Payroll Changes to Begin Soon

The CLASS program payroll deduction: Starting on January 1, 2011, there is a new employee-paid long-term care assistance plan, the CLASS program (community living assistance services and support).

The benefit: CLASS provides participants at least $50/day to purchase non-medical support and services the person needs to maintain a community residence if he or she has difficulty performing some daily living activities.

How employees pay for coverage: They sign up for voluntary payroll deductions. Employers will have to help administer the program.

Eligible individuals: Employees who have paid into the program for at least 5 years. All working adults are automatically enrolled and must opt out if they do not want to participate.

HSAs, FSAs, similar plans: Starting on January 1, 2011, the definition of "medical expense" changes for FSAs, HSAs and Archer MSAs. Over the counter drugs not prescribed by a doctor are not reimbursable tax free.

Only those medications prescribed by a doctor can be reimbursed through any of the above — even if a drug that is normally prescribed is also available over the counter.

The change does not affect items such as bandages, braces, etc., which remain reimbursable tax-free.

Additions to W-2s: For taxable years beginning after December 31, 2010, the cost of employee-sponsored health coverage must be included on W-2s.

Changes after 2010
Future periods covered: Tax years 2014-2015.

Future amount of credit: Up to 50%.

Employers that qualify: Same maximum credit and phase-out range. Coverage purchased through state insurance exchanges to br created under the law qualifies for the credit.

The Medicare payroll tax: In 2013, the rate increases to 2.35% for singles earning over $200,000 and couples filing jointly earnings at least $250,000. High earners will pay 3.8% for Medicare on net investment income. Employers must withhold additional Medicare tax or 0.9% on wages over $200,000, but there is no employer Medicare tax on this. The IRS is deciding how to implement the change.

2014 medical insurance requirement: Starting January 1, 2014, employers with more than 50 employees will be required to offer coverage, or pay a fee of at least $2,000 per full-time employee.

Employers with more than 200 employees will have to automatically enroll employees in health insurance plans offered by the employer, but employees may opt out of the coverage.

HSAs, FSAs, and similar plans: As of January 1, 2013, contributions to FSAs for medical expenses will be limited to $2,500 a year (currently $3,050).

Itemized deductions limited: As of tax years beginning January 1, 2013, itemized medical expenses are deductible only to the extent that they exceed 10% of AGI. The current 7.5% of AGI is retained for individuals age 65 and older for tax years 2013-2016.