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Brian T. Whitlock CPA, JD, LLM

How Federal Health Care Changes will Impact Your Organization

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• Mandates on Providers

• Mandates on Insurance & Drug Co.

• Mandates on Employers

• Mandates on Individuals

Coverage of Act

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Tax Treatment of Non-Profit Hospitals

501(c)(3) Hospitals must meet new 501(r)Community Health Needs AssessmentWritten Financial Assistance PolicyBill Collection PracticesLimitation on Charges for patients that qualify for financial assistance

—May not use chargemaster rates (gross charges)

—Amounts billed must be based on average of best negotiated rates, or Medicare rates

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Mandates on Health Care Providers

2010 Medicare Reimbursement cuts $455 Billion reduction in reimbursement rates to

Medicare Providers over 10 years— 21% cut in Medicare Reimbursements to doctors— June Pension funding relief act postponed this until November

2010. December Tax act postponed again.— The Flinch Method

Impact on all health care providers accepting Medicare Providers will shift costs resulting in higher charges to

insurers and their participants Likely result - higher insurance premiums

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Mandates on Suppliers

2010 - 10% Excise Tax on Tanning Salons States looking to prohibit use under 18 years of age

2013 - Medical Device Excise Tax of 2.3% Direct pay by purchaser Prosthetic devices (electric wheelchairs) Excludes eyeglasses, hearing aids, retail items Sales after December 31, 2012 Likely to include – MRI’s, CT, X-Ray, Dialysis

Equipment, Diabetes and medical Testing kits (i.e., pregnancy tests, snake bite kits)

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Mandates on Suppliers

Annual Health Insurance Provider Fee $8 Billion in 2014 increasing to $14 Billion in 2018 Divided among insurers based on market share Cost likely passed on via higher premiums

Annual Brand Name Drug Company Fee $2.5 Billion in 2011 increasing to $4.1 Billion in 2018 Allocated by share of prescription drug sales under a

specified government program Cost likely passed on in higher prices

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Mandates on Insurance Companies

2018 - Excise Tax on High Cost “Cadillac” Plans 40% tax assessed on Insurance Companies Assessed on employer plan benefits in excess of

— $10,200 a year of individuals

— $27,500 a year for families

— Effective for taxable years beginning after 12/31/2017

— Would raise $2.5 Trillion over ten years

Cost likely passed on via higher premiums

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Typical Health Insurance Plans Today

Preferred Provider Organization (PPO) Individual $558.20 /mo ($6,700/yr) 82.8%($5,550/$1,150) Family $1,800 /mo($21,600/yr) 60% ($12,960/$8,540)

Health Maintenance Organization (HMO) Individual $366/mo($4,400/yr) 87.5% ($3,850/$550) Family $1,100/mo ($13,200/yr) 59.7% ($7,880/$5,320)

High Deductible Health Care (HDHC) Individual 355 /mo ($4,260/yr) 92.7% ($3,950/$310) Family $1,137/mo($13,650/yr) 61.9% ($8,450 + 600/$5,200

+$4,500)

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Health Related Excise Taxes and Fees

Elimination of Corporate deduction Medicare Part D Subsidy “donut hole”

Medicare will begin to close the hole on its own

$500,000 income tax deduction limit on executive compensation of health insurance executives

Beginning for tax years beginning after 12/31/2012

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Standardized Benefit Provisions

Beginning September 2010 - Plans must provide standardized benefits

Minimum standardized benefits— Coverage for all dependents to age 26

— All emergency care must be covered as “in Network”

— No Cost Sharing on preventative services

— Restrictions on annual limits

— No lifetime limits

— Insurance Company must cover pre-existing conditions on children under 19

Insurance Companies will only be able rescind policies for fraud of applicant

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Mandates on Insurance Companies

Beginning in 2014 State Insurance Exchanges – “Orbitz for Insurance” Insurance companies required to offer policies Guaranteed issue, no limit on pre-existing condition Premiums become community rated

— Geography no longer allowed as variable— Family no longer allowed as variable

Age and Tobacco use are only variables Age 3:1 ratio; Tobacco 1.5:1 ratio Essential Plan Benefits required

— Undefined currently

Result: Insurance Company margins squeezed

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Employer Mandates

Plans as of March 23, 2010 – Grandfathered Not currently required to meet employer mandates In 2014 – “Essential Plan Benefits” will be required

Beginning September 2010 All other Plans Section 105(h) discrimination rules apply to all plans;

previously only self insured plans— 70% of employees must be eligible for coverage— Highly compensated taxed on “benefits” of self-insured plan— NEW FOR GROUP PLANS - $100 per day per individual

discriminated against for group plans (Notice 2010-63)

Maintaining discriminatory plans may be costly

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Employer Mandates

2014 Employer “Coverage” for Employees(“Individual” Coverage not “Family” Coverage) FIRST TEST: Number of FTEs (Full-Time Equivalent)

— # of FTEs = total employee hours / 2,080

Employers with >50 FTE’s — Must Cover “Full-Time” employee (avg. 30 hours/ week)— Must offer “affordable” coverage— Must contribute to cost of Insurance— Employer Penalties for non-compliance

Employers with <50 FTE’s Employers with <25 FTE’s may be eligible for credits if

they voluntarily choose to offer coverage

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Essential Plan Benefits

Must offer Affordable Coverage Individual coverage not family coverage

Definition to be developed in Regulations Must meet actuarial guidelines

Individuals portion of Insurance Premium must meet % of Income tests

— Generally, 8-10% of Household income

Base = 400% of FPL (Federal Poverty Level) — $43,320 for an individual in 2009— $88,200 for family of four in 2009

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Employer Mandates

2014 Employer - Penalties If employer does not offer coverage when required

— If one employee claims premium credit then employer subject to penalty of $2,000 per Full-time employees (30+ hours)

If employer offers unaffordable coverage— If one employee claims the credit, then employer will be subject to a

penalty equal to lesser of $3,000 per employee claiming credit or $2,000 per all Full-time employees (30+ hours)

If employer offers affordable coverage—Employer must offer Free Choice Vouchers if employee contribution is

8-9.5% of income (Congress Flinched and removed by 2011 Appropriations Act – April 15th)

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Small Business Tax Credit [Code 45R(c)

Credit Available for 2010, 2011, 2012 and 2013 Full credit where 10 or fewer FTEs and avg. wages of $25,000

— Credit = 35% of Premiums paid

— Credit = 25% of Premiums for small tax exempts

— Beginning in 2014 and 2015

– Credit = 50% of Premiums paid

– Credit = 35% of Premium for small exempts

– Insurance Exchange option required

Reduced credit — Between 10 and 25 FTEs

— Average wages between $25,000 and $50,000

Limitations— No credit available for premiums paid for self-employed or family

members; >2% owner of S; >5% owner of C— Must pay 50% or more of Premium for single coverage

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Employer Mandates

Employee average wage calculation Excludes ineligible group

— Self-employed and family members; >2% owner of S; >5% owner of C

Includes leased employee Includes affiliated service groups – 415(m)

and (o) Excludes Seasonal Workers

— Less than 120 days

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Employer Mandates

2011 – 4 page employer summary of benefits

2012 – Form W-2 Information Reporting Optional for 2011 (IRS Notice 2010-69, 10/13/10) Cost of Coverage to be list (not taxed) Verification of Insurance Coverage

2012 – Expanded Form 1099 Reporting PPA removed exception for Goods and Services Small Business Act treated landlords as “Trade or Business”

(Congress Flinched and removed both in 2011 HR4 on April 14th)

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Other Health Related Provisions in 2010

Section 1035 - Pension Protection Act of 2006 Expanded opportunity to exchange annuities and life

policies for policies that contain Long-term Care Ins. Effective for exchanges after 12/31/2009

—Hancock – Life Care—United of Omaha – Living Care Benefits

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Individual Mandates

Current Statistics - 310 MM in US179 MM covered by Private Insurance

—132 M in Large Group Plans— 29 M in Small Group Plans— 18 M in individual Plans

100 MM covered by Government Programs—44 M in Medicare—44M in Medicaid—12M in VA and Dept of Defense

41 MM Uninsured—12 MM estimated Illegal Aliens (no impact)—29 MM people potential new insureds

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Individual Mandates

2014 Individuals Required to have Coverage All US Citizens and legal residents must have qualifying

coverage or pay a penalty— 1% of household income in 2014

— 2% in 2015

— 2.5% in 2016

Exemption for financial hardship, religious objections, or if lowest cost plan is greater than 8% of income.

Premium credits payable to exchange to reduce cost of coverage for low income beginning 2014

— Tax Evasion(?) No, offset refunds and tax credits

— Education Jobs Act eliminates advance refund of EIC (flinch?)

— 2011 HR4 Requires credit repayment if income > 400% of FPL (Flinch)

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Revenue Raisers – Check Please

2011 - Expanded 1099 reporting Small Business Jobs Act signed September 27, 2010

(Congress Flinched and removed first part in 2011)—Effective for years beginning after 12/31/2010—Expanded the “trade or business” definition

– “a person receiving rental income from real estate shall be considered to be engaged in a trade or business”

– Exception rental of principal residence—Raised the Section 6721 Penalty from $50 to $100 for

failure to file “correct information returns”– Reduced penalty if corrected in 30 days increased from

$15 to $30– Reduced penalty if corrected by August 1st days

increased from $30 to $60– Intentional disregard increased from $100 to $250

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Revenue Raisers - Check Please

2013 - 0.9% payroll tax on wages over $200,000 2013 - Individuals, trusts and estates pay 3.8% tax

Net investment income (interest, dividends, capital gains, and rental income)

Modified AGI over $200,000 single/$250,000 MFJ Top fiduciary bracket – trusts and estates >$11,200 No indexing of brackets

2013 - Itemized deduction threshold increased from 7.5% of AGI to 10% of AGI

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Revenue Raisers - Check Please

2013 - $2,500 limit for contributions to FSA 20% penalty on nonqualified distributions from

HSA & MSAOver the counter drugs prescribed by

physician excluded from HSA, FSA, MSA reimbursements – Announcement issued September 2010

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Revenue Raisers – Check Please

Closing the Tax Gap US Tax System is Best among Developed Countries Gap estimated at $465 Billion per year

Cash economy Lack of Tax Withholding at the source

What will “Tax Reform” Look like Some version of Expanded Form 1099 Reporting? President Commission Report—Lower rates and broaden base

American Bar Association – Simplification International Tax Reform—Value Added Tax (only US, Iran, Somalia(?) lack VAT)—Internet or National Sales Tax

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Health Care 2014

Legislative Attacks Small changes will continue to chip away Massive “defunding” not likely

—Majority of Effective dates not until 2014—Value of having a Political Issue

– 2012 Presidential Election

– 2014 Mid-Term Election

Executive - Presidential VetoJudicial Challenges to Constitutionality of Mandates

Florida v US (“unconstitutional”) — Appellate argument set for June 8th in Florida

Virginia v Sebelius (struck down parts of Act)— US Sup Ct denied request to bypass Ct of Appeals – April 25 th

— Appellate argument set for May 10th in Richmond, Virginia

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Actions

Evaluate the effect of changes on current group health coverage

Address cost and compliance issues

Consider keeping grandfathered plans

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Reasonable Questions to Consider

Is getting out of the employee insurance business a reasonable option for you?

Cheaper to get out completely(?) Impact on current employees? Ability to attract future employees?

Pay penalty allow employees to self insure?Remember Section 105(h) discrimination rule

Not just White collar v. Blue collar (70%)Look at employer self insuring a larger portion

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Questions

Brian T. Whitlock JD, CPA, LLM

Blackman Kallick, LLP

10 S. Riverside Plaza, Chicago, IL 60606

Phone: (312) 980-2941

Website: www.blackmankallick.com

Email: bwhitlock@blackmankallick.com

Linked-in

Blog www.untaxinglyyours.com