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Financial Planning > Tax Planning > Tax Reform

Tax Provisions In Health Reform Act Are Starting To Become Clearer

By Arthur D. Postal

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Health care reform legislation contains a number of provisions that will impact insurance agents and the products they sell, with the industry voicing particular concern about a provision imposing a tax on annuities sold to high-end individuals starting in 2013.

At the same time, a health care industry consultant says he is optimistic that federal agencies are moving quickly to implement the bill.

Bruce Fried, a consultant on health care issues and partner at Sonnenschein Nath & Rosenthal LLP, Washington, D.C., says he is particularly pleased that the Department of Health and Human Services and its Centers for Medicare and Medicaid Services have asked for public comments on how the government should implement the law’s medical loss ratio and premium review provisions.

“The agencies requested information about how the requirements regarding MLR should be structured, and what the agency should be thinking about in implementing the bill,” he said. “That strikes me as very fast, and indicates an openness to hearing the ideas of the broader health care industry.”

He added that, “I think most people recognize that we have the law, we’re not trying to shape the law. The law is the law. The question is how do the regulators implement it as well as possible? Moreover, everyone has a stake in making that work.”

Fried adds that he is “impressed that they have moved as quickly as they have on some of these things despite the fact that they face logistical and staffing challenges.”

“They are serious about doing what is necessary to try to get it right,” he says.

Regarding the tax changes, starting in 2013, the new bill will increase the Medicare wage tax by 0.9% and impose a new 3.8% tax on investment income, including annuities, for high income taxpayers–individuals earning more than $200,000 and married couples filing jointly who earn $250,000 or more. No indexing is provided.

“We hope annuity sales will not be impacted by the new health care tax, but we fear they will,” said Tom Currey, president of the National Association of Insurance and Financial Advisors.

But the tax on annuities is just the start.

The new bill will also impact health savings accounts and flexible spending accounts. Effective in 2013, the bill imposes $2,500 annual cap on FSA contributions, but the cap is being indexed for inflation.

The limits on HSAs are narrower. The new bill bars use of HSA funds to buy over-the-counter drugs without a doctor’s prescription. Those who withdraw HSA funds for nonmedical purposes will see their tax penalty double, from 10% to 20% of the total withdrawal, starting Jan. 1, 2011.

The Archer Medical Savings Account, the small-business version of an HSA, will see similar restrictions, with the only difference being the Archer MSA’s penalty for nonmedical withdrawals now stands at 15% and will go up to 20%.

Archer MSAs also will have restrictions on buying over-the-counter drugs without a prescription starting Jan. 1, 2011.

Starting this tax year, the new law also gives a tax credit to certain qualifying small employers that provide health care coverage to their employees.

“So if your business qualifies for a tax credit, you are eligible right now,” says Diane Boyl, a NAIFA vice president of federal government relations.

The tax credit is worth up to 35% of the premiums a business pays to cover its workers and 25% for nonprofit firms. In 2014, the value of the credit will increase to 50% and 35% for nonprofits, according to a Q&A prepared by NAIFA for its members.

Regarding HSAs and FSAs, Currey says NAIFA was “encouraged” that Congress did not eliminate HSAs.

“They have become very popular and a relatively low cost way for people, particularly the young, to acquire health insurance,” he says.

Currey also says that HSAs are a good way for small employers to offer health insurance on a cost-effective basis.

“We are hopeful that HSAs will continue to increase in popularity because they serve a critical niche in the quest for covering more people with health insurance,” Currey says.

As for FSAs, he says, “All of us who have them love them; we were sorry to see Congress put down a limit on them.”

But, he notes, the final bill does index them for inflation, “a good thing.”

“We have good reasons to be hopeful about the indexing,” he says. “One is that Congress could have done away with them, and second, that they have left it at an amount where most people will find it of value.

“Thirdly, by indexing them, they allowed FSAs to keep up with inflation,” he says. “Those are three positives in the health care bill.”

Regarding the tax on annuities, a coalition of insurance groups wrote a letter opposing their inclusion in the health care bill, noting that such a tax “would serve as a disincentive to save in a product that uniquely allows an individual to accumulate retirement savings and to guarantee that savings can never be outlived.”

The letter particularly questioned the inclusion of annuity income in the reconciliation bill “since the Administration’s Middle Class Task Force clearly recognizes the value of guaranteed lifetime income.”

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