Understanding PPACA: A Dose of Accounting Medicine

February 13, 2014 Jay Hutto, CPA/ABV/CFF, CVA Partner

Health Care Update

• Business reporting and penalties have been delayed until January 1, 2015 for employers with 100 or more full-time equivalent (FTE) employees that offer insurance to 70 percent of workers for 2015 and 95 percent thereafter

• Under new rules, employers with 50 to 99 FTE employees will be given until 2016 to offer health care coverage before being subject to shared-responsibility payments

• Employers with fewer than 50 FTE employees do not have to offer coverage but will need to report on workers and health care insurance coverage in 2015

Health Care Overview

• Transition relief offered if employer doesn’t reduce the size of its workforce or the overall hours of service of its employees unless the reductions are for a bona fide business reason

• The individual mandate penalty was effective as of January 1, 2014 via the Form 1040

• For the Health Care Marketplace (Exchanges), there are new storefronts, kiosks, call centers, and navigators assisting individuals with obtaining coverage

Health Care Review

• Florida is one of the majority of states that do not have a separate exchange so individuals and small businesses will go to www.healthcare.gov for information

• Medicare Part D - Subsidy is reduced for those with incomes above $170,000 (couples)/ $85,000 (single)

• Medical device manufacturers and importers must pay a 2.3% tax imposed on the sale of any medical device

Status Of Reform

• Florida has not participated in Medicaid expansion

• Medical malpractice reform has not been addressed

• Medical Loss Ratio (MLR) Insurance Rebates are paid if the health insurance issuer does not spend at least 80% or 85% (large plans) of premium dollars on medical care starting back in 2012

Fees

• PCORI fees for self-insured and health reimbursement accounts (HRAs) are paid on Form 720 and will be included in health insurance premiums for policies with policy years ending after September 30, 2012.– The fee is $1 per covered person ($2 for plan years after September 30,

2013).• Health Insurance Industry fee – fund premium subsidies and cost-sharing

reductions for exchange participants (2% to 2.5% of premium)• Reinsurance fee – stabilize premiums in exchange due to high cost claimants

($63 per member per year)• Risk Adjustment fee – spread the financial risk in the exchange• Marketplace User fee – fund a self-sustaining exchange going forward

(equates to 3.5% of premiums)

Summary Of PPACA – 2010 And 2011

• Small business tax credit since 2010• Dependent coverage up to 26 and no discrimination for pre-existing

conditions• Over-the-counter drugs (OTCD) are no longer treated as allowable for

FSA, HSA, HRA and MSA• Increased tax on non-qualifying HSA and MSA distributions to 20%

Small Business Health Care Credit

• Available for certain businesses offering health coverage• For uniform non-elective contributions if business has no more than 25 full-

time employees (FTE) with an average annual wage of no more than $50,000• The maximum credit is the lesser of:

– Actual insurance paid by the employer, or– What the employer would have paid had the employee enrolled in

coverage with a small business benchmark premium (Rev. Rul. 2010-13)• Multiplied by the percentages below:

– 2010 - 2013: 35%– 2014 and beyond: 50% (SHOP and 2 yr max)

• The credit is refundable for nonprofits but subject to the sequestration reduction

Small Business Health Care Credit

• Credit phase-out is the sum of:– The credit x (# of FTE – 10)/15, and– The credit x (average annual wage –

$25,000)/$25,000• Employer contribution must be at least

50% of the premiums paid for employee only coverage

• Tax-exempt employers can qualify• Any unused credit is carried forward• Qualified premiums are those paid in a

uniform percentage for all employees

Summary Of 2012

• Reporting of cost of employer-sponsored health coverage (250 or more W-2s)

• Summary of Benefits and Coverage must be provided

• Medical loss rebates• Electronic medical records

(EMR)

How will I be affected in 2013?What does this mean for taxpayers?

• Additional Medicare Tax: – For single taxpayer employees earning over

$200,000 (married taxpayers filing jointly

$250,000)– Pay an additional 0.9% Medicare tax over the

1.45% tax currently applicable

• Tax applies to wages and self-employment

income in excess of threshold• Thresholds not affected by inflation• Penalty for being married• No employer match on 0.9% tax

Tax on Earnings - Example

John• Single taxpayer• Self-employed• $500,000Excess of Earnings Threshold

$500,000- $200,000 $300,000

0.9% surtax wouldapply to $300,000

=

$2,700 Additional Tax

Medicare Surtax

3.8% of the lesser of 1. Net Investment Income OR2. The excess (if any) of:

- “Modified Adjusted Gross Income” (MAGI)

- “Threshold Amount” ($200,000 single, $250,000 married)

Net Investment Income

• Net Investment Income Categories:1. Passive Income2. Net Gain from Dispositions of Entity

Interest3. Investment Income

• Trust threshold for 3.8% tax is $11,000• Investment fees can reduce net

investment income

3.8% Medicare Surtax – Example 1

John• Single taxpayer• $100,000 of salary• $50,000 net investment

income

• 3.8% surtax would NOT apply

• MAGI is less than threshold

MAGI$150,000

Tom & Sandy• Married, filing jointly• $400,000 salary income• $50,000 net investment

incomeExcess of Earnings Threshold

$400,000- $250,000 $150,000

• 3.8% surtax would apply to $50,000 =

AND• 0.9% surtax would

apply to $150,000 =

3.8% Medicare Surtax – Example 2

$1,900 Additional Tax

$1,350 Additional Tax

Summary Of 2013

• Medicare payroll tax • Unearned income surtax• Medical expense deduction – exceeds

10% of AGI• New FSA contribution limits of $2,500

per year• Medical device manufacturer excise tax• Notice regarding exchange was delayed

from March 1, 2013 to October 1, 2013

Impact For 2014 And After

• Health insurance exchanges• Penalties if no health insurance post 2013 for

individual mandates• Penalties if large employer and no health

insurance for full-time workers post 2014 for employer mandates

• Reporting requirements post 2014 also for employers

• Pay or Play penalty for 2015:- Depends on whether coverage is offered- Penalty as high as $2,000 - $3,000 per

employee

• Waiting period – 90 days• Increase access to Medicaid in

certain states based on % of poverty level

• Pre-existing coverage conditions and no limits

• Cadillac Health Plan– 40% Excise Tax (2018)

Impact For 2014 And After

• Plans through 2013 – Old rules allowed for a company health insurance plan to provide reimbursement to the employee for health insurance as long as it was under an accountable plan and not discriminatory. Otherwise, the reimbursement must be included in wages.

• Plans for 2014 and future years – There is no pre-tax reimbursement for individual insurance plan under the ACA. Employers must have a group health insurance in place to be tax-free to the employee.

Group Health Plans for 2014

• An HRA is an arrangement that is funded solely by an employer and thatreimburses an employee for medical care expenses incurred by the employee, or his spouse, dependents, and any children who, as of theend of the taxable year, have not attained age 27, up to a maximum dollar amount for a coverage period.

• The ACA provides that an employer-sponsored HRA cannot be integrated with individual market coverage.

• A group health plan used to purchase coverage on the individual market is not integrated and will fail to comply with the annual dollar limit prohibition because an employer payment plan is considered to impose an annual limit up to the cost of the individual market coverage purchased through the arrangement and an employer payment plan cannot be integrated with any individual health insurance policy purchased under the arrangement.

Integrated Health Plan

Integrated Health Plan (continued)

An HRA is integrated with another group health plan for purposes of the annual dollar limit prohibition and the preventive services requirements if (1) the employer offers a group health plan (other than the HRA) to the employee that does not consist solely of excepted benefits; (2) the employee receiving the HRA is actually enrolled in a group health plan (other than the HRA) that does not consist solely of excepted benefits, regardless of whether the employer sponsors the plan (non-HRA group coverage); (3) the HRA is available only to employees who are enrolled in non-HRA group coverage, regardless of whether the employer sponsors the non-HRA group coverage (for example, the HRA may be offered only to employees who do not enroll in the employer’s group health plan but are enrolled in other non-HRA group coverage, such as a plan maintained by the employer of the employee’s spouse); (4) the HRA is limited to reimbursement of one or more of the following—co-payments, co-insurance, deductibles, and premiums under the non-HRA group coverage, as well as medical care that does not constitute essential health benefits; and (5) under the terms of the HRA, an employee (or former employee) is permitted to permanently opt out of and waive future reimbursements from the HRA at least annually and, upon termination of employment, either the remaining amounts in the HRA are forfeited or the employee is permitted to permanently opt out of and waive future reimbursements from the HRA. This opt-out feature is required because the benefits provided by the HRA generally will constitute minimum essential coverage and will therefore preclude the individual from claiming a premium tax credit. If minimum value is required, item (4) above is not required.

Year Provision2013 • Flexible spending arrangement the maximum drops to $2,500 per plan

year• New “HI” (hospital insurance tax) on high-income taxpayers (.9% tax

on wages in excess of threshold amount)• New 3.8% Medicare tax on investment income• Medical care itemized deduction threshold increases to 10% of AGI

starting in 2013 but remains at 7.5% for those age 65 and older until 2016

• Notification to employees by October 1, 2013

2014

2015

• States will be required to provide federally approved insurance plans or default to federal marketplace

• Premium assistance credit• Excise tax on uninsured individuals on Form 1040• Excise tax on applicable large employers• Insurer reporting requirements

2017 • Increase in medical deduction threshold for taxpayers age 65 and over

2018 • Excise tax on high-cost employer plans

Individual Health Insurance Plans

The insurance price is determined by only four

criteria:

1. Age – Older people will not pay more than

three times the amount younger people pay

2. Premium Rating Area – High cost areas will

have more expensive insurance

3. Number of family members covered

4. Tobacco Use Observation – Young adults

and men may see an increase in premiums

Essential Health Benefits

Generally, the following ten benefits must be

provided with no annual or lifetime limits:

1. Ambulatory services

2. Emergency services

3. Hospitalization

4. Maternity and Newborn care

5. Mental Health and substance abuse

6. Prescription drugs

7. Rehabilitative services

8. Laboratory services

9. Pediatric services including oral and vision care

10. Preventative and wellness services and chronic disease management

Individual Mandate

• The requirements• The penalty• Premium Assistance Credit• Note: Not like a normal credit.

The money goes directly to the insurance company.

• Exceptions to the penalty• Define Minimum Essential

Coverage

Individual Mandate (continued)

• Small Business Health Options Program (SHOP) Marketplace for small businesses with up to 100 employees

• Must purchase insurance through the SHOP Marketplace to be eligible for small business health care tax credit for tax years 2014 and beyond

• Online SHOP Marketplace has been delayed by one year requiring an agent, broker or insurance company to get coverage

Penalty For Remaining Uninsured

• Minimum essential coverage is required to avoid the penalty

• Insurance bought through an exchange will meet the minimum essential requirements

• The penalty imposed on the uninsured under 18 is one-half of that imposed on adults

• A taxpayer is responsible for providing coverage if they are able to claim a personal exemption for the person

Penalty For Remaining Uninsured (continued)

• Exemptions from penalties

• The penalty is the greater of a Percentage of the Taxpayer’s Income or a Flat Dollar Amount. The per adult annual penalty is phased in:

2014: Greater of 1% of applicable income* or $952015: Greater of 2% of applicable income or $3252016: Greater of 2.5% of applicable income or $6952017 and beyond: Indexed for inflation from $695

* Applicable Income is the excess of household income over the threshold filing amount.

Penalty Cap

• The Flat Dollar amount is capped at 300% of the adult penalty (without regard to dependents)

• For 2016, the cap is 2.5% of household income or $2,085 (3 x $695)

• The penalty cannot exceed the cost of a bronze level plan

• The penalty applies to any period essential coverage is not maintained (monthly)

• The penalty is to be assessed through the IRC (no liens or levies allowed)

Premium Assistance Credit

• Tax credit available for those with incomes up to 400% of the federal poverty level — currently: $46,680 (single), $95,400 (family of four)

• Not eligible for Medicaid or affordable employer insurance• These people will have to obtain insurance through an exchange

Premium Assistance Credit

• Based on income level estimated before the enrollment period

• Eligibility is determined month-by-month• Cannot be eligible to be claimed as a

dependent• The taxpayer is only eligible for the credit if

the employer coverage is unaffordable• The employer plan is unaffordable if the

employee must pay (self-coverage only) premiums that exceed 9.5% of household income

Substantiation of Income in the Marketplace

• Include taxpayer, spouse, children who live with you, unmarried partner, any dependent, and anyone else under 21 who you take care of and lives with you

• Estimate your income for 2014 including wages, net income from self-employment or business, unemployment, Social Security, alimony and other items included in household income

• Household income is MAGI plus any tax-exempt Social Security, tax-exempt interest and tax-exempt foreign income

• Any adjustment necessary based on actual income will be reflected on tax return

Premium Assistance Credit Household Income

• Household Income is AGI plus:– Tax exempt income, foreign

earned income and housing excluded under Section 911, and excluded social security benefits

• Also include the AGI of dependents who are required to file a return

Premium Assistance Credit Household Income

• Taxpayer buys insurance at the exchange and the exchange makes advance payments on behalf of taxpayer after the exchange determines eligibility. At tax time, taxpayer reconciles the actual credit for the tax year computed on his 1040 with the amount of advance payments made on his behalf. If the credit exceeds the amount of advance payments, he gets a refund or the excess amount is applied to other taxes owed. If the advance payments exceed the credit, he owes but the amount owed is limited.

• Repayment of excess - The limitation is between $600 - $2,500 ($300 -$1,250 single)

• The credit is the lesser of the premiums for the month or a calculation based on your household income (Excess of “adjusted monthly premium” for a “benchmark plan” (silver plan) over 1/12 of the product of household income and the “applicable percentage”)

Premium Assistance CreditApplicable Percentage

Household Income as % of Percentage of Federal Poverty Level (FPL) Household

IncomeLess than 133% 2.0 – 2.0%133% to 150% 3.0 – 4.0%150% to 200% 4.0 – 6.3%200% to 250% 6.3 – 8.05%250% to 300% 8.05 – 9.50%300% to 400% 9.50 – 9.50%Over 400% N/A

Credit is benchmark plan premium over percentage.

Cost Sharing Reduction Subsidy

• The Cost Sharing Reduction Subsidy is available to those that qualify with income not exceeding 250% of the FPL

• This subsidy allows for a reduction in the amount of out-of-pocket expense they could incur

• Applies to deductibles and co-pays• Must buy insurance through an Exchange to qualify

Exemption From Individual Mandate Penalty

1. Religious reasons2. Member of health care sharing ministry3. Indian tribes4. No tax return filing requirement5. Short coverage gap (went without coverage for less than three

consecutive months). The coverage gap only applies to the first gap.6. Unaffordable coverage options – Minimum amount you must pay for

premiums is more than 8% of your adjusted household income.7. Incarceration8. Not a U.S. citizen, a U.S. national nor an alien lawfully present in the U.S.

Exemption From Penalty – 8% Rule

• If premiums exceed 8% of Adjusted Household Income, the taxpayer is exempted from penalties

• Adjusted Household Income is AGI plus:

– Tax exempt income, foreign earned income

and housing excluded under Section 911• Subtotal is called Household Income• Add back premiums paid through a salary

reduction plan (e.g. Cafeteria plan)• Total is Adjusted Household Income

Exemption From Penalty – 8% Rule (continued)

• Also include the AGI of dependents who are required to file a return

• Do not add in non-taxed Social Security benefits as we do with the Premium Assistance Credit

• If an individual can only buy through an Exchange the cost is based on Bronze level premiums

Employer Mandate

• Effective Date - Effective January 1, 2015 for large employers with 100 or more full-time equivalent (FTE) employees and effective January 1, 2016 for employers with 50 to 99 FTE employees

• Large Employer Play or Pay – A large employer is one that had at least 50 FTE (average at least 30 hours per week or 130 hours per month) during the previous calendar year

• Part-time workers – In determining whether a company is a large employer the employer will take the aggregate number of hours of part-time employees ÷ 120 and add this to the number of FTEs

Employer Mandate

• Large Employer (100+ FTE) – Business reporting and penalties delayed until January 1, 2015. No penalties if offer insurance to 70 percent of workers for 2015 and 95 percent of workers in 2016 and future years.

• Large Employer (50-99 FTE) – Shared-responsibility payments delayed until January 1, 2016

• All Employers – Beginning in 2015, must report on workers and health care insurance coverage.

• Transition Relief – Available only if employer doesn’t reduce the size of its workforce or the overall hours of service of its employees unless the reductions are for a bona fide business reason.

• Reimbursement of Individual Policies – Not available in 2014 unless part of an integrated Health Reimbursement Arrangement (HRA)

Employer Mandate (continued)

• An exemption applies where the workforce exceeds 50 FTE for no more than 120 days, and the employees in excess of 50 were seasonal

• Include all hours which the employee is paid including holidays, vacation, sick pay, etc.

• Coverage must begin within 90 days of employment for full-time employees

Employer Mandate Periods

• If an employee works at least 30 hours per week during the measurement period, then they are treated as full-time during the stability period regardless of how many hours they actually work.

• Standard Measurement Period - A three to six month period where an employer can look back. The employer can choose the length of time. The length of time needs to be consistent with employees in the following categories: salaried and hourly employees, employees of different entities, employees in different states, and collectively bargained and non-collectively bargained employees.

Employer Mandate Periods

• Stability period - A period of time where employees determined to be full-time in the measurement period must be offered insurance.

• Must be for at least six consecutive calendar months and no shorter than the measurement period.

• Initial measurement period can be used by an employer that is between three to twelve months.

• An administrative period is available for new employees in addition to the initial measurement period of up to 90 days before the stability period starts.

Employer Mandate Potential Penalties

1. “No coverage penalty” - An employer does not offer minimum essential insurance to at least 95% (70% for 2015) of its full-time employees (in 2015 this includes dependents) and at least one employee qualifies for the Premium Assistance Credit or Cost Sharing Reduction. The penalty is calculated on a monthly basis and there is a 30 FTE threshold before the penalty is applied.

2. “Lacking Minimum Value or Unaffordable Penalty” - An employer does offer minimum essential coverage to at least 95% (70% for 2015) of the full-time, but at least one employee qualifies for the Premium Assistance Credit or Cost Sharing Reduction. The penalty is assessed monthly with a maximum of the above penalty.

Affordable Coverage

• Affordable coverage is determined to exist if an employee’s share of the premium for employer provided coverage would cost the employee no more than 9.5% of that employee’s annual household income

• If an employer offers multiple healthcare coverage options, the affordability test applies to the lowest-cost option available to the employee that also meets the minimum value requirement

Affordable Coverage

Employers can take advantage of one of the following safe harbors todetermine if the coverage is affordable:

a. Form W-2 Determination Method - Self-Only coverage does not exceed 9.5% of the W-2 as reported in Box 1. This is determined at the end of the year on an employee-by-employee basis. The employee’s required contribution must remain consistent throughout the year.

b. Federal Poverty Line Method - The cost does not exceed 9.5% of the Federal Poverty Line.

c. Rate of Pay Method - The cost does not exceed 9.5% of 130 hours x employee’s rate of pay as of the first day of the coverage period. Use monthly salary for salaried employees.

Minimum Value

Methods for an employer to determinewhether the coverage it offers providesminimum value:a. A minimum value calculator will be made

available by the IRS and the Department of Health and Human Services (HHS). Employers can input information and determine if the plan provides minimum value by covering at least 60% of the expected costs.

b. Ask the insurance agent or company.

Employer Mandate Issues

• Testing Periods - The employer can use any consecutive six month period in the prior year to measure the number of employees for the applicable year.

• Aggregation rules - Controlled and Affiliated group rules apply so you can’t bypass with multiple companies.

• Benefits provided through an association - The determination of large employer status is made at the employer level.

• The IRS will send a notice and demand for payment of the Employer Shared Responsibility payment due and it is not deductible.

Employer Mandate Tax Planning

• Measurement Period• Keep Employees Below 30

Hours Per Week• Use Independent Contractors• Health Insurance Coverages• Thomson Reuters EBIA Health

Care Reform Tool for independent information

Cadillac Plans Excise Tax

• 40% tax imposed on high cost employer-sponsored and self-insured plans beginning in 2018

• The tax is levied on insurance companies and plan administrators

• It is applied to annual insurance premiums for those under 55 that exceed $10,200 for individuals/$27,500 for families

• For ages 55 and above, the threshold is $11,850 for individuals/$30,950 for families

• There are age, gender and other adjustments

Obamacare Strategy Steps

• Notice to Employees required on October 1, 2013 (http://www.dol.gov/ebsa/faqs/faq-noticeofcoverageoptions.html)

• Get an accurate head count to determine if the employer mandate is applicable• Consider whether you will offer coverage • Decide where to shop for health insurance (SHOP, Private, Marketplace, Direct, or

Agents)• Explore a Self-Funded Plan (avoid community ratings)• Consider Skinny Plan Strategy (doesn’t meet ACA minimum value test) to limit the

penalty to $3,000 per-employee only for employees who actually claims a subsidy on exchange. The benefit to the employee is that they may qualify for subsidy and avoid individual mandate penalty.

• Claim your Tax Credit if you have 25 or fewer FTEs and pay average wages below $50,000 and pay at least half the cost of employee only health insurance (SHOP and 2 year limitation for 2014 and future years).

American Tax Relief Act (ATRA)

• Agreement on legislation to address the “fiscal cliff”

• 2012: Ordinary-income rates permanent, ranging from 10% to 35%

• 2013: Taxable income exceeding the following amounts are subject to the top marginal tax rate of 39.6%:– $400,000 (Single)– $425,000 (Heads of Household) – $450,000 (Married Filing Jointly)

American Taxpayer Relief Act

• Individual Tax Rates – Joint 2013 Taxable Income 2012 20130 10% 10%17,850 15% 15%72,500 25% 25%146,400 28% 28%223,050 33% 33%398,350 35% 35%450,000

39.6%• Capital gains - max 15% 20%• Qualified dividends - max 15% 20%• Estate/Gift tax rate 35% 40%

American Tax Relief Act (ATRA)

• 2013: Return of limits on certain itemized deductions. Thresholds at:– $250,000 (Single)– $275,000 (Heads of Household)– $300,000 (Married Filing Jointly)

• Long-term capital gains – 2012 rates of 0% and 15%

• Taxable income exceeding thresholds face long-term gains rate of 20%. Thresholds at:– $400,000 (Single)– $425,000 (Heads of Household)– $450,000 (Married Filing Jointly)

Return Of Phase-Outs – Exemptions

• Phase out of personal exemptions starting after 2012• Reduced 2% for each $2,500 or part thereof Adjusted Gross

Income in excess of new thresholds:

Joint $300,000Head of Household $275,000Single $250,000Married filing separate $150,000

• Can be completely phased out• Adjusted for inflation after 2013

Return Of Phase-Outs – Itemized Deductions

• Limitation of itemized deductions starting after 2012• 3% of excess of adjusted gross income in excess of new thresholds:

Joint $300,000Head of Household $275,000Single $250,000Married filing separate $150,000

• Adjusted for inflation after 2013• Reduction not to exceed 80% of Schedule A amount• Medical, investment interest, casualty and gambling losses not

reduced by limitation

American Tax Relief Act (ATRA)

• Alternative Minimum Tax (AMT) relief retroactive to January 1, 2012

• Tax break extensions:– Deduction for state and local sales tax in

lieu of state and local income tax– Child- and education-related credits and

deductions– Taxpayers age 70 ½ or older can make

direct tax-free rollover from an IRA to charity

– Certain home and energy-related breaks

American Tax Relief Act (ATRA) (cont.)

• Estate Taxes– Top estate tax rate, 40%– “Portability” election permanent– Exemption annually inflated,

adjusted $5 million

How To Prepare?

Questions

Jay Hutto, CPA/ABV/CFF, CVAPartnerJames Moore, CPAswww.jmco.comJay.Hutto@jmco.comPh: 352.378.1331

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