Tax - Impact of Affordable Care Act of 2010 on W-2 Form, Salary Deductions, Healthcare Plans and Revenue Codes

The Affordable Care Act of 2010 is the short name being used for a combination of two laws recently enacted by our government and signed into effect by the President on two separate days:

1.-The Patient Protection and Affordable Care Act, Public Law No. 111-149 (PPACA), dated March 23, 2010

2.-The Health Care and Education Reconciliation Act of 2010, Public Law No. 111-152 (HCERA), dated March 30, 2010

One of the provisions in both these laws had a great impact on some other laws and codes already in place.

This is the provision for tax-free, employer-provided health coverage for older children under age 27.

Other codes or rules were affected due to earlier age restrictions for children included in a parent's plan or a cap on tax exemptions.

The Internal Revenue Codes affected are:

Section 105 - Amounts Received Under Accident and Health Plans
106 - Contributions by Employers to Accident and Health Plans,
162(l) - Special Rules for Health Insurance Costs of Self-Employed Individuals,
401(h) - Medical, Etc. Benefits for Retired Employees and Their Spouses and Dependents,
501(c)(9) - Voluntary Employees' Beneficiary Association,

WHAT IT MEANS FOR THE TAXPAYER

Health coverage provided for an employee's children under 27 years of age is now tax-free to the employee from March 30, 2010.

Some salary deductions and healthcare plans will change accordingly due to inclusion of older children up to 26 years in the parent's healthcare plans from 2010.

His or her W-2 Form will have a new section too in 2011.

A. W-2 FORM WITH A NEW SECTION FOR HEALTHCARE INSURANCE VALUE

Starting in tax year 2011, employers will have to report the value of the health insurance coverage they provided on each employee's W-2 Form for information purpose.

But, remember, it does not affect tax liability, as the value of the employer contribution to health coverage is already being excluded from the taxable income of such employees.

B. DEDUCTIONS UNDER FICA, FUTA AND RRTA

These deductions may change due to the inclusion of additional child under age 27 in the list of dependents for healthcare insurance benefits.

Coverage and reimbursements under an employer-provided accident and health plan for employees and their dependents are usually excluded from wages for calculating Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) deductions.

Similarly, Railroad Retirement Tax Act (RRTA) deductions will reflect the same changes.

C. HEALTHCARE PLANS

The extended health care tax benefit applies to various

-Workplace health plans.
-Retiree health plans
-Health insurance deductions on federal income tax returns by qualified self-employed individuals.

Apart from the traditional group health plans and health insurance for dependents offered by the employer, the following programs are also included in the extended healthcare tax benefit:

CAFETERIA PLANS

Cafeteria plans allow employees to choose from a menu of options:

-tax-free benefits
-cash benefits
-taxable benefits.

It also permits pre-tax contributions by employees.

FSAs (Flexible Spending Arrangements)

An FSA allows an employee to save a part of the earnings into a separate account to pay for qualified expenses under the cafeteria plan, for medical expenses, dependent care or other related expenses.

HRAs (Health Reimbursement Arrangements)

Health Reimbursement Arrangement (HRA) is a plan not related to a cafeteria plan described above. It is paid for solely by an employer. It reimburses an employee for medical care expenses up to a maximum dollar amount for an agreed period.

VEBAs (Voluntary Employees' Beneficiary Association)

A VEBA is a tax-exempt entity established for the payment of life, sick, accident, or other benefits to members of this Association or their dependents or designated beneficiaries.

SECTION 401(h) ACCOUNTS (Types of Pension/Annuity Plans)

Section 401(h) Accounts are pension or annuity plans established as separate accounts to provide for sickness, accident, hospitalization, and medical expenses of retired employees, their spouses and their dependents under the requirements of this code.

SECTION 162(l) DEDUCTIONS (by Qualified Self-Employed Individuals)

Section 162(l) deductions are available to qualified self-employed individual in computing adjusted gross income. Healthcare insurance for the taxpayer, his or her spouse, and dependents are usually deductible provided certain conditions are met.

PLEASE NOTE:
This is a general introduction to this subject; so, it may not include all the relevant facts. Some of the health insurance plans may not yet reflect the changed scenario as providers are allowed time until the year end to do so. So your employer or insurance provider should be able to answer questions about the time of such revision. This being a new law, constant updates are expected until some of the provisions attain their final status. So for the latest update and authoritative information on the subject, please refer to the resources provided by the Internal Revenue Service(IRS).