When Vermonters and small businesses make health insurance decisions for next year, there are a number of penalties and tax implications they should keep in mind.
Navigating this massive transition can be daunting, so VTDigger has laid out the key financial ramifications and tax-exempt options at hand.
For starters, the federal Affordable Care Act altered the Internal Revenue Code to require most U.S. citizens to buy health insurance. This requirement is widely known as the “individual mandate,” and the U.S. Supreme Court upheld its constitutionality.
Beginning in 2014, the federal government will penalize U.S. citizens for not having health insurance.
The Internal Revenue Service will charge 1 percent of a household’s income or $95 for each adult and $47.50 for each child — whichever is greater. For these lower income families paying the $95 and $47.50 fees, their total household penalty is capped at $285.
For a family of four penalized at 1 percent of household income, penalties could be as high as about $12,000, which is the penalty maximum based on the projected national average of premiums for lower coverage plans. For individuals, the cap is about $4,500 to $5,000.
There is no penalty, however, for a single gap in coverage of less than three months.
Exempt from this penalty are individuals whose household income is below the filing marker for federal income taxes and those individuals whose self-only premiums are more than 8 percent of their household income. The law also allows exemptions for religious reasons, members of “Indian tribes,” incarcerated persons and a few other populations.
For more on the individual mandate, see this Congressional Research Service report.
Small Business Assessment
Employers that have more than four full-time equivalent employees and do not offer health insurance coverage to them are responsible for paying an assessment that the Legislature’s Joint Fiscal Office estimates will cost business owners about $480 annually per employee.
If an employer offers a contribution to an employee, and that employee’s annual premium for a single plan is more than 9.5 percent of his or her household income, then the employer’s contribution is deemed unaffordable. In that case, an employer would be liable for paying the state assessment and the employee would be able to go onto the exchange and draw down subsidies. Household income is based on modified adjusted gross income.
Subsidies or Tax Deductions
Employers are eligible for a tax write-off for the amount that they contribute to an employee’s health insurance. Any part of the premium that an employee is responsible for is withheld from his or her taxable income.
If an employer does not provide coverage to an employee, and the employee is income eligible, the employee can draw down subsidies but not a tax deduction for money spent on premiums. In other words, employees can’t double dip.
Vermont households earning up to 400 percent of the federal poverty level are eligible for federal premium assistance and some are eligible for subsidies to reduce out-of-pocket costs. The premium subsidies are available to individuals earning up to $45,960 annually and for a family of four earning up to $94,200. There are additional state premium subsidies available for Vermonters earning up to 300 percent of the federal poverty level.
Some businesses have considered paying employees more and allowing them to buy health insurance independently to receive subsidies. There are two issues to keep in mind when considering this option: One, those extra dollars are taxable on both sides of the business. Two, an increased payment could bump an employee out of the income eligibility level for subsidies or decrease an employee’s subsidy.
For more on the new subsidies, read here.
IRS reconciliation
Vermonters who accept premium subsidies at the beginning of 2014, and who experience a rise in income, could owe the federal government thousands of dollars when it comes time to pay taxes.
Vermonters can choose to have their subsidies applied directly to their premiums or receive them at the end of the year. If a Vermonter receives the subsidy up front, it goes directly to the insurer and is based on an estimate of their annual income from the previous year. This subsidy will be reconciled at the end of the year based on his or her actual income.
For Vermonters earning less than 200 percent of the federal poverty level, the most they would owe to the feds for a rise in income is $300 for an individual and $600 for a couple filing jointly. For residents earning between 200 and 300 percent of the federal poverty level, the most they would owe is $750 for an individual and $1,500 for a couple. Vermonters earning between 300 and 400 percent of the federal poverty line could owe as much as $1,250 for an individual and $2,500 for a couple.
Those Vermonters whose incomes exceed 400 percent of the poverty line — $45,960 for an individual and $94,200 for a couple — would owe the full subsidy to the federal government. To avoid this situation, Vermont Health Connect encourages Vermonters to report monthly changes of income.
On the other hand, residents who see their income drop and who receive subsidies up front would be eligible for a larger tax return to compensate them for their subsidy based on an overestimated income.
‘Tax-favored accounts’
Regardless of whether employers offer a health insurance contribution, they can contribute to an employee health savings account, or HSA. An HSA allows employees and their families to use pre-tax dollars to pay for out-of-pocket expenses, but not premiums.
Employers can contribute to an employee’s HSA and an employee can still access subsidies — in the case where employers don’t offer coverage. This was verified by the U.S. Treasury, but the administration warns that the policy may be subject to change.
Representatives from the Centers for Medicare and Medicaid Services and the U.S. Treasury have not yet responded to questions about how this federal policy would pan out.
An HSA can be used in conjunction with only five of the 18 plans offered on the market. This account can be used with high deductible health plans offered at the two lowest benefit levels by Blue Cross Blue Shield of Vermont and MVP Health Care. HSAs can also be used with a Blue Cross plan that has the highest medical deductible on the market.
In 2014, the most an employer can contribute to an individual’s HSA is $3,300. The maximum contribution is $6,550 for a family.
Employers that offer health insurance contributions can contribute to employees’ medical expenses with pre-tax dollars via Flexible Spending Accounts and Health Reimbursement Accounts. For more on these arrangements, click here.
