Topic Number 763 - The Affordable Care Act
The Affordable Care Act contains comprehensive health insurance reforms and includes tax provisions that affect individuals, families, businesses, insurers, tax-exempt organizations and government entities. These tax provisions contain important changes, including how individuals and families file their taxes. The law also contains benefits and responsibilities for other organizations and employers. The information under the following headings briefly explains some of the current income tax provisions of the legislation.
Small Business Health Care Tax Credit
This Small Business Health Care Tax Credit helps small employers, including small tax-exempt employers, to afford the cost of covering health insurance premiums for their employees. It specifically targets employers with low and moderate-income workers. The maximum credit is up to 50% of contributions paid by small business employers for premiums, and up to 35% for small tax-exempt employers. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. To qualify for the credit, a small employer must pay premiums on behalf of each employee enrolled in a qualified health plan offered by the employer through a Small Business Health Options Program (SHOP) Marketplace or qualify for an exception to this requirement.
If you're a small employer that qualifies for this credit, use Form 8941.pdf, Credit for Small Employer Health Insurance Premiums, and attach it to your income tax return.
For additional information on this topic, refer to the Form 8941 Instructions and the Small Business Health Care Tax Credit and the SHOP Marketplace page.
Health Coverage for Older Children
Health coverage for an employee's children under 27 years of age is generally tax free to the employee. This health care tax benefit applies to various work place and retiree health plans. As a result, employers with cafeteria plans – plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits – are allowed to permit employees to begin making pre-tax contributions to pay for this expanded benefit. Tax-free treatment for employer-provided health care to an employee's child has been extended until the end of the year in which the child turns age 26. The costs and reimbursements under employer health plans for coverage for an employee's eligible children are free of income, FICA and FUTA taxes, without regard to the IRS's dependency tests. This tax benefit also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.
Reporting of Employer Provided Health Coverage on Form W-2
The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan on an employee's Form W-2.pdf, Wage and Tax Statement, in Box 12 using Code DD. Reporting the cost of health care coverage on the Form W-2 is for informational purposes only. The purpose for this reporting requirement is to provide employees useful and comparable consumer information on the cost of their health care coverage. The value of the employer's contribution to health coverage continues to be excludable from the employee's income and isn't taxable. Many employers are eligible for transition relief until future guidance limits the availability of some or all of this transition relief for this reporting requirement. The employer isn't required to report the total of the aggregate reportable costs attributable to all the employees on Form W-3.pdf, Transmittal of Wage and Tax Statements. More information about the reporting is available in the Form W-2 and W-3 General Instructions.
Additional Medicare Tax
A 0.9 percent Additional Medicare Tax applies to an individual's wages, Railroad Retirement Tax Act compensation, and self-employment income that exceed a threshold amount based on the individual's filing status. The threshold amounts are $250,000 for married taxpayers who file jointly, $125,000 for married taxpayers who file separately, and $200,000 for all other taxpayers. An employer is responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year.
For more information on the Additional Medicare Tax, see Topic No. 560 and Questions and Answers for the Additional Medicare Tax.
For more information about these and other tax provisions included in the Affordable Care Act, see our Affordable Care Act (ACA) Tax Provisions page. Visit the Department of Health and Human Services website and HealthCare.gov, for more information about your coverage options, financial assistance, and the Health Insurance Marketplace.