At the end of June, the U.S. Supreme Court said that the individual mandate under the Patient Protection and Affordable Care Act was constitutional, allowing all of the tax provisions in the law to go into effect as scheduled. Here are some of the actions you’ll have to take for your business to comply with the tax law in 2013. Some are very complicated and you probably want to work with a knowledgeable tax advisor to see how the tax rules apply to you.
Note: The Affordable Care Act contains many tax benefits for small businesses that have already gone into effect as scheduled. The Supreme Court’s decision simply affirms that the law will continue to be implemented. For more on various ACA provisions, check out these other articles from SBA.
Changes to flexible spending accounts (FSAs)
If your business allows employees to allot part of their wages to a health FSA to pay out-of-pocket expenses not covered by health insurance (or you want to adopt a health FSA), you’ll have to implement a new contribution cap for 2013. Starting next year, the employee contribution limit is set at $2,500; an employer-set limit will no longer govern employee contributions. This $2,500 limit will be indexed for inflation after 2013.
The IRS says you have until the end of 2014 to amend your FSA to reflect the new cap. However, you must operate the plan in 2013 in accordance with the limit.
All employers that are part of a controlled group (i.e., where the same owner or owners control multiple corporations) are treated as a single employer, with a single $2,500 limit. However, if an employee works for two or more separate companies and participates in more than one FSA, he or she can contribute up to the $2,500 limit to each account. You don’t have to inquire about an employee’s participation in the plan of a different company.
Note: The $2,500 cap does not apply to other employee-funded plans, such as a cafeteria plan used to fund the employee portion of health insurance premiums, a dependent care FSA, or a health savings account (HSA).
Payroll withholding changes
Unless you use an outside payroll company, you may want to start updating now your payroll procedures for next year. The new additional Medicare tax of 0.9% is set to apply starting on January 1, 2013. It applies to wages over $200,000 ($250,000 if the employee is married jointly or $125,000 if filing separately). You must withhold the tax on compensation in excess of the applicable threshold, even if the employee turns out not to owe the tax (e.g., a married employee’s wages together with a spouse do not exceed $250,000).
You are required to begin withholding the additional Medicare tax in the pay period in which wages exceed the threshold amount (e.g., $200,000 for an employee who is single). Thus, even if wages are expected to be greater for the year, you don’t start the withholding on January 1. If a bonus made late in the year pushes an employee over the threshold, you only need to withhold on the portion of the payment that is in excess of $200,000.
Example from the IRS: An employee receives $180,000 in wages through November 30, 2013. On December 1, 2013, M’s employer pays him a bonus of $50,000. The employer is required to withhold additional Medicare tax on $30,000 of the $50,000 bonus; the employer may not withhold the additional Medicare tax on the other $20,000. Of course, the employer also must withhold additional Medicare tax on any other wages paid before the end of the year.
You don’t have to give any special notice to employees about this new withholding. But you may want to give them a heads up about the change in withholding. You might also explain that the additional Medicare tax is on top of the basic Medicare tax of 1.45% that they pay on all of the wages.
An employee may not request additional withholding specifically for the additional Medicare tax. However, as always, any employee can ask an employer to increase withholding by filing Form W-4.
Anticipate a new version of Form 941, Employer’s Tax Return, to be available for filing for the first quarter of 2013.
Note: There is no extra cost to the employer for the additional Medicare tax, other than administrative expenses, because there is no employer match for this tax as there is for the basic Medicare tax.
Find IRS guidance on the additional Medicare tax here.
The additional Medicare tax of 0.9% applies as well to self-employed individuals. If you are self-employed and over the $200,000/$250,000 (or $125,000) threshold for net earnings from self-employment, you’ll have to factor the additional Medicare tax into your estimated tax payments for 2013.
Continuation of prior provisions
In addition to new rules, various tax rules that have already taken effect continue to apply for 2013, including:
- Small employer health credit up to 35% of employer-paid premiums
- Coverage for employees’ children up to age 26 (even if not their dependents) on company health plans
Changes for 2014
There are other dramatic tax changes scheduled to take effect in 2014. It’s too early now to go into detail; they will be covered in a future article.
Talk with your tax advisor so you can implement the tax changes under the Affordable Care Act that apply to your business.