Health Care Act Updat= e

Tax Free Employer Provided Health Coverage Available for Children under Age 27<= o:p>

As a result of changes made by the Affordable Care Act, health coverage provid= ed for an employee's children under 27 years of age is now generally tax-free to t= he employee, effective March 30, 2010. These changes immediately allow employe= rs with cafeteria plans to permit employees to amend their deferral elections = and begin making pre-tax contributions to pay for their children who are under = age 27.

Employers with cafeteria plans may permit employees to immediately make pre= -tax salary reduction contributions to provide coverage for children under age 2= 7, even if the cafeteria plan has not yet been amended to cover these individu= als. Plan sponsors then have until the end of 2010 to amend their cafeteria plan language to incorporate this change.

This expanded health care tax benefit applies to various workplace and reti= ree health plans. It also applies to self-employed individuals who qualify for = the self-employed health insurance deduction on their federal income tax return= .

Employees who have children who will not have reached age 27 by the end of = the year are eligible for the new tax benefit from March 30, 2010 forward, if t= he children are already covered under the employer's plan or are added to the employer's plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child, or eligible foster child. This new law eliminates the requirement that a child generally qualify as a dependent for tax purposes to qualify for coverage.

Health Care Reform Act Creates New Incentive for Roth IRA Conversion

Distributions from a Roth IRA are generally tax-free and distributions from a traditional IRA are taxable and added to = your adjusted gross income.

Starting in 2013, the health care reform act imposes a 3.8 % unearned income Medicare contributions tax on the lesser of:

1. Net investment income or

2. The excess of modified adjusted gross income (AGI) o= ver the threshold amount ($200,000 for single individuals or heads of household= s; $250,000 for married couples filing a joint return and surviving spouses; a= nd $125,000 for married couples filing separate returns).

EXAMPLE. Kathy has modified AGI of $220,0= 00. Included in the AGI are net investment income of $40,000 and taxable IRA distributions of $10,000. The tax applies to the lesser of:

(i) net investment income ($40,000) or

(ii) (ii) Modified AGI ($220,000) over the threshold amount for a single pe= rson ($200,000) or $20,000.

The tax is 3.8 percent of $20,000 or $760. The tax in this case is not appl= ied to the entire $40,000 of investment income.

The tax is reduced by $380 if we assume the IRA distribution is a tax-free = Roth IRA distribution instead of a taxable IRA distribution. Modified AGI is red= uced from $220,000 to $210,000.

EXAMPLE. Kathy has modified AGI of $210,0= 00. Included in the AGI are net investment income of $40,000 and taxable IRA distributions of $0. The tax applies to the lesser of:<= /span>

(iii) net investment income ($40,000) or

(iv) (ii) Modified AGI ($210,000) over the threshold amount for a single pe= rson ($200,000) or $10,000.

The tax is 3.8 percent of $10,000 or $380. The tax in this case is not appl= ied to the entire $40,000 of investment income.

Net investment income includes interest, dividends, royalties, rents, gain = from disposing of property from a passive activity, and income earned from a tra= de or business that is a passive activity. In determining net investment incom= e, investment income is reduced by deductions properly allowable to that incom= e.

Net investment income does not include distributions from qualified retirem= ent plans, including pensions and certain retirement accounts such as individual retirement accounts (IRAs).