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NOTE:
The tax regime applying to all fringe benefits is
highly complex, and professional advice should be
taken before planning any scheme designed to minimise
taxation. These notes are intended simply to give
a general overview and should not be relied upon as
a basis for action in any particular case.
Medical
Expenses
Health
care is a very hotly debated and important topic to
many Americans. Employers are not required to provide
health care to employees, but many recognize its importance
and do provide an accident or health plan for their
employees. This is an arrangement that provides benefits
not only for their employees but also for their spouses
and their dependents in the event of personal injury,
or sickness. The plan may be insured or non-insured
and does not need to be in writing.
There
is no federal law in the US requiring employers to
provide health insurance. Many workers go uninsured,
though numerous employers voluntarily provide insurance
as a means of attracting and keeping good employees.
Hawaii is the only state that requires employers to
provide health insurance. Some states require that
employers who do provide insurance provide some type
of minimum coverage.
Some
employers require employees to pay the full cost of
insurance plans; other employers will pay some of
the premiums for employees. Usually the employer deducts
money for the premiums from employees' pay.
There
are two main types of insurance plans. Under a reimbursement
plan, the employer reimburses a hospital or doctor
for medical services. This type of plan allows employees
to choose their own medical providers. Reimbursement
plans are becoming less common as health maintenance
organizations (HMOs) grow in popularity. Under an
HMO plan, employers pay a monthly fee and employees
can only go to a hospital or doctor approved by the
HMO.
Generally,
the value of accident or health plan coverage provided
by an employer is not included in an employee's income.
Benefits received from the plan are generally taxable.
Contributions by an employer to provide coverage for
long-term care services are generally not included
in income. However, contributions made through a flexible
spending or similar arrangement (such as a cafeteria
plan) must be included in the employee's income. Contributions
by an employer to an employee's medical savings account
are not included in the employee's income.
An employee
must report as income any amount he or she receives
for personal injury or sickness through an accident
or health plan that is paid for by his or her employer.
If both the employee and the employer pay for the
plan, only the amount that the employee receives that
is due to his or her employer's payments is reported
as income. However, certain payments may not be taxable
to the employee. If an employee pays the entire cost
of an accident or health plan, he or she does not
have to include any amounts received from the plan
for personal injury or sickness as income on his or
her tax return.
Generally,
if an employee is covered by an accident or health
insurance plan through a cafeteria plan, and the amount
of the insurance premiums has not been included in
his or her income, he or she is not considered to
have paid the premiums and must include any benefits
received in his or her income. If the amount of the
premiums was included in his or her income, then he
or she is considered to have paid the premiums and
any benefits received are not taxable.
President
Obama's Health-Care Plans
The health-care
program had a very rough ride in Congress and the
Senate and, after much negotiation and many amendments,
was signed by Mr. Obama on March 23, 2010. The 'Patient
Protection and Affordable Care Act' was enacted into
law in September, 2010.
The
bill, approved by the House of Representative by a
vote of 219 to 212, had been debated in various forms
for more than a year.
Key
tax measures include:
- Executive
Compensation Limitations – This provision
limits the deductibility of executive compensation
under Section 162(m) for insurance providers if
at least 25% of the insurance provider’s gross
premium income from health business is derived from
health insurance plans that meet the minimum creditable
coverage requirements. The deduction is limited
to USD500,000 per taxable year and applies to all
officers, employees, directors, and other workers
or service providers performing services, for or
on behalf of, a covered health insurance provider.
This provision is effective beginning in 2012 with
respect to services performed after 2009.
-
Health Care Affordability Tax Credits – These
tax credits will be available beginning in 2013
on a sliding scale based on the percentage of income
that the cost of premiums represents.
-
Small Business Health Care Affordability Tax Credits
– Small businesses that provide health insurance
coverage to their employees will be able to claim
a tax credit of up to 35% of their contribution
in 2011 and 2012, rising to 50% in 2013. Small businesses
with 10 or fewer employees with average taxable
wages of USD20,000 or less will be able to claim
the full credit amount. The credit phases out for
small businesses with more than 10 employees and
average taxable wages of USD40,000.
-
Cafeteria Plan Changes – This provision creates
a Simple Cafeteria Plan, a vehicle through which
small businesses can provide tax-free benefits to
their employees on a simplified basis, due to come
into effect after December, 31, 2013.
-
High Cost Insurance Excise Tax – An excise
tax on insurers of 40% of the aggregate value of
employer-sponsored health coverage that exceeds
a threshold amount, currently USD10,200 for individual
coverage and USD27,500 for family coverage, beginning
in 2013.
- Increase
in Medicare payroll tax - From 2013, payroll tax
will be increased from 2.9% to 3.8% for individuals
with an annual income of USD200,000 and USD250,000
for couples. Capital Gains, dividends and interest
will also be subject to 3.8% tax.
-
Increase the Threshold for Claiming the Itemized
Deduction for Medical Expenses – This provision
increases the threshold for claiming the itemized
deduction for medical expenses from 7.5% to 10%
of adjusted gross income beginning in 2013. Individuals
over the age of 65 would be able to claim the itemized
deduction for medical expenses at 7.5% of adjusted
gross income through 2016.
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