Health Insurance Tax Facts You Need to Know

Originally posted on April 4, 2014 by Robert Bloink and William H. Byrnes on

Among the many changes the Patient Protection and Affordable Care Act (PPACA) has triggered, amendments to the tax code rank high. Employers and those who advise them may have questions about what expenses qualify for deductions, which tax credits they can take advantage of, and what the new rules mean for grandfathered plans. Individuals may be wondering how HSA distributions are taxed, or whether benefits received under a personal health insurance policy are taxable. If these or other questions are coming your way, fear not, we have the well-researched answers you're looking for.

1. Are premiums paid for personal health insurance deductible as medical expenses?

Premiums paid for medical care insurance, that is, hospital, surgical, and medical expense reimbursement coverage, is deductible as a medical expense to the extent that, when added to all other unreimbursed medical expenses, the total exceeds 10 percent of a taxpayer’s adjusted gross income (7.5 percent for tax years beginning before 2013). The threshold is also 10 percent for alternative minimum tax purposes.

The Patient Protection and Affordable Care Act increased the threshold to 10 percent of a taxpayer’s adjusted gross income for taxpayers who are under the age of sixty-five effective in tax years beginning January 1, 2013. Taxpayers over the age of sixty-five will be temporarily excluded from this provision and the threshold for deductibility for these taxpayers will remain at the 7.5 percent level from years 2013 to 2016.

No deduction may be taken for medical care premiums or any other medical expenses unless a taxpayer itemizes his or her deductions. The limit on itemized deductions for certain high-income individuals is not applicable to medical expenses deductible under IRC Section 213.

Premiums for only medical care insurance are deductible as a medical expense. Premiums for non-medical benefits, including disability income, accidental death and dismemberment, and waiver of premium under a life insurance policy, are not deductible.

Amounts paid for any qualified long-term care insurance contract or for qualified long-term care services generally are included in the definition of medical care and, thus, are eligible for income tax deduction, subject to certain limitations.

Compulsory contributions to a state disability benefits fund are not deductible as medical expenses but are deductible as taxes. Employee contributions to an alternative employer plan providing disability benefits required by state law are nondeductible personal expenses.

If a policy provides both medical and non-medical benefits, a deduction will be allowed for the medical portion of the premium only if the medical charge is reasonable in relation to the total premium and is stated separately in either the policy or in a statement furnished by the insurance company.

Similarly, because the deduction is limited to expenses of the taxpayer, his or her spouse and dependents, where a premium provides medical care for others as well (as in automobile insurance) without separately stating the portion applicable to the taxpayer, spouse and dependents, no deduction is allowed.

If a policy provides only indemnity for hospital and surgical expenses, premiums qualify as medical care premiums even though the benefits are stated amounts that will be paid without regard to the actual amount of expense incurred. Premiums paid for a hospital insurance policy that provides a stated payment for each week an insured is hospitalized, not to exceed a specified number of weeks, regardless of whether the insured receives other payments for reimbursement, do not qualify as medical care premiums and hence are not deductible.

Premiums paid for a stand-alone critical illness policy are considered capital outlays and are not deductible.

A deduction will also be denied for employees’ contributions to a plan that provides that employees absent from work because of sickness are to be paid a percentage of wages earned on that day by co-employees.

Premiums paid for a policy that provides reimbursement for the cost of prescription drugs are deductible as medical care insurance premiums.

Medicare premiums, paid by persons age sixty-five or older, under the supplementary medical insurance or prescription drug programs are deductible as medical care insurance premiums. Taxes paid by employees and self-employed persons for basic hospital insurance under Medicare are not deductible.

Premiums prepaid by a taxpayer before the taxpayer is sixty-five for insurance covering medical care for the taxpayer, his or her spouse, and his or her dependents after the taxpayer is sixty-five are deductible when paid provided they are payable on a level-premium basis for ten years or more or until age sixty-five, but in no case for fewer than five years.

Payments made to an institution for the provision of lifetime care are deductible under IRC Section 213(a) in the year paid to the extent that the payments are properly allocable to medical care, even if the care is to be provided in the future or possibly not provided at all. The IRS has stated that its rulings should not be interpreted to permit a current deduction of payments for future medical care including medical insurance provided beyond the current tax year in situations where future lifetime care is not of the type associated with these rulings.

2. May an employer deduct as a business expense the cost of premiums paid for accident and health insurance for employees?

An employer generally can deduct as a business expense all premiums paid for health insurance for one or more employees. This includes premiums for medical expense insurance, dismemberment and sight loss coverage for the employee, his or her spouse and dependents, disability income for the employee, and accidental death coverage.

Premiums are deductible by an employer whether coverage is provided under a group policy or under individual policies. The deduction for health insurance is allowable only if benefits are payable to employees or their beneficiaries; it is not allowable if benefits are payable to the employer. Where a spouse of an employer is a bona fide employee and the employer is covered as a family member, the premium is deductible. A corporation can deduct premiums it pays on group hospitalization coverage for commission salespersons, regardless of whether they are employees. Premiums must qualify as additional reasonable compensation to the insured employees.

If a payment is considered made to a fund that is part of an employer plan to provide the benefit, the deduction for amounts paid or accrued may be limited.

An accrual basis employer that provides medical benefits to employees directly instead of through insurance or an intermediary fund may not deduct amounts estimated to be necessary to pay for medical care provided in the year but for which claims have not been filed with the employer by the end of the year if filing a claim is necessary to establish the employer’s liability for payment.

3. What credit is available for small employers for employee health insurance expenses?

A credit is available for employee health insurance expenses of an eligible small employer for taxable years beginning after December 31, 2009, provided the employer offers health insurance to its employees.

An eligible small employer is an employer that has no more than twenty-five full time employees, the average annual wages of whom do not exceed $50,000 (in 2010, 2011, 2012 and 2013; the amount is indexed thereafter).

An employer must have a contribution arrangement for each employee who enrolls in the health plan offered by the employer through an exchange that requires that the employer make a non-elective contribution in an amount equal to a uniform percentage, not less than 50 percent, of the premium cost.

Subject to phase-out based on the number of employees and average wages, the amount of the credit is equal to 50 percent, and 35 percent in the case of tax exempts, of the lesser of (1) the aggregate amount of non-elective contributions made by the employer on behalf of its employees for health insurance premiums for health plans offered by the employer to employees through an exchange, or (2) the aggregate amount of non-elective contributions the employer would have made if each employee had been enrolled in a health plan that had a premium equal to the average premium for the small group market in the ratings area.

For years 2010, 2011, 2012 and 2013, the following modifications apply in determining the amount of the credit:

(1) the credit percentage is reduced to 35 percent (25 percent in the case of tax exempts);

(2) the amount under (1) is determined by reference to non-elective contributions for premiums paid for health insurance, and there is no exchange requirement; and

(3) the amount under (2) is determined by the average premium for the state small group market.

The credit also is allowed against the alternative minimum tax.

In 2014 small employers will have exclusive access to an expanded Small Business Healthcare Tax Credit under the Patient Protection and Affordable Care Act (PPACA). This tax credit covers as much as 50 percent of the employer contribution toward premium costs for eligible employers who have low- to moderate-wage workers.

4. Are benefits received under a personal health insurance policy taxable income?


All kinds of benefits from personal health insurance generally are entirely exempt from income tax. This includes disability income; dismemberment and sight loss benefits; critical illness benefits; and hospital, surgical, or other medical expense reimbursement. There is no limit on the amount of benefits, including the amount of disability income, that can be received tax-free under personally paid health insurance or under an arrangement having the effect of accident or health insurance. At least one court has held, however, that the IRC Section 104(a)(3) exclusion is not available where a taxpayer’s claims for insurance benefits were not made in good faith and were not based on a true illness or injury.

The accidental death benefit under a health insurance policy may be tax-exempt to a beneficiary as death proceeds of life insurance. Disability benefits received for loss of income or earning capacity under no fault insurance are excludable from gross income. The exclusion also has been applied to an insured to whom policies were transferred by a professional service corporation in which the insured was the sole stockholder.

Health insurance benefits are tax-exempt if received by the insured and if received by a person having an insurable interest in an insured.

Medical expense reimbursement benefits must be taken into account in computing a taxpayer’s medical expense deduction. Because only unreimbursed expenses are deductible, the total amount of medical expenses paid during a taxable year must be reduced by the total amount of reimbursements received in that taxable year.

Likewise, if medical expenses are deducted in the year they are paid and then reimbursed in a later year, the taxpayer or the taxpayer’s estate, where the deduction is taken on the decedent’s final return but later reimbursed to the taxpayer’s estate, must include the reimbursement, to the extent of the prior year’s deduction, in gross income for the later year.

Where the value of a decedent’s right to reimbursement proceeds, which is income in respect of a decedent, is included in the decedent’s estate, an income tax deduction is available for the portion of estate tax attributable to such value.

Disability income is not treated as reimbursement for medical expenses and, therefore, does not offset such expenses.

Example. Mr. Jones, whose adjusted gross income for 2012 was $25,000, paid $3,000 in medical expenses during that year. On his 2012 return, he took a medical expense deduction of $1,125 [$3,000 - $1,875 (7.5 percent of his adjusted gross income)]. In 2013, Mr. Jones receives the following benefits from his health insurance: disability income, $1,200; reimbursement for 2012 doctor and hospital bills, $400. He must report $400 as taxable income on his 2013 return. Had Mr. Jones received the reimbursement in 2012, his medical expense deduction for that year would have been limited to $725 ($3,000 - $400 [reimbursement] - $1,875 [7.5 percent of adjusted gross income]). Otherwise, he would have received the entire amount of insurance benefits, including the medical expense reimbursement, tax-free.

5. How is employer-provided disability income coverage taxed?


An employer generally can deduct all premiums paid for disability income coverage, as with all premiums paid for health insurance, for one or more employees as a business expense.

Premiums are deductible by an employer whether coverage is provided under a group policy or under individual policies. The deduction is allowable only if benefits are payable to employees or their beneficiaries; it is not allowable if benefits are payable to an employer.

The deduction of premiums paid for a disability income policy insuring an employee-shareholder was prohibited where the corporation was the premium payer, owner, and beneficiary of the policy. The Tax Court held that IRC Section 265(a) prevented the deduction because the premiums were funds expended to produce tax-exempt income. The Tax Court stated that disability income policy benefits, had any been paid, would have been tax-exempt under IRC Section 104(a)(3).

Taxation of benefits

Sick pay, wage continuation payments, and disability income payments, both preretirement and postretirement, generally are fully includable in gross income and taxable to an employee. Specifically, long-term disability income payments received under a policy paid for by an employer are fully includable in income to a taxpayer.

A disabled former employee could not exclude from income a lump sum payment received from the insurance company that provided the employee’s employer-paid long-term disability coverage. The lump sum nature of the settlement did not change the nature of the payment into something other than a payment received under accident or health insurance.

If benefits are received under a plan to which an employee has contributed, the portion of the disability income attributable to the employee’s contributions is tax-free. Under an individual policy, an employee’s contributions for the current policy year are taken into consideration. With a group policy, an employee’s contributions for the last three years, if known, are considered.

In Revenue Ruling 2004-55, the IRS held that the three-year look back rule did not apply because the plan was amended so that, with respect to each employee, the amended plan was financed either solely by the employer or solely by the employee. The three-year look back rule does not apply if a plan is not considered a contributory plan.

An employer may allow employees to elect, on an annual basis, whether to have premiums for a group disability income policy included in employees’ income for that year. An employee who elects to have premiums included in his or her income will not be taxed on benefits received during a period of disability beginning in that tax year. An employee’s election will be effective for each tax year without regard to employer and employee contributions for prior years.

Where an employee-owner reimbursed his corporation for payment of premiums on a disability income policy, the benefit payments that he received while disabled were excludable from income under IRC Section 104(a)(3).

Where an employer initially paid disability income insurance premiums but, prior to a second period of benefit payments, an employee took responsibility for paying premiums personally, the benefits paid from the disability income policy during the second benefit-paying period were not includable in the employee’s income.

Premiums paid by a former employee under an earlier long-term disability plan were not considered paid toward a later plan from which the employee received benefit payments. Thus, disability benefits were includable in income. If an employer merely withholds employee contributions and makes none itself, the payments are excludable. A tax credit for disability retirement income is available to taxpayers receiving those payments after the minimum age at which they would have received a pension or annuity if not disabled. This credit is called the Disability and Earned Income Tax Credit (EITC).

6. How is personal disability income coverage taxed?


Premiums for non-medical care, such as personal disability income coverage, are not deductible. Only premiums for medical care insurance are deductible as a medical expense.

A deduction is allowed for medical care that is not otherwise compensated for by insurance. The deduction is allowed to the extent that the medical care expenses exceed 7.5 percent of the taxpayer’s adjusted gross income. For taxable years beginning in 2017, the deduction is allowed to the extent that the medical care expenses exceed 10 percent of the taxpayer’s adjusted gross income. The threshold is 10 percent for the alternative minimum tax and there is a transition rule for people over 65. The 10 percent threshold for regular tax does not apply until 2017.

Taxation of benefits

Benefits from personal disability income coverage typically are entirely exempt from income tax. There is no limit on the amount of benefits, including the amount of disability income that can be received tax-free under personally paid disability income coverage.

If benefits are received under a plan to which both an employer and employee have contributed, the portion of the disability income attributable to the employee’s contributions is tax-free.

7. How are amounts distributed from a Health Savings Account (HSA) taxed?

A distribution from an HSA used exclusively to pay qualified medical expenses of an account holder is not includable in gross income. Any distribution from an HSA that is not used exclusively to pay qualified medical expenses of an account holder must be included in the account holder’s gross income.

Any distribution that is includable in income because it was not used to pay qualified medical expenses is also subject to a penalty tax. The penalty tax is 10 percent of includable income for a distribution from an HSA. For distributions made after December 31, 2010, the additional tax on nonqualified distributions from HSAs is increased to 20 percent of includable income.

Includable distributions received after an HSA holder becomes disabled within the meaning of IRC Section 72(m)(7), dies, or reaches the age of Medicare eligibility are not subject to the penalty tax.

Qualified medical expenses are amounts paid by the account holder for medical care for the individual, his or her spouse, and any dependent to the extent that expenses are not compensated by insurance or otherwise. For tax years beginning after December 31, 2010, medicines constituting qualified medical expenses will be limited to doctor-prescribed drugs and insulin. Consequently, over-the counter medicines will no longer be qualified expenses unless prescribed by a doctor after 2010.

With several exceptions, the payment of insurance premiums is not a qualified medical expense. The exceptions include any expense for coverage under a health plan during a period of COBRA continuation coverage, a qualified long-term care insurance contract, or a health plan paid for during a period in which the individual is receiving unemployment compensation.

An account holder may pay qualified long-term care insurance premiums with distributions from an HSA even if contributions to the HSA were made by salary reduction through an IRC Section 125 cafeteria plan. Amounts of qualified long-term care insurance premiums that constitute qualified medical expenses are limited to the age-based limits found in IRC Section 213(d)(10) as adjusted annually.

An HSA account holder may make tax-free distributions to reimburse qualified medical expenses from prior tax years as long as the expenses were incurred after the HSA was established. There is no time limit on when a distribution must occur.

HSA trustees, custodians, and employers need not determine whether a distribution is used for qualified medical expenses. This responsibility falls on individual account holders.

8. When may an account owner transfer or rollover funds into an HSA?

Funds may be transferred or rolled over from one HSA to another HSA or from an Archer MSA to an HSA provided that an account holder affects the transfer within sixty days of receiving the distribution.

An HSA rollover may take place only once a year. The year is not a calendar year, but a rolling twelve-month period beginning on the day when an account holder receives a distribution to be rolled over. Transfers of HSA amounts directly from one HSA trustee to another HSA trustee, known as a trustee-to-trustee transfer, are not subject to the limits under IRC Section 223(f)(5). There is no limit on the number of trustee-to-trustee transfers allowed during a year.

A participant in a health reimbursement arrangement (“HRA”) or a health flexible spending arrangement (“Health FSA”) may make a qualified HSA distribution on a one time per arrangement basis. A qualified HSA distribution is a transfer directly from an employer to an HSA of an employee to the extent the distribution does not exceed the lesser of the balance in the arrangement on September 21, 2006, or the date of distribution. A qualified HSA distribution shall be treated as a rollover contribution under IRC Section 223(f)(5), that is, it does not count toward the annual HSA contribution limit.

If an employee fails to be an eligible individual at any time during a taxable year following a qualified HSA distribution, the employee must include in his or her gross income the aggregate amount of all qualified HSA distributions. The amount includable in gross income is also subject to a 10 percent penalty tax.

General-purpose health FSA coverage during a grace period, after the end of a plan year, will be disregarded in determining an individual’s eligibility to contribute to an HSA if the individual makes a qualified HSA distribution of the entire balance. Health FSA coverage during a plan year is not disregarded, even if a health FSA balance is reduced to zero. An individual who begins HDHP coverage after the first day of the month is not an eligible individual until the first day of the following month.

The timing of qualified HSA distributions therefore is critical for employees covered by general-purpose, that is, non-high-deductible, health FSAs or HRAs:

(1) An employee only should make a qualified HSA distribution if he or she has been covered by an HDHP since the first day of the month;

(2) An employee must rollover general purpose health FSA balances during the grace period after the end of the plan year, not during the plan year, and, of course, he or she must not be covered by a general purpose health FSA during the new year; and

(3) An employee must rollover the entire balance in an HRA or a health FSA to an HSA. If a balance remains in an HRA at the end of a plan year or in a health FSA at the end of the grace period, the employee will not be an HSA-eligible individual.

Beginning in 2007, a taxpayer may, once in his or her lifetime, make a qualified HSA funding distribution. A qualified HSA funding distribution is a trustee-to-trustee transfer from an IRA to an HSA in an amount that does not exceed the annual HSA contribution limitation for the taxpayer. If a taxpayer has self-only coverage under an HDHP at the time of the transfer, but at a later date during the same taxable year obtains family coverage under an HDHP, the taxpayer may make an additional qualified HSA funding distribution in an amount not exceeding the additional annual contribution for which the taxpayer has become eligible.

If a taxpayer fails to be an eligible individual at any time during a taxable year following a qualified HSA funding distribution, the taxpayer must include in his or her gross income the aggregate amount of all qualified HSA funding distributions. The amount includable in gross income also is subject to a 10 percent penalty tax.

9. What employers are eligible for the new tax credit for health insurance, and how does it work?

The new health insurance tax credit is designed to help approximately four million small for-profit businesses and tax-exempt organizations that primarily employ low and moderate-income workers. The credit is available to employers that have twenty-four or fewer eligible full time equivalent (“FTE”) employees paying wages averaging under $50,000 per employee per year.

IRC Section 45R provides a tax credit beginning in 2010 for a business with twenty-four or fewer eligible FTEs. Eligible employees do not include seasonal workers who work for an employer 120 days a year or fewer, owners, and owners’ family members, where average compensation for the eligible employees is less than $50,000 and where the business pays 50 percent or more of employee-only (single person) health insurance costs. Thus, owners and family members’ compensation is not counted in determining average compensation, and the health insurance cost for these people is not eligible for the health insurance tax credit.

The credit is largest if there are ten or fewer employees and average wages do not exceed $25,000. The amount of the credit phases out for business with more than ten eligible employees or average compensation of more than $25,000 and under $50,000. The amount of an employer’s premium payments that counts for purposes of the credit is capped by the average premium for the small group market in the employer’s geographic location, as determined by the Department of Health and Human Services.

Example: In 2013, a qualified employer has nine FTEs (excluding owners, owners’ family members, and seasonal employees) with average annual wages of $24,000 per FTE. The employer pays $75,000 in health care premiums for these employees, which does not exceed the average premium for the small group market in the employer’s state, and otherwise meets the requirements for the credit. The credit for 2013 equals $26,250 (35 percent x $75,000).

Additional examples can be found here.

10. How do the rules for obtaining the tax credit change over the years?

To obtain the credit, an employer must pay at least 50 percent of the cost of health care coverage for each counted worker with insurance.

In 2010, an employer may qualify if it pays at least 50 percent of the cost of employee-only coverage, regardless of actual coverage elected by an employee. For example, if employee-only coverage costs $500 per month, family coverage costs $1,500 per month, and the employer pays at least $250 per month (50 percent of employee-only coverage) per covered employee, then even if an employee selected family coverage the employer would meet this contribution requirement to qualify for the tax credit in 2010.

Beginning in 2011, however, the percentage paid by an employer for each enrolled employee must be a uniform percentage for that coverage level. If an employee receives coverage that is more expensive than single coverage, such as family or self-plus-one coverage, an employer must pay at least 50 percent of the premium for each employee’s coverage in 2011 and thereafter.

Thus, grandfathered health insurance plans that provide, for instance, for 100 percent of family coverage for executives and employee-only coverage for staff will qualify for the tax credit in 2010 but not in 2011 or beyond.

(1) Prohibition of lifetime benefit limits;

(2) No rescission except for fraud or intentional misrepresentation;

(3) Children, who are not eligible for employer-sponsored coverage, covered up to age twenty-six on a family policy, if the dependent does not have coverage available from his or her employer;

(4) Pre-existing condition exclusions for covered individuals younger than nineteen are prohibited; and

(5) Restricted annual limits for essential benefits.

Grandfathered health plans are exempt from the following additional requirements that apply to new and non-grandfathered health plans:

(1) No cost sharing for preventive services;

(2) Nondiscrimination based on compensation;

(3) Children covered up to age twenty-six on family policy regardless of whether a policy is available at work. Grandfathered status for the adult dependent coverage ends on January 1, 2014;

(4) Internal appeal and external review processes;

(5) Emergency services at in-network cost-sharing level with no prior authorization; and

(6) Parents must be allowed to select a pediatrician as a primary care physician for their children and women must be allowed to select an OB-GYN for their primary care physician.



How the Affordable Care Act affects your 2013 tax returns

Originally posted September 16, 2013 by Roger Prince on

As Affordable Care Act deadlines approach, most of the discussion heard on the street concerns the individual health insurance mandate and the expected opening of the state and federal insurance marketplaces this fall. Lost in the shuffle are the tax increases related to the ACA. Most of these changes impact high earners, but thresholds differ depending upon the tax provision in question. For anyone in the affected income categories — and there are many in Maine — the increases are significant.

Which taxpayers will be affected?

The accompanying chart outlines some of the important tax increases imposed as a result of the ACA and more recent legislation. The increases generally affect single filers with an adjusted gross income (AGI) above $200,000 and married couples filing jointly above $250,000. Some of the tax increases don't kick in until single AGI hits $400,000 and married filing jointly AGI hits $450,000.

How to mitigate the impact

As with any increase in marginal tax rates, a focus on income deferral and upfront tax planning can help soften the blow by reducing the amount of income that qualifies for the new tax rates. There are a number of strategies for income deferral, some of them employer-initiated and some handled by the individual. For example, employers might decide to redesign their 401(k) or 403(b) plans to provide for greater employer non-elective contributions (such as profit-sharing allocations) for certain types or groups of employees. A company might also decide to offer deferred compensation as part of an incentive program using so-called "synthetic" equity tools such as Phantom Stock or Stock Appreciation Rights. In these forms of compensation, the benefit is tied in various ways to the value of hypothetical shares of stock set to be paid out on a specified later date.

Individuals can defer or eliminate taxes in a higher-tax environment with various retirement savings strategies as well as tax-effective investment strategies. Individuals should get advice from both investment advisers and tax professionals to make sure their investment strategies coincide with a prudent tax strategy. The key is to be sure that the current income and investment structure maximizes the after-tax return.

Changes in the medical expense deduction

Regardless of income level, the unreimbursed medical expense deduction will now be available only for those medical expenses in excess of 10% of AGI, compared to 7.5% before. There is a temporary exemption from this requirement for individuals ages 65 and older and their spouses from 2013 through 2016. Individuals and their spouses who are 65 years or older are still allowed to deduct unreimbursed medical care expenses that exceed 7.5% of their AGI.

Other ACA steps

Employers have other compliance steps and opportunities under the ACA for this tax year. Among them:

  • Employers that have employees who earn more than $200,000 will have to look at the potential for additional Medicare withholding.
  • Employers that issued 250 or more W-2 forms in 2012 must report the cost of employer-sponsored health coverage for 2013 on the 2013 W-2 forms.
  • Small employers (those with 25 or fewer full-time equivalent employees) that offer group health insurance might be eligible for the small business health care tax credit. The credit can be as much as 35% of employer premiums (25% for not-for-profits.) The maximum credit will increase to 50% in 2014 (35% for not-for-profits.) The credit is only available if the employer is paying at least 50% of the total premiums.

As always, everyone's particular tax situation is different. It is safe to say that tax planning for 2013 and thereafter will be more important than ever given the potential loss of tax adjustments and higher marginal tax rates imposed by the ACA and more recent legislation.