Health Care Reform Update

Presented by:

Traci Howell Tony Stergio Micah StewartBenefits Advisor Shareholder Vice President

Labor and Employment Tax Services

What is changing in 2013?

Effective 1/1/2013 FSAs limited to $2,500.

For W-2’s issued in January 2013, employers issues more than 250 W-2’s will be required to report the aggregate cost of employer-sponsored health care.

By 7/31/2013 all plans will pay $1/member to fund comparative effectiveness research of medical treatments by the new non-profit Patient Centered Outcomes Research Institute.

2013 Changes Continued

On 3/1/2013 employers must provide notice on exchanges informing employees of:

◦ The state's Exchange, including a description of how the employee may contact the Exchange for assistance.

◦ If the plan offered by the employer is inadequate, meaning it does not meet the actuarial value of 60 percent. The employer must let employees know that they may be eligible for a premium tax credit and a cost-sharing reduction if they purchase a health plan through the Exchange.

◦ If they purchase a health plan through the Exchange, the employee may lose the employer's contribution to health benefits offered by the employer.

◦ This requirement was delayed on January 24th until further notice.

Exchanges - 1/1/2014Effective 1/1/2014 U.S. citizens and legal residents and small businesses with less than 100 employees will have access to either a state exchange or the Federal Exchange. What is an Exchange?

At a basic level, a health insurance exchange is a store or shop specializing in health insurance merchandise. More specifically, a health insurance exchange is an insurer’s or broker’s or government’s insurance offering to individuals and/or employees. Today’s health insurance exchanges typically include the following components:

A choice of two or more health insurance optionsAdvice and recommendation on what health insurance options best fit your needsAutomated billing for the chosen health insurance plan premium(s)On-going support for the chosen health insurance plan(s)

Individual Mandate - 1/1/2014 Effective 1/1/2014 U.S. citizens and legal residents are required to purchase

minimum essential health coverage or pay an annual individual responsibility tax. The per person tax is the greater of:

2014: $95 or 1% of household income (AGI plus tax exempt interest and foreign-earned income for all persons in the household) in excess of the threshold amount required to file a federal income tax return ($9,500 for a single person or $19,000 for married persons filing jointly in 2012)

2015: $325 or 2% of household income 2016: $695 or 2.5% of household income

The per person tax is reduced by 50% for each person under age 18. Families would be capped at $2,250. After 2016, the dollar amounts would be indexed to inflation.

Note: It is our understanding the IRS cannot enforce the individual tax via lien and can withhold the tax only from income tax refunds or Social Security benefits.

Pay or Play - 1/1/2014An employer with more than 50 full-time equivalent employees (FTEs) must offer all of its FTEs minimum essential health coverage; otherwise, if at least one FTE receives a federal subsidy to buy coverage through the exchange, then the employer must pay a nondeductible excise tax calculated as follows:

# of actual full-time employees (minus 30) x 1/12 of $2,000 for each month that such coverage is not offered

A FTE is defined as an employee who works on average at least 30 hours/week. On 8/31/2012 the IRS issued guidance on safe harbor methods employers may use to identify FTEs.

Coverage may be offered to employees and their dependents. Dependents is defined as children under age 26 and does not include spouses.

Applies to all common law employers (exception for seasonal workers).

Independent Contractors 1099Status doesn’t necessarily matter

Common for employers to categorize some employees as independent contractors

But these are significant dangers in classifying employees as independent contractors

◦ Back payroll taxes and penalty◦ This is a personal liability to decision makers (not just company)◦ Overtime liability and penalties

Independent Contractor/Employee

Workers are generally employees if:

◦ Work at the same place everyday

◦ Do not have specialization skill they “sell” to other customers

◦ Do not have potential for profit and loss

◦ Do not bring own equipment

◦ Are told what to do and how to do it by you

“Controlled Group” Provisions

• The Employer Mandate Penalty relies on Controlled Group provisions, focusing on WHO controls the company and not necessarily what the company does.

• Enforceable by the IRS

Pierce Corporate Veil

Texas Courts will pierce corporate veil in several other situations:

◦ where the fiction is used as a means of perpetrating fraud;

◦ where a corporation is organized and operated as a mere tool or business conduit of another corporation;

◦ where the corporation fiction is resorted to as a means of evading an existing legal obligation;

◦ where the corporate fiction is employed to achieve or perpetuate a monopoly;

◦ where the corporate fiction is used to circumvent a statute;

◦ where the corporate fiction is relied upon as protection of a crime or to justify a wrong.

Can I Play and Still be Penalized?An employer with more than 50 FTEs that offers essential coverage deemed“unaffordable”, causing at least one FTE to receive a federal subsidy to buy coverage through the exchange, must pay an excise tax calculated as follows:

# FTEs who receive a premium subsidy x 1/12 of $3,000 for each month that such coverage is “unaffordable.”

Coverage is “unaffordable” if:oThe employee’s required premium/contribution for self-only coverage exceeds 9.5% of the employee’s W-2 income; or

oThe employer’s share of covered expenses is less than 60%.

oPremium subsidies or credits are available to any employee whose household income is at least 100% of the Federal Poverty Level (FPL) but less than 400% of FPL.

Rating Limits – 1/1/2014The Patient Protection and Affordable Care Act (“PPACA”) includes new federal rules limiting the extent to which insurance companies can impose premium surcharges on individuals and small businesses based on such factors as claims experience, age, tobacco use and gender. Traditionally, this practice has been regulated by the states, with wide variations in how much insurers are allowed to adjust rates. Starting January 1, 2014 companies must adhere to minimum premium rating rules:

◦ Self-only or family enrollment◦ Geographic area◦ Age (except the rate cannot vary by more than 3 to 1 for adults◦ Tobacco use (except the rate cannot vary by more than 1.5 to 1

Will result in lower premiums for older or unhealthy groups and higher rates for young or healthy groups.

Cost Sharing Limits – 1/1/2014 Group health plans may not impose annual deductibles greater than $2,000

single/$4,000 family for plan years starting on or after January 1, 2014, with these amounts indexed to the increase in U.S. health insurance premiums in subsequent years. Further guidance is necessary to clarify whether this restriction applies to all employers or only to small employers.

PPACA allows these maximum deductibles to be raised by the amount of any employer contributions to an employee’s health flexible spending account. It is not clear whether future regulations will treat employer contributions to a health savings account (HSA) similarly.

Group health plans may not impose out-of-pocket limits greater than the maximum limits allowed for HSA-eligible account-based health plans ($6,250 single/$12,500 family in 2013) beginning in 2014. These maximum deductibles and out-of-pocket limits do not apply to “grandfathered” plans, existing plans that were first offered before the PPACA’s enactment.

The Affordable Care Act - Individuals• Additional Health Insurance Taxo Individuals are subject to an additional .9 percent hospital insurance tax on wages

and self-employment income in excess of $200,000 ($250,000 in the case of a joint return) for tax years beginning after December 31, 2012.

• Medicare Tax on Unearned Incomeo A 3.8 percent Medicare tax is imposed on a portion of the net investment income

of individuals, estates, and trusts for tax years beginning after 2012. o Example: Eliot and Sylvia, a married couple filing a joint return, collectively earn

$270,000 in wages and have $80,000 of net investment income in 2013. Their modified AGI is $350,000. For 2013, the couple will incur a 3.8 percent unearned income Medicare contribution tax on the lesser of their: (1) $80,000 of net investment income or (2) $100,000 of modified AGI in excess of the $250,000 threshold for married taxpayers filing jointly. Thus, Eliot and Sylvia will incur a $3,040 unearned income Medicare contribution tax in 2013 (3.8 percent x $80,000).

o This tax does not apply to a trade or business in which the taxpayer is active.

The Affordable Care Act - Individuals

Medicare Tax – Planning

• With the Taxpayer Relief Act of 2012 the maximum rate for capital gains is 23.8%.

• Taxpayers should plan to reduce their investment income and their modified adjusted gross income as much as possible.

• The IRS has issued little guidance.

• Municipal bonds are exempt from the Medicare tax.

• FLPs and S-corporations can be used as a means of estate planning.

The Affordable Care Act - Individuals• Premium Assistance Credito Taxpayers with household income between 100 percent and 400 percent

of the federal poverty line can qualify for a refundable health insurance premium assistance credit. Employers must keep track of these employees for reasons discussed later.

• Medical Deduction Thresholdo The threshold for the itemized deduction for unreimbursed medical

expenses is increased from 7.5 percent of AGI to 10 percent of AGI for regular income tax purposes, for tax years beginning after December 31, 2012.

• Over-the-Counter Medicineso Qualified medical expenses for purposes of the rules on HSAs, Archer

MSAs, health FSAs, and HRAs no longer include over-the-counter medicines and drugs not prescribed by doctor.

The Affordable Care Act - Individuals

• Miscellaneous Provisionso Adoption credit and adoption assistance: The dollar limitations for the

adoption assistance program exclusion and the adoption credit have been increased by $1,000, and the adoption credit has been made refundable.

o Medical benefits for children under 27: A child who is under the age of 27 is a dependent of a taxpayer for purposes of the exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan and other purposes related to medical benefits.

o Student loan repayment programs: Individuals can exclude from gross income repayments under state loan repayment or forgiveness programs that are intended to provide for the increased availability of health care services in underserved or health professional shortage areas.

The Affordable Care Act - Businesses

Small Employer Health Insurance Credit

An eligible small employer may claim a 35 percent tax credit(25 percent in the case of a tax-exempt eligible small employer) for premiums it pays toward health coverage for its employees in tax years beginning in 2010 through 2013.

The Affordable Care Act - Businesses• Miscellaneous Provisionso Retiree prescription plans: The rule that allowed an employer, as a plan

sponsor, to disregard the value of any qualified retiree prescription drug plan subsidy in calculating the employer's business deduction for retiree prescription drug costs is repealed.

o Excessive remuneration: The deduction for employee remuneration paid by certain health insurance providers is limited. The limitation applies to certain individuals who are paid in excess of $500,000 in tax years beginning after December 31, 2012.

o “Cadillac” health plans: A 40 percent excise tax will be imposed on insurers to the extent that the aggregate value of employer-sponsored health coverage for an employee exceeds a threshold amount starting in 2018.

o Drug and insurance companies: Annual fees are imposed on manufacturers and importers of branded prescription drugs and providers of health insurance for U.S. health risks, and a 2.3 percent excise tax is imposed on sales of medical devices.

Other Changes to Come..January 2014Guaranteed issue, renewability and rating rules take effect for individual and small group markets

Employer-sponsored plans cannot impose annual benefit limits or pre-existing condition limits on adults.

Employers cannot use an eligibility waiting period in excess of 90 days or face a fine of $600/full time employee

January 2017: Large employers can access exchanges

UnknownAutomatic enrollment for employers with 200 employees was enacted 3/23/10 and pushed back to 2014. Guidance has not been issued.Non-discrimination rules were to start 2011 but guidance was delayed.