Health Care Reform, Part 2: 2011 & 2012 Tax Changes

The most significant tax changes occurring in 2011 pertain to the sunset of the 2001 tax cuts enacted by Pres. Bush.  Those changes will be discussed in a later blog post as this article focuses on tax changes enacted by the health care reform act.

• A new type of employee benefit plan, the Simple Cafeteria Plan, will be available beginning in 2011.  The rules will ease traditional restrictions on participation by company owners so that more small business can provide tax-free benefits to their employees.  A small business is defined as one with 100 employees or less.  A "cafeteria plan" is established by an employer to offer a "menu" of certain nontaxable benefits from which participating employees may select.  Examples of benefits include medical spending accounts and dependent care assistance.
• Over-the-counter medicines will no longer be eligible for tax-free reimbursement from Flexible Spending Accounts, Health Reimbursement Accounts, Archer Medical Savings Accounts, and Health Savings Accounts beginning in 2011.  The penalty on nonqualified distributions from Health Savings Accounts will increase from 10% to 20% and on Archer Medical Savings Accounts from 15% to 20%.
• Employers are required to report the total cost of providing employer-sponsored health insurance coverage to each employee on his or her Form W-2, starting with the 2011 plan year.  This is for information reporting only and does not make such benefits taxable.  UPDATE:  On October 12, 2010, the IRS released Notice 2010-69 wherein this W-2 reporting will not be mandatory for W-2s issued for 2011 in order to provide employers with additional time to make the changes to their systems to comply with the reporting requirement.  UPDATE #2:  The IRS subsequently released Notice 2011-28 that further delays the requirement of W-2 disclosure until W-2s are issued for 2012 compensation for small employers filing less than 250 W-2s.
• Beginning in 2012, all businesses must report payments of $600 or more on Forms 1099 for all persons and entities providing services or property to the business.  Currently, Form 1099 is not required to be prepared for payments to corporations or for the receipt of property.  Businesses that do not complete the required Forms 1099 are subject to penalties.  UPDATE:  New legislation enacted on April 14, 2011 repeals the expansion of Form 1099 reporting.