Archive for Patrick W. O'Hara, EA

The Affordable Care Act: A Look At The Employer Mandate

Last week in my article “The Affordable Care Act: A look under the hood to see how it works,” I described how the Individual Mandate would affect American taxpayers. This week, I will describe the “Employer Mandate” – what the Personal Protection and Affordable Care Act (PPACA) requires of “Applicable Large Employers” (ALE).

The PPACA does not require employers to offer healthcare insurance coverage to its employees, but “Applicable Large Employers” are subject to a shared-responsibility mandate effective January 1, 2014.

Applicable Large Employers

An Applicable Large Employer (ALE) is an employer that employed an average of at least 50 full-time employees during the past year. However, some employers may be exempt if their workforce exceeded 50 full-time employees for 120 or fewer days during the calendar year or the employees in excess of 50 were seasonal workers. Therefore, an employer’s employee population in 2013 will determine whether it will be subject to the employer penalties in 2014.

According to the Act, a full-time employee is one that is employed an average of at least 30 hours per week. A seasonal worker maintains the same definition that is used in the Department of Labor in its Migrant and Seasonal Agricultural Worker Protection Law.

Labor is performed on a seasonal basis where, ordinarily, the employment pertains to or is of the kind exclusively performed at certain seasons or periods of the year and which, from its nature, may not be continuous or carried on throughout the year. A worker, who moves from one seasonal activity to another, while employed in agriculture or performing agricultural labor, is employed on a seasonal basis even though he may continue to be employed during a major portion of the year.

In addition, workers employed exclusively during holiday seasons are also included in the definition of seasonal worker for purposes of the ALE exemption.

To determine the total number of full-time and full-time equivalent employees for a particular month for purposes of determining if the employer is a “large employer,” the employer must add together (a) the total number of full-time employees for the month, plus (b) a number that is equal to the total number of hours worked in a month by part-time employees, divided by 120.

Reporting Requirements

The PPACA imposes additional reporting requirements on ALEs. Additional information about the employer heath plan, or its absence, must be reported to the IRS each year. The ALE must also notify each employee of the information disclosed about that employee in that IRS health insurance report. The special reporting requirement of an ALE under PPACA include: 1) The name and employer ID number of the employer; 2) A certification as to whether the employer offers its full-time employees the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan; 3) The number full-time employees for each month during the calendar year; 4) The name, address, and tax ID number of each full-time employee during the calendar year and the number of months each employee was covered by a health plan; and 5) Any other information the IRS may later require. Employers that offer coverage are also required to disclose the details regarding coverage offered, including waiting periods, the lowest cost option for employees, and the total cost of benefits allowed under the plan.

An eligible employer-sponsored plan is defined as a group health insurance plan offered by an employer to an employee, which is 1) a governmental plan under the Public Health Act; 2) Any other plan or coverage offered in a group market within a state; or 3) A grandfathered health insurance plan. Some group health insurance plans and health insurance coverage existing as of the enactment of PPACA (March 23, 2010), are grandfathered plans that are not subject to many of the PPACA provisions and can continue in place. Grandfathered plans must include a statement notifying the enrollees that they have grandfathered status as permitted by the PPACA. Making certain changes to a grandfathered plan can result in termination of its grandfathered status.

Written Statements to Employees

Employers who are subject to the health insurance coverage reporting requirement must also furnish to each employee named in the report a written statement indicating 1) the name, address, and telephone number of the person compiling the report; and 2) The particular details about the employee that are shown in the report. These disclosures are due to the employees on January 31of the year following the calendar year for which the health insurance report was made to the IRS.

Penalties

The health insurance report that employers are required to file with the IRS is considered an “information return.” The written statements the employer is required to provide employees are also considered “information returns”. Information returns carry potential penalties under IRC §6721. Generally the amount of the penalty is related to the amount of information returns that were not filed on a timely basis. Depending on circumstances, the maximum penalties for small employers (less than $5 Million in gross receipts) can range from $75,000 to $500,000 depending on number of returns not filed, or filed late. Larger employers (greater than $5 Million in gross receipts) may be subject to maximum penalties f $250,000 to $1.5 Million depending on number of returns not filed, or filed late. Intentional disregard to file carries a $250 per information return penalty or the statutory percentage, which can be 5% or 10% of the dollar amount shown on certain specified information returns when filed correctly.

Employers Not Offering Coverage

The PPCA does not require employers to provide coverage to employees. It requires shared-responsibility payments if 1) the employer fails to offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan for any month, and 2) at least one-full-time employee has been certified to the employer as having enrolled in a state exchange and receives a premium adjustment credit (PAC) or qualifies for cost sharing.

The employer is subject to a shared-responsibility payment, which is calculated on a monthly basis using the following steps: 1) Subtract 30 employees from the total number of FTE employees for the month, and 2) multiply that reduced number by $166.67. This is referred to as the §4980H(a) penalty.

EXAMPLE:

An employer has 50 FTE employees and does not offer health insurance for the entire year and at least one employee purchases health insurance from an exchange and receives a premium assistance credit (PAC). The employer would be subject to the penalty for each month it did not provide healthcare. They would take 50 employees, subtract 30, and multiply by $166.67 times the number of months, for a penalty of about $40,000. (50-30 = 20 times $166.67 time 12 months = $40,000.80)

Employers Offering Coverage

Employers that offer coverage to employees have specific requirements that must be met under the PPACA. Three of the most important include: 1) The employer must provide insurance that covers at least 60% of the employee’s healthcare costs. This means that the employees costs co-payments, deductibles, and other out of pocket costs cannot exceed 40% of the total benefit cost under the plan offered by the employer; 2) The employer cannot offer coverage to some employees and not others; 3) The employer must offer affordable coverage to employees. Unaffordable coverage occurs when full-time employees spend greater than 9.5% of their household income on healthcare coverage.

If the employer offers a plan but it does not meet the minimum coverage requirements or is not affordable, the employer may be subject to a shared-responsibility payment. If the coverage that is offered does not meet the minimum coverage or it is deemed not-affordable, employees may be eligible to purchase coverage on a state exchange and be eligible for premium assistance credits (PAC) and or cost-sharing reductions. If the employee is eligible, and purchases coverage from the exchange and receives PAC or a cost-sharing reduction, the employer may be subject to a shared-responsibility payment.

ALEs that offer coverage are also subject to the shared-responsibility payment if: 1) They offer full-time employees the opportunity to enroll in minimum essential coverage under an employer-sponsored plan for any month, but 2) they have one or more fulltime employees who have been certified for the month as having enrolled in a qualified health plan offered through a state exchange, which makes that employee eligible for a PAC or cost-sharing reduction.

An employee offered affordable minimum essential coverage by an employer is not eligible for PAC or cost-sharing reduction. Medicaid eligible employees can also leave the employer’s insurance program and enroll in Medicaid without exposing the employer to the shared-responsibility payment.

The shared responsibility payments are calculated for only those full-time employees that qualify for PAC or cost-sharing. The §4980H(b) penalty is $250 per month for each employee who qualifies for the PAC or cost-sharing reduction. The $250 penalty cannot be larger than the penalty assessed if the employer had not offered any insurance, and therefore the penalty is capped at the amount of the §4980H(a) penalty.

EXAMPLE:

During 2014, XYZ Corp has 80 full time employees. The company offers minimum essential coverage only to some of its employees. Eight employees receive PAC because they enrolled in a plan through the state healthcare exchange. All eight employees qualified for PAC and / or the cost-sharing reduction for all 12 months in 2014. For each of these 8 employees, XYZ Corp owes the §4980H(b) penalty of $250 per month per employees, or $24,000 for 2014. ($250 times 8 employees times 12 months = $24000). However, the annual penalty is capped to the amount if no insurance had been provided. (80-30 = 50 times $166.67 times 12 months = $100,000. Thus the penalty is $24,000 under §4980H (b).

Mandatory Notice to Employees

Effective March 1, 2013, employers must provide written notice to employees regarding upcoming state exchanges and the employees’ potential eligibility to purchase coverage through the state exchange in the event the employer’s coverage does not meet the requirements. This notice must also be given to all newly hired employees in subsequent years.

Implementation

Implementation of the Affordable Care Act relies heavily on state healthcare exchanges. Employers will have to understand their role in the act, as well as any responsibility. As with any regulatory program, compliance assistance or assurance will become another functional area for development. The PPACA has a wide potential for changing public policy in the areas of healthcare, labor, and taxation. Next week, I will post some of the policy shifts that I believe are likely under the PPACA.

Written by | Posted in Federal • Indirect Tax • North America • Tax Policy

The Affordable Care Act: A look under the hood to see how it works

The Patient Protection and Affordable Care Act (PPACA) added a new section in the Internal Revenue Code that requires individuals to obtain healthcare coverage. The new section, IRC 5000A, states that every applicable individual must obtain minimum essential coverage for themselves and their dependents or pay a tax penalty.  This section becomes effective January 1, 2014 and coverage will be reported starting with the 2014 tax year.

Applicable individuals are subject to the requirements to obtain and maintain healthcare coverage for each month that the individual is subject to the mandate. Dependents must also have appropriate coverage each month. The healthcare mandate extends to all applicable individuals, with the exception of members of a healthcare sharing ministry, persons with a religious exemptions, illegal aliens, and prisoners.

Minimum Coverage

Minimum coverage is necessary to meet the healthcare mandate. The types of healthcare plans that meet the minimum coverage include Medicare, Medicaid, Children’s Health Insurance program (CHIP);  Healthcare plans for active military, veterans, and civilian Department of Defense workers, as well as the Peace Corps health plan; an eligible employer-sponsored plan; a group healthcare plan or health insurance coverage that an individual is already enrolled in (grandfathered); coverage purchased through a state-sponsored healthcare exchange; and other plans that the Secretaries of the Treasury and Health and Human Services recognize.

Certain medical benefits do not qualify on their own as minimum coverage. These benefits are generally referred to as “accepted benefits” and are not sufficient to meet the minimum coverage requirements of the healthcare mandate. This includes insurance for accident or disability income; general liability, auto, or supplemental insurance; workers compensation; coverage for on-site medical clinics, or other similar types of coverage where medical benefits are secondary in nature.

Limited-purpose coverage also does not meet the minimum coverage requirements. This includes specific coverage insurance like dental, vision, or long-term care. Insurance for special illness or disease also does not qualify, nor does supplemental coverage to Medicare, or other plans.

Shared Responsibility Payments

Failure to maintain coverage subjects the taxpayer to a tax penalty for some or all of the months that minimum coverage is not maintained. The penalty is called a “shared responsibility payment.”The taxpayer’s penalty will be reflected in the tax year the coverage was not maintained. As with most tax matters, there is joint and several liability for the penalty with married taxpayers filing jointly.

The penalty for a taxpayer who does not maintain minimum essential coverage is based on three factors: 1) the flat dollar amount penalty; 2) the percentage of income penalty; and 3) the average national cost for the “bronze-level” minimum essential coverage that is available to the taxpayer.

The flat dollar penalty is the lesser of 1) the applicable dollar amount of $95 per adult in the household ($48 for children under 18) for applicable individuals who did not maintain coverage for the full 12-month period of the year; or 2) three times the applicable dollar amount of $95. Note, that dollar amounts are expected to increase in subsequent years.  Rates for 2015 are scheduled at $325/$163; and 2016 are schedule at $695/$348.

The percentage of income penalty is based on the modified adjusted gross income (MAGI) of the household. Household income includes the MAGI of all members of the household, including dependents that are required to file a return. In 2014, the percentage is 1.0%, and increases to 2.0%, and 2.5% respectively in 2015 and 2016.

The penalty is the lesser of 1) the flat dollar amount penalty or the percentage of income penalty, whichever is greater; or 2) the national average costs for a “bronze level” qualified plan on the state exchanges during the tax year for the taxpayer and any family members for whom coverage should have been maintained for the full tax year.

EXAMPLE:

A husband, wife and two minor children have household income of $60,000 in 2014. Their flat dollar amount penalty would be $286 ($95+95+$48+$48). Their percentage of income would be 1.0% of 60,000, or $600. The cost of “bronze level” coverage was $12,000. The penalty would be the lesser the cost of coverage or the greater of the flat dollar amount or percentage of income. In this case, the percentage of income was higher than the fixed dollar penalty. The penalty would be $600, because it is less than the cost of the healthcare coverage.

Penalty Exceptions

There are some exceptions to the shared responsibility payment penalties. Penalties do not apply when the individual’s household income falls below the filing threshold. When coverage is unaffordable – when the cost of healthcare is greater than 8% of household income, there is no penalty. There is an exception for native Americans who are members of an Indian tribe, under the definition of IRC 45(c)(6). There is an exception for short periods without coverage, generally no more than 3 months in a calendar year. There is also an exception for hardship in obtaining required coverage on their state exchange.  It should also be noted that the taxpayer is responsible for a penalty with respect to any dependent that is claimed on their return. Additionally, any time in residence outside of the U.S. is deemed as time with essential minimum coverage.

Cost Limitations

The new healthcare reform law provides for subsidized healthcare to certain lower income individuals. Individuals who purchase coverage through a healthcare exchange are entitled to receive a premium assistance credit (PAC), which will be a refundable income tax credit available on a sliding scale basis for taxpayers with household incomes between 100 and 400% of the federal poverty level guidelines. Taxpayers above 400% of the federal poverty guideline do not qualify for PAC. Households with incomes under 133% of the federal poverty guideline will generally be covered under Medicaid.

Healthcare will be marketed by exchanges in four different levels – Bronze (60%), Silver (70%), Gold (80%), and Platinum (90%). In each case, the insurance will cover the percentage level of medical costs, and the taxpayer will pay the balance.  The refundable PAC will be paid directly to the health insurance plan.

The PAC is tied to the “second lowest cost of the silver plan,” which is also referred to as the applicable benchmark plan. The applicable benchmark plan is generally self-only coverage for single taxpayers without dependents or family coverage for taxpayers with a spouse and or dependents. In order to qualify for the PAC, taxpayers who are married at the end of the year must file jointly.

 Premium Assistance Credit (PAC)

For purposes of the PAC, household income includes tax exempt interest, foreign Income excluded under IRC section 911, and any social security or railroad retirement benefits excluded from gross income under IRC section 86.

The poverty guidelines are published annually in the Federal Register by the Department of Health and Human Services, and range from $11,700 for a one member household to $38,890 for an eight member household. There are additional amounts for families above 8. Families with incomes between 100% and 400% of the poverty level are eligible for the PAC.

EXAMPLE:

The federal poverty level for a family of four is $23,050. Thus, families of four with household income of $92,200 or less are eligible for the PAC.

The Premium Assistance Credit is determined on a sliding scale based on income and an applicable percentage, or contribution rate toward healthcare insurance. The taxpayers household income is multiplied by the applicable percentage to arrive at the amount of refundable PAC the taxpayer will receive to be used toward the purchase of healthcare. The qualifying taxpayer’s applicable percentage of income represents the maximum amount the taxpayer will be required to pay for healthcare.

EXAMPLE:

A family of four earns $92,200 – 400% the federal poverty level.  The applicable percentage is 9.5%. of $92,200, or $8759, which represents the maximum premium payment the family must make toward the benchmark plan. Assuming the benchmark plan (2nd lowest Silver plan) is $15,000, the premium assistance credit is $6241.

Administration

The premium assistance credit (PAC) will be paid as an advance credit. When the taxpayer goes to the state exchange to purchase coverage, the exchange will calculate the taxpayer’s PAC. The taxpayer will pay the cost of the desired insurance less the amount of the PAC. When the taxpayers file their return at the end of the tax year, the return will include a reconciliation of the exchange-calculated PAC and the actual PAC that will be calculated and shown on the return. Any amount of the state exchange-calculated PAC paid to the insurance plan in excess of the actual PAC will be recovered as an additional tax liability on the taxpayer’s return. There may be some relief from the additional tax liability for taxpayers with incomes below 400% of the poverty level.

When the individual mandate becomes effective beginning January 1, 2014, initial eligibility for the PAC and any advance payments of the credit to state exchanges will be based on the taxpayer’s household income two years prior to enrollment. Taxpayers will also update their eligibility information or request a redetermination of their tax credit eligibility if there is a change in marital status, a decrease in income of more than 20%, or the receipt of unemployment income.

The PPACA also has a provision to limit the amount of out of pocket expenses paid by the insured. This includes deductibles, co payments  qualified medical expenses, and coinsurance. For 2014, this overall out-of-pocket limitation mandated by PPACA is the same as the limit on out-of-pocket expenses for high-deductible health plans (HDHP). The out of pocket limit is calculated on a sliding scale based on the federal poverty income guidelines and the out of pocket limitation ratios.

EXAMPLE:

A family of four earns $92,200 – 400% the federal poverty level.  Their out of pocket limitation would be 2/3 the maximum out of pocket for HDHP, estimated at $13,000 for 2014. Thus, the maximum out of pocket would be 2/3 of $13,000 or $8667.

The individual mandate is complicated to explain in its entirety. It introduces a lot of complicated terminology. This article is intended to give a better picture of the PPACA system, but obviously lacks the detailed charts to understand individual scenarios. Before the PPACA can be implemented, states need to develop healthcare exchanges and the HHS secretary must develop procedures to administer subsidies, and deal with cost-sharing reductions with employer provided coverage. Surely this benefit program will evolve as administration begins.

Written by | Posted in Federal • Individual • North America

Becoming a Weatherman

Despite being a “taxman” for the past 22 years, I find my role in today’s economic climate making me feel more like a “weatherman” assessing a coming storm. The weatherman talks about the huge storm coming and for people to take cover and prepare for the worst. Who listens to the weatherman anyway? The storm sometimes seems so abstract that most people just cannot fathom what potential it carries, and generally believe it will hit somewhere else.

The IRS has been releasing more information about the new taxes in the Affordable Healthcare Act that will be implemented in 2013. Just like the “weatherman,” the tax professional should be reviewing their client’s situation to see if this coming storm will affect them, where, and how hard: preparedness mitigates damage, and saves resources.

The role of the tax professional has changed over the years, and the Affordable Healthcare Act just reinforces the need for your tax professional to be more focused on tax planning for immediate consequences, as well as making adjustments for coming changes in the future.

On the immediate horizon is the new 3.8% Medicare surcharge tax on net investment income for taxpayers with income over $200,000 / $250,000 (single / married filing jointly). One of the key planning hurdles was waiting for what the IRS definition of “net investment income”, which includes most passive income activities. Although this additional tax will not hit the majority of taxpayers, poor planning may make it a trap for some. One very real area is anyone considering doing a Roth Conversion (I rarely advise) after December 31, 2012, which has the potential to make lower income folks subject to the new tax by raising their adjusted gross income (AGI) above the threshold.

Higher income taxpayers will be subject to an additional 0.9% Medicare tax on their wage income over $200,000. If their AGI surpasses the thresholds above, their net investment income will be subject to the 3.8% described previously, and will subject interest, dividend, capital gains, royalties, rental income, as well as any other passive activity income to the additional tax.

The clairvoyant tax planner may also see many other changes on the horizon that taxpayers should mitigate. My senses tell me that we will see fringe benefits like employer-paid healthcare became taxable in the future, as these tax-free benefits become a larger portion of employee compensation. There will also be a coming debate on taxation between those that pay for insurance after-tax from government exchanges versus those that get it from their employer tax-free. The haven of the Subchapter S Corporation will likely end, or be modified so that all income is subject to self-employment tax. As personal tax rates climb, and both political parties talk about reducing corporate rates, partnerships and S Corporation may find the traditional C-Corporation more advantageous. Moreover, if conditions continue to align, it may even challenge the taboo of individual taxpayers holding their rental real estate (passive activity) in a corporation (active trade), which is generally frowned upon because it makes it difficult to refinance property and take tax-free distributions.

Yes, tax planning is the future emphasis on the tax professional. I hope that we do better than the weatherman, who only gets it right 50% of the time. At this point though, with most taxpayers experiencing declining wages and less disposable income, tax planning may be low-hanging fruit to put more dollars back into the taxpayer pocket.

Taxpayers should find an experienced Enrolled Agent in their area that focuses on tax planning and taxpayer representation. Enrolled Agents are the only federally licensed tax professionals with unlimited rights to practice before the IRS and focus solely on taxation. Attorneys and CPAs are licensed to practice by their state only, while Enrolled Agents are licensed in all 50 states.

Written by | Posted in Federal • Individual • Tax Policy