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AFFORDABLE CARE ACT: Tax Implications for Employers August 21, 2013 Juliana Reno juliana.reno@kutakrock.com PowerPoint Presentation
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AFFORDABLE CARE ACT: Tax Implications for Employers August 21, 2013 Juliana Reno juliana.reno@kutakrock.com. SMALL BUSINESS TAX CREDIT Effective Now. SMALL BUSINESS TAX CREDIT. Which employers qualify? All of the following must be true: Full-time equivalent employees (“FTEs”) ≤ 25

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AFFORDABLE CARE ACT:Tax Implications for EmployersAugust 21, 2013 Juliana Renojuliana.reno@kutakrock.com

small business tax credit
SMALL BUSINESS TAX CREDIT
  • Which employers qualify?
  • All of the following must be true:
    • Full-time equivalent employees (“FTEs”) ≤ 25
    • Average annual wages ≤ $50,000
    • Offer insured health coverage
      • 2014 and later: must be exchange coverage
    • Contribute ≥ 50% of the cost of employee-only coverage
small business tax credit1
SMALL BUSINESS TAX CREDIT
  • How to Calculate the Credit: Big Picture
    • First calculate the maximum credit.
    • Then reduce appropriately if
      • FTEs > 10 or
      • Average wages > $25,000.
small business tax credit2
SMALL BUSINESS TAX CREDIT
  • Maximum Credit:
    • Amount of premiums paid by employer

multiplied by

    • Applicable Percentage
      • 2013 tax-exempt employers—25%
      • 2013 other employers—35%
      • 2014+ tax-exempt employers—35%
      • 2014+ other employers—50%
    • There is a cap! In effect, the cap means that the employer cannot get a tax credit for buying coverage that is more expensive than the average in the state.
small business tax credit3
SMALL BUSINESS TAX CREDIT
  • Reductions
    • If FTEs > 10, multiply the credit by:

(FTEs-10)/15

    • If average wages > $25,000, multiply the credit by:

(average wages-25,000)/25,000

small business tax credit4
SMALL BUSINESS TAX CREDIT
  • Miscellaneous
    • Credit can only be claimed in 2 years
    • Tax-exempt employers apply the credit against payroll tax liabilities
    • Other employers must reduce the premium deduction by the amount of the credit
    • Who is the employer? All entities within the controlled group count as a single employer.
    • Who is an employee? Do not “count” self-employed, sole proprietors, 2% shareholders, 5% owners, and their family members
retiree drug subsidy
RETIREE DRUG SUBSIDY
  • Applicable if employer offers a prescription drug plan to Medicare-eligible retirees
  • The employer may deduct its costs
  • The employer may be entitled to a subsidy
  • Interplay of deduction and subsidy:
    • Before 2013, employer could disregard the subsidy when calculating its deduction
    • In 2013 and later, employer must reduce its deduction by the subsidy
additional medicare tax
ADDITIONAL MEDICARE TAX
  • Employer must withhold an additional 0.9% on wages over $200,000
    • Employer is not required to match this payment (this is different than “regular” Medicare taxes)
    • What the employer must withhold is not exactly the same as what the employee will owe
  • Employee who anticipates the need to pay the additional tax may request early/additional withholding
form w 2
FORM W-2
  • Which employers are affected?
    • Employers who issued 250 or more W-2s in the prior year
  • What must be reported?
    • Total cost of coverage (employer and employee premiums) for most employer-sponsored health plans, BUT NOT FOR

** stand-alone limited-scope dental or vision coverage ** coverage only for a specified disease or illness ** hospital indemnity or other fixed indemnity insurance ** coverage for long-term care ** accident-only coverage, disability coverage, or any combination of these ** coverage issued as a supplement to liability insurance ** liability insurance, including general liability insurance and automobile liability insurance ** workers’ compensation or similar insurance **

flexible spending accounts
FLEXIBLE SPENDING ACCOUNTS
  • Employee contribution limit: $2,500
  • No longer permitted to reimburse OTC drugs unless
    • An appropriate medical professional has issued a prescription; or
    • The drug is insulin.
pcori fees
PCORI FEES
  • What are those?
    • A way to fund the Patient-Centered Outcomes Research Institute (PCORI)
    • PCORI  better outcomes  lower medical costs
    • Scheduled to last 6 years
  • Who is responsible for compliance?
    • For fully-insured plans—insurance company
    • For self-funded plans—employer
pcori fees1
PCORI FEES
  • How to comply?
    • Calculate the fee
      • Applicable Dollar Amount: $1 for PYE between October 1, 2012, and September 30, 2013

multiplied by

      • Average # of Covered Lives: different methods
    • Complete IRS Form 720
    • Pay & Report
      • Due by July 31 of the calendar year after the PYE
      • First due date was July 31, 2013
coverage mandates
COVERAGE MANDATES
  • What are those?
  • Examples include but are not limited to:
    • No lifetime limits on essential health benefits
    • No pre-existing condition exclusions
    • If the plan covers children, must cover to age 26
    • No rescissions except in the case of fraud
    • Cover preventive care at 100%
    • Cover ER equally at in-network and non-network hospitals
coverage mandates1
COVERAGE MANDATES
  • Who is responsible for compliance?
    • For fully-insured plans—insurance company
    • For self-funded plans—employer
  • What is the penalty for non-compliance?
    • Excise Tax
    • $100 per affected individual per day
    • Not deductible
    • Employer must self-report
transitional reinsurance fees
TRANSITIONAL REINSURANCE FEES
  • What are those?
    • A way to help insurance companies cover the claims of very sick people.
    • Scheduled to last 3 years
  • Who is responsible for compliance?
    • For fully-insured plans—insurance company
    • For self-funded plans—employer
transitional reinsurance fees1
TRANSITIONAL REINSURANCE FEES
  • How to comply?
    • Report average # of covered lives to HHS by November 15, 2014
    • HHS to issue invoice within 30 days
      • Applicable Dollar Amount: $63 for 2014

multiplied by

      • Average # of Covered Lives
    • Payment due within 30 days thereafter
employer mandate pay or play
EMPLOYER MANDATE (PAY OR PLAY)
  • Premiums paid by an employer for an employer-sponsored plan
    • Deductible as ordinary and necessary business expenses
    • Not subject to payroll taxes (because not taxable income to the employee)
  • Penalties under Code § 4980H
    • Not deductible
example
EXAMPLE
  • Company has 100 FT employees
  • Company offers coverage
    • Employee-only coverage costs $6,000
    • Company pays 50%, or $3,000
  • Status Quo
    • $210,000 premiums (70% uptake)
    • Deductible
    • Tax savings (35%) = $73,500
    • Net = $210,000 - $73,500 = $136,500
  • BOTTOM LINE W/O TAX IMPACT = $210,000
  • BOTTOM LINE W/TAX IMPACT = $136,500
example1
EXAMPLE
  • Option #1: Continue Status Quo
    • $150,000 premium (50% uptake)
      • Deductible
      • Tax savings (35%) = $52,5000
      • Net = $150,000 - $52,500 = $97,500
    • $60,000 penalty (20 employees)
      • Not deductible
    • BOTTOM LINE W/O TAX IMPACT = $210,000

($150,000 + $60,000)

    • BOTTOM LINE W/TAX IMPACT = $157,500

($97,500 + $60,000)

example2
EXAMPLE
  • Option #2: Stop Offering Coverage
    • $0 premium
    • $140,000 penalty ($2000 x (100-30))
      • Not deductible
    • BOTTOM LINE W/O TAX IMPACT = $140,000
    • BOTTOM LINE W/TAX IMPACT = $140,000
cadillac tax
CADILLAC TAX
  • Employee will owe a 40% tax on the amount of the premium that is above the threshold
  • Threshold (subject to indexing):
    • $10,200/individual and $27,500/family
    • Threshold is higher for high-risk professions
nondiscrimination
NONDISCRIMINATION
  • Long-Standing Rule: Self-funded plans must not discriminate in favor of highly compensated individuals with respect to eligibility or benefits.
  • Health Care Reform: “Similar rules” shall apply to fully-insured plans
    • Grandfathered plans are exempt
  • IRS has non-enforcement policy in place