Health Care Reform Update May 2011

To align the federal tax code with the health care reform law, the IRS issued a notice in March 2010 that allows employees to exclude from their gross income any employer-sponsored accident or health insurance benefits for children younger than 27. However, some states – including California – did not make similar changes to state tax code in 2010.  

On April 7, 2011, Gov. Jerry Brown signed a bill that makes health care benefits for children under age 27 exempt from taxable income in California. The law took effect immediately, and it applies to tax returns for 2010 and future years. For more information, go to http://www.ftb.ca.gov/professionals/taxnews/Patient_Protection_and_Affordable_Care_Act.shtml

Broker Compensation | Medical Loss Ratio

As part of health care reform, insurance carriers as of January 1, 2011, must spend 80% – 85% of premium dollars on “patient care.”  So their “loss ratio” cannot exceed 80% in small group, and 85% in large group.  The lion’s share of premiums must be used to pay doctors, hospitals, pharmacies and the like.  That leaves no more than 15% – 20% to provide ID cards, customer service staff, and overhead costs.

Most health insurance carriers in California already meet the 85% loss ratio. Insurance carrier profit margins average 3% per year.  So, the huge insurance premiums we pay now are due more to the higher cost of providing care than inflated insurance company profits.

There is legislation pending in Congress now to allow brokers to be paid as a “pass through” cost, similar to the way insurance carriers pay their taxes.  This way, the broker who is the insured’s advocate, shopper and educator, can be included (or not) as an add-on cost.  Otherwise, insurance carriers will be forced to cut broker commissions or perhaps eliminate the brokerage system altogether. 

Repealed | 1099 Expanded Provisions

Part of the PPACA health care reform included a new and expanded 1099 reporting rule, which required business owners to report payments for any purchase of “property” totaling $600 or more to a single payee.  This would have applied to various goods, computer and office equipment, tools, fixtures, and so on. 

Another little known new rule was a requirement for private individuals to complete a 1099 for receipt of rental income for $600 or more. These two new requirements would have created a crushing burden of paperwork for taxpayers and the IRS, alike.

Last week, President Obama signed the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011.  This new law repeals both of the expanded 1099 reporting requirements mentioned above and allows the 1099 rules previously on the books to remain unchanged.

Repeal of Expanded Information Reporting Requirements

http://www.irs.gov/govt/fslg/article/0,,id=238635,00.html

New Guidance | W-2 Reporting of Health Care Costs

PPACA requires employers to report the cost of employer-provided health coverage to employees on annual W-2 forms.  Though the amounts are not taxable, they will be used to provide information about the cost of health care.

On March 29, 2011, the IRS provided guidance in Notice 2011-28.  Here are the highlights:

• Will not be mandatory for 2011 Forms W-2
• Becomes mandatory with 2012 Forms W-2 for most employers
• Smaller employers have until the the 2013 Forms W-2 (“smaller” defined as employers who file fewer than 250 Forms W-2 for 2011)

Health care costs to be reported include the aggregate cost of employer-sponsored group health coverage.  For self-insured plans, that would be the “applicable premium” for purposes of COBRA continuation coverage.  This does not apply to contributions to Health Savings Accounts, Medical Savings Accounts or Flexible Spending Arrangements.  It also does not apply to long term care insurance or for a separate policy for dental or vision coverage.  If the dental and vision are “bundled” into the same policy, then it would be includable.

IRS New Release Notice 2011-31 (3/29/2011)
 IRS Issues Interim Guidance on Information Reporting of Employer-Sponsored Health Coverage
 http://www.irs.gov/newsroom/article/0,,id=237870,00.html