I.R.C. imposes 40% excise tax on certain high cost employer-sponsored health care plans

My friend April sent me an email about the Title IX: Revenue Provisions in the Health Care Bill that was passed. I was surprised at what she referred to so I went to the website, http://thomas.gov and searched for HR 3590 summary.

What I wanted was on pages 21-22 of the summary. I bet you’ll be as surprised as I was. Here is a summary of the summary.

Subtitle A: Revenue Offset Provisions – (Sec. 9001, as modified by section 10901) Amends the Internal Revenue Code to impose an excise tax of 40% of the excess benefit from certain high cost employer-sponsored health coverage. Any amount which exceeds payment of $8,500 for an employee self-only coverage plan and $23,000 for employees with other than self-only coverage (family plans) as an excess benefit. Increases such amounts for certain retirees and employees who are engaged in high-risk professions (e.g., law enforcement officers, emergency medical first responders, or longshore workers). Imposes a penalty on employers and coverage providers for failure to calculate the proper amount of an excess benefit.

As I understand this, if you are in a company plan and the company pays over $8,500 for a single individual employee that employee will be paying tax on the amount over $8,500 at 40%. Example: Company pays $10,000 for individual employee health coverage. Deduct $8,500 leaving $1,500 excess. Employee will have to pay $600 excise tax on the $1,500 calculated at 40%.

The employee that insures a family will have to pay the excise tax on the amount over $23,000 that the company pays. Example: Company pays $30,000 for a family plan. Deduct $23,000 leaving $7,000 excess. Employee will have to pay $2,800 excise tax on the $7,000 calculated at 40%.

(Sec.9002) Requires employers to include in the W-2 form the aggregate cost of applicable employer-sponsored group health coverage that is excludable from the employee’s gross income (excluding the value of contributions to flexible spending arrangements).

I don’t know if these plans apply to the average employee or to high earning executives. I guess we’ll find out when W-2s come out in 2011.

There are some other sections that relate to health savings account, Archer medical savings account, limits of annual salary reduction contributions under a cafeteria plan, etc.

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SandraCherry, June 1st 2010 | Tags: , ,
Posted in Insurance, Tax Planning

6 IDEAS FOR WHO MIGHT BE GOOD IRA CONVERSION CANDIDATES

1. A young person is an excellent candidate to do an IRA to Roth conversion due to the length of time they have to recover from the tax hit. Remember, the income tax has to be paid within two years of the conversion.

2. If someone is in the early years of their retirement, they expect to live a long time and won’t need to access the IRA assets for at least five years, a conversion may well be worth it. It comes down to how long it will take to recoup the income tax hit.

3. If already retired and receiving Social Security (SS) converting to a Roth could reduce the tax owed on the SS income. The conversion might bump up the amount of SS that is taxed in the conversion year and reduce the amount of taxes owed on SS in future years. Roth distributions don’t factor into the calculation used to calculate which SS benefits will be taxed.

4. People who have made nondeductible IRA contributions are good candidates. The gain on the account is all that is taxable.

5. Someone who has a large estate should look at the IRA conversion. Two things to consider:

Roth IRAs do not require a mandatory distribution allowing assets to compound and increasing the amount that may be passed to heir’s tax free.

The overall assets passed to heirs will be smaller since some assets are used to pay the income tax on the conversion. It could reduce estate-tax liability if there is any. As of this writing there is an exemption of $3,500,000 per person before the estate tax kicks in.

6. For those that are unemployed or who have income that is appreciably lower than usual, it might be advantageous to convert provided there is cash available to pay the tax. The tax will be lower if you are in a lower income tax bracket.

Always consult with your tax advisor.

Next time I’ll discuss who should not be considering a conversion. Until then………..

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SandraCherry, November 20th 2009 | Tags: , ,
Posted in Financial Planning, Tax Planning

IRA Conversion Opportunity in 2010; Pay Taxes in 2011 & 2012

The Tax Code allows a taxpayer to put earned pre-tax dollars into an Individual Retirement Account (IRA), defer the tax on the growth of the account, and pay income tax on the growth when the money is withdrawn. At age 70 ½ there is a required minimum distribution (RMD) or a penalty is paid.

With a Roth IRA, after-tax dollars are deposited into an account and all subsequent growth is tax-free. There is no RMD with a Roth IRA.

Upper income tax payers, $100,000 and up, have been prohibited from converting to a Roth IRA. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) provides a tax planning opportunity for traditional IRA owners beginning in 2010.

The $100,000 income ceiling for converting a traditional IRA to a Roth IRA will be eliminated for tax years after 2009. When converting, income tax will still have to be paid.

When converting in 2010, a taxpayer can choose to pay the tax over a period of two years, half of the income will be taxed in 2011 and half in 2012. The converting taxpayer can choose to pay the tax in full in 2011.

The Roth is a better option than a traditional IRA for a number of reasons. As I said before there is no RMD at age 70 ½ as there is with a traditional IRA. If someone doesn’t need IRA assets during retirement, he/she can allow the investments to continue growing and pass on the larger amount to the beneficiaries.

If the assets in the Roth IRA are needed and five years have passed since the Roth conversion the owner can withdraw the converted amount plus any gain and he/she won’t have to pay any taxes or penalties even if they are taking the asset prior to age 59 ½.

Next time I’ll discuss who good conversion candidates are.

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SandraCherry, November 16th 2009 | Tags: , ,
Posted in Uncategorized