Health Care Law Brings Tax Changes

By Bill Bischoff

Last year’s massive health care law included a bunch of tax changes. Very few are taxpayer-friendly. The good news is the most expensive ones won’t kick in until 2013 and beyond. But some of the changes take effect this year. Here’s the list:

No More Tax-Free Health care Account Withdrawals for Non-Prescription Medicines

If you participate in an employer-sponsored health care flexible spending arrangement (FSA) or health reimbursement arrangement (HRA) or have your own health savings account (HSA), you could previously take tax-free withdrawals to pay for non-prescription drugs like pain and allergy relief medications. Starting this year, tax-free withdrawals are only allowed for prescription drugs, insulin, and doctor-prescribed over-the-counter medications. In other words, you now need a doctor’s prescription—which probably means a doctor visit you’ll be charged for–to take a tax-free withdrawal to pay for aspirin. And they call that reform?

Stiffer Penalty on Non-qualified HSA Withdrawals

If you take money out of your HSA for any reason other than to cover qualified medical expenses, the pre-2011 rules said you owed federal income tax plus a 10% penalty tax. The health care legislation increased the penalty tax to 20% for non-qualified withdrawals that occur in 2011 and beyond.

New Tax on Drug Companies

The health care legislation imposed a new non-deductible fee (which I will call a tax) on manufacturers and importers of branded prescription drugs. Each targeted company must pay an allocable portion of the total annual fee, which is $2.5 billion for 2011. The fee is apportioned among targeted companies based on each company’s share of sales in 2010. I’m still waiting for an explanation of how this will improve our nation’s health care situation.

New Simplified Cafeteria Plans for Small Employers

This one is a taxpayer-friendly change. The health care legislation established a new and simpler type of cafeteria benefit plan for companies with 100 or fewer employees. Such plans allow workers to pay certain expenses (including eligible health care costs) with pre-tax dollars. That increases workers’ cash flow after considering taxes. These simplified cafeteria benefit plans will be deemed to automatically satisfy all applicable nondiscrimination rules if minimum standards for eligibility, participation, and contributions are met.

Employers Must Show Health Insurance Costs on Employees’ W-2s

Finally, the health care legislation requires employers to report the cost of company-paid heath insurance coverage on employees’ W-2s issued for 2011 and beyond. These amounts are not taxable (yet); they are for informational purposes only. However, the IRS has already suspended this requirement for 2011 because gathering the necessary information proved to be too difficult for many employers.

Readers, which of these will impact you most?