In a prior client alert, we discussed several issues that would be faced by closely-held businesses under the health care reform bill that was passed by the United States House of Representatives. Recently, a similar bill, captioned as the "Patient Protection and Affordable Care Act," was introduced in the United States Senate. On November 21st, the Senate voted to formally advance the bill to the Senate floor for debate. Like the health care reform bill that was previously passed by the House, the Senate bill would alter the employer-based health care system and would require both owners and potential acquirers of closely-held businesses to re-examine various tax and entity structure issues. The most significant of these issues arise from a proposed requirement to either provide qualified health care to employees or face increased payroll tax costs.
Comparison of the House Bill to the Senate Bill
As outlined in our prior client alert, the health care reform bill passed by the House provides that an employer would be required to either offer qualified health care coverage to its employees or pay an 8% payroll tax. This payroll tax concept does not appear in the Patient Protection and Affordable Care Act that is soon to be considered by the Senate. Under the Senate version of the bill, an employer would be required to either offer qualified health care coverage to its employees or pay an additional tax of $750 a year per full time employee. In addition to the foregoing, the Senate bill contains tax provisions which could impose additional tax costs on closely-held businesses and their owners, including the following:
- a 40% excise tax on health care coverage arrangements that require total premiums in excess of $8,500 for individuals or $23,000 for families;
- a 0.5% increase in the hospital insurance payroll tax for individuals earning more than $200,000 per year or couples earning more than $250,000 per year;
- a $2,500 cap on contributions to health flexible spending arrangements ("FSAs");
- the disallowance of the use of FSA funds to purchase non-prescription medications;
- an increase of the threshold for medical expense deductions to 10% of adjusted gross income, up from 7.5% under current law; and
- a 5% tax on all elective cosmetic procedures.
Conclusion
There are several planning issues that will arise from these proposals if they become law. Specifically, some closely-held businesses will likely need to consider whether changes to their organizational structure (i.e., change from a limited liability company to a corporation or S corporation) are needed to minimize the tax costs created by the law. In addition, in situations in which a closely-held business is being sold, either through an outright sale or merger, the implication of these tax costs will likely change how the transactional documents are drafted.
