Transcript TITLE Presented by: Name Title, Grant Thornton LLP

Tax Update for Healthcare Financial
Executives
Carolinas HealthCare System
November 1, 2013
Michele Melchior, Director – Health Care Tax
Cindy Brown, Director – Compensation and Benefits
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Agenda
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IRS Priority Guidance Plan: 2013 / 2014
IRS College and University Report
ACA: Premium tax credit – what providers need to know
501(r) – Additional requirements for hospitals: Update
Health Care Reform: Update on Changes
Health Care Reform: New Taxes and Fees
Individual Mandate
Employer Mandate
New Reporting Requirements
Same-Sex Marriage and Federal Tax Law
Questions
2
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IRS Priority Guidance Plan: 2013 / 2014
• Executive Compensation, Employment Taxes
• Health Care and Benefits
• Regulations (ACA requirements):
– shared responsibility employer health coverage
– annual fee on health insurance providers
– minimum value of eligible employer-sponsored coverage
and other provisions relating to health insurance premium
tax credit
– reporting by Health Insurance Exchanges
– 501(r) – additional requirements for hospitals
3
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IRS Priority Guidance Plan: 2013 / 2014
• Other Guidance:
– 501(c)(4) organizations: measurement of 'primary' activity
of social welfare, including political campaign intervention
– additional guidance for supporting organizations
– additional guidance for donor advised funds
– DOMA (Defense of Marriage Act)
– charitable contributions / donee substantiation
4
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College and university compliance project
Highlights and insights
Background:
• IRS launched project in October 2008
• 400 randomly selected institutions received questionnaires
• Focused on unrelated business income & executive comp
• 34 selected for IRS examinations
• Final report issued April 2013
5
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College and university compliance project
Highlights and insights
Significant highlights:
Why is this important?
• Findings:
– underreporting of unrelated business income,
– flaws in comparability data used to establish
reasonable compensation
– employment tax and retirement plan reporting
concerns
6
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College and university compliance project
Highlights and insights
“Because these issues may well be present
elsewhere across the tax-exempt sector, all
exempt organizations need to be aware of
the importance of accurately reporting
unrelated business income and providing
appropriate executive compensation.”
- Lois Lerner, Director, Exempt Organizations division.
7
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College and university compliance project
Highlights and insights
Highlights - results
• Increases to UBTI for 90% of institutions examined
– totaling $90 million
• Over 180 changes to amounts of UBTI reported on 990-T
• Disallowance of $170 million in losses and NOLs (net
operating loss) carryovers
– could amount to more than $60 million assessed taxes
8
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College and university compliance project
Highlights and insights
Highlights – reasons for increases to UBTI
• IRS disallowed expenses
– Lack of profit motive ($150 million NOLs disallowed)
– Improper expense allocation
• Errors in computation or substantiation of NOLs ($19 mm)
• Reclassification of exempt activities as unrelated ($4 mm)
9
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College and university compliance project
Highlights and insights
Highlights – fail to meet rebuttable presumption standard
• Comparable institutions were not similarly situated for
– location
– endowment size
– revenues
– total net assets
– number of students
– selectivity
10
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College and university compliance project
Highlights and insights
Highlights – fail to meet rebuttable presumption standard
• Compensation study did not document sufficiently
selection criteria or explain why they were comparable
• Compensation study did not specify whether amounts
reported were salary only or if they included other types of
compensation (e.g. fringe benefits and deferred
compensation)
Remember: Just because it's not taxable, doesn't mean it
isn't considered compensation!
11
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College and university compliance project
Highlights and insights
Highlights – compensation-related wage adjustments
• fringe benefits
– personal use of autos
– housing
– social clubs and
– travel
• misclassification of employees as independent contractors
• withholdings on nonresident aliens
• graduate tuition waivers and reimbursements
12
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College and universities compliance project
Highlights and insights
Highlights – deferred compensation adjustments
• nonqualified deferred compensation – with no substantial
risk of forfeiture
• excess loans from 403(b) plans – deemed distributions
• excess 403(b) plan deferrals
• excess 403(b) plan additions
13
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College and universities compliance project
Highlights and insights
Insights
• Institutions selected for exam not a representative sample
• Most of the adjustments were to NOLs
• 20% of those examined had outside tax advice on UBI
• Personal use of autos, housing, social clubs and travel - were
documented in employment agreements, but not taxed correctly
– did not result in intermediate sanctions
– resulted in increases in employment tax
– resulted in increases in taxable wages
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Rebuttable Presumption of Reasonableness:
On the Form 990
• Governance- Policies (Part VI)
– Did the process for determining compensation of the
following persons include a review and approval by
independent persons, comparability data, and
contemporaneous substantiation of the deliberation
and decision?
• CEO, Executive Director, President (top management
official) and Other Officers, Key Employees
– The process must also be described in writing
15
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Rebuttable Presumption of Reasonableness:
On the Form 990
• Schedule J: Indicate which of the following the organization
used to establish compensation for the CEO, Exec. Dir.,
President (top management official):
– Compensation Committee
– Independent Compensation Consultant
– Form 990 of other Organizations
– Written employment contract
– Compensation survey or study
– Approval by the board of directors or compensation
committee
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Form 990: Schedule J
Questions about compensation practices
• Check the boxes if you provide:
– first class or charter travel, companion travel, tax gross-ups,
discretionary spending account, or
– personal residence, club dues or fees, or personal services
• Did you follow a written policy for the above items?
• Did you require substantiation prior to reimbursing for or
allowing the above items for Officers, Directors, Trustees and
CEO/ED?
 “Discretionary spending account” – ‘an account or sum of money under the control of a
listed person for which he/she is not accountable to the organization under an
accountable plan, whether or not actually used for any personal expenses.’
17
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Individual Mandate
Penalty for No Coverage
Beginning in 2014, individuals must acquire “minimum essential”
health care coverage or pay a penalty. Individuals can choose to
obtain coverage offered by their employer, or may purchase coverage
from an insurance carrier or state’s insurance marketplace.
The individual's penalty for failing to acquire minimum essential health
care coverage is the greater of:
Year
Penalty for Lacking Coverage (Half for Child)
2014
$95 per adult or 1% of household income over the threshold
2015
$325 per adult or 2% of household income over the threshold
2016
$695 per adult or 2.5% of household income over the threshold
2017
Indexed for cost of living or 2.5% of household income over the
threshold
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ACA: Premium tax credit – what providers need to
know
• Premium tax credit – who is eligible:
– Household income = 100% - 400% of FPL (federal
poverty line)
– Each member of the family is tested separately for
eligibility
– Adult children up to age 26 are included in 'household'
income
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ACA: Premium tax credit – what providers need to
know
• Premium tax credit – who is not eligible:
– Enrolled in or eligible for a qualifying employer-sponsored
plan (if meets affordability / minimum value)
– Eligible for other government-sponsored coverage
(Medicare, Medicaid)
– Medicaid eligibility will vary from state to state based on
each state's participation in Medicaid expansion
(Note: Certain individuals not required to obtain coverage under Individual mandate:
religious conscience, incarceration, hardship, no US income tax filing required,
coverage not affordable, member of Indian tribe, not lawfully present in US, health
care sharing ministry, short coverage gap < 3 mos.)
20
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ACA: Premium tax credit – what providers need to
know
• Premium tax credit – how does it work:
– Individuals self-report projected annual income when applying
for credit
– Option: Request advance monthly payments be paid directly to
insurance company each month, or receive refundable credit
with Form 1040 filed following year
– Individual pays remaining portion of monthly premium directly
to insurance company (monthly)
– Several forms sent to individuals will assist in reconciling
eligibility and advance payments
– Result: Could receive additional refundable credit or may owe
back part of all of credit as additional tax
21
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ACA: Premium tax credit – what providers need to
know
What providers need to know:
• Many hospitals desire to help financially needy patients by
providing assistance with the non-covered portion of the
premium
– Concerns: Anti-Kickback Statute problems? Private
benefit problems? (See AHA October 10, 2013 advisory)
• Grace period rule (90 days): Subsidized insurance coverage
may be terminated retroactively for non-payment – Providers
will bear the cost!
22
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ACA: Premium tax credit – what providers need to
know
What providers need to know:
• Certified Application Assistors
– certification required to assist those applying for insurance
due to confidential nature of data
– is it permitted under state law?
• Enrollment only permitted during Open Enrollment season or
other qualifying changes (similar to normal employee
enrollment)
– cannot enroll simply because patient arrives at the ER
uninsured
23
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Internal Revenue Code §501(r) – Additional
Requirements for Certain Hospitals
To maintain tax-exempt status, hospitals must:
o Conduct a community health needs assessment
(CHNA) every 3 years
o Establish financial assistance and emergency
medical care policies
o Limit amount changed for certain care provided to
those who qualify for financial assistance
o Avoid engaging in extraordinary collection actions
before making reasonable efforts to determine
eligibility for financial assistance
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Internal Revenue Code §501(r) – Additional
Requirements for Certain Hospitals
Effective Dates for hospitals
CHNA and Implementation Strategy:
– Effective for years beginning after 3/23/2012
– Every three years thereafter
– Proposed Regulations issued April 2013
Financial Assistance Policies and Other requirements:
– Effective 10/1/2010
– Proposed Regulations issued June 2012
Final Regulations: Expected late 2012 / early 2013
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IRC §501(r) – Guidance Issued
Community Health Needs Assessment (CHNA)
• Notice 2011-52 Issued July 2011
– May be relied upon only until October 5, 2013
– Watch out on completion timing!
• Proposed Regulations Issued April 2013
– Current guidance – can be relied upon now
Financial Assistance & and Other Policies
• Proposed Regulations Issued June 2012
– Current guidance – can be relied upon now
26
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Internal Revenue Code §501(r) and ACA: Financial
Assistance Policies
• 501(r): Written policy must include 'eligibility criteria for
financial assistance, and whether such assistance includes
free or discounted care.'
– criteria set at discretion of tax-exempt hospital
• Existing policies:
– Currently many overlap with eligibility for premium tax
credit (100% - 400% FPG)
– Medicaid Gap
27
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Internal Revenue Code §501(r) and ACA: Financial
Assistance Policies
Updating your policies?
• Considerations:
– some individuals will remain uninsured (undocumented
persons, failed to enroll, terminated coverage, not
affordable at family level, etc.)
– coverage under exchange is prospective (not retroactive)
– impact on Form 990, Schedule H – project it first!
• Are you exchanging Charity Care for Bad Debt?
– impact to your mission
• Many hospitals are in a 'wait and see mode'
28
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Internal Revenue Code §501(r) and ACA: Financial
Assistance Policies
• Review policies NOW to ensure they satisfy the express
requirements of Section 501(r) (which are currently in effect)
• Be prepared to make additional final changes to your policies
once final regulations are issued
– Expectation is that final regulations will generally track the
proposed regulations
– Not expecting lengthy transition relief
– Be mindful of Schedule H questions (expect it to change)
• Educate boards and leadership – awareness
• Involve professional advisors to ensure all regulatory issues
are addressed
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Internal Revenue Code §501(r): Community Health
Needs Assessment (CHNA)
• Proposed Regulations issued April 2013:
– Generally consistent with Notice 2011-52
– Somewhat more flexible (opportunities for joint reports)
– Identify 'significant' health needs (instead of 'all')
– Penalties for non-compliance
• $50,000 excise tax
• Facility-level tax (Form 990T)
• Opportunity for correction / disclosure
• Loss of tax-exemption (willful or egregious failure to
comply)
30
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Internal Revenue Code §501(r): Community Health
Needs Assessment (CHNA)
Common issues:
• Wide disparity in types of CHNA reports (25 pages to 250 pages) – bigger
is not necessarily better, requirements must be covered
• Checklist of requirements: be prepared for IRS review – assess your
compliance
• Public Document: Posted on each facility website
• Does it align with hospital's strategy and direction?
• Board authorization required – ensure the board understands the
conclusions
System-wide approach – use same template / organization
• Drives consistency
• Easier to analyze
• Leadership to ensure
IRS compliance
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Internal Revenue Code §501(r): Implementation
Strategy
• Proposed Regulations permit a one time transition delay –
due 4 1/2 months after year end (i.e. first due date of Form
990)
– hereafter, will be due with CHNA at year end
• Board approval required
• Attached to Form 990, or
– post to website with URL link on Form 990
• Progress updates will be required annually on Form 990
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Internal Revenue Code §501(r): Implementation
Strategy
Tips for System-wide approach
• Think strategically as a 'system' to choose broad focus areas
that work with strategic plan
– facility can customize based on specific needs
• Think about goals that have measurable results
• Facility level teams, system level leadership
• Timelines to finalize, provide education, get board approval
• Ongoing process: Quarterly or bi-annual updates with
teams, leadership, board
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Internal Revenue Code §501(r)
What's next?
New Regulations are 'Proposed'
• Not yet 'effective', but can be relied upon
• The law is in effect now!
Form 990: Schedule H
• Not updated and not consistent with proposed regulations
– expect changes
• Make best reasonable effort to comply with 501(r)
34
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Health Care Reform
Delayed Enforcement of Penalties
What does this delay mean?
• Employers will not pay any penalties in 2014 for noncompliance with the "employer mandate"
• The delay also applies to certain reporting requirements
What does the delay not impact?
• It does not remove the “employer mandate”
• It does not change the criteria for determining full-time
employee status, affordable coverage and “minimum value”
• It does not impact the “individual mandate” for all individuals to
have health insurance by 2014
• It does not delay the implementation of the Exchanges
35
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Second
of coverage
mandates
for group
2014group
HEALTH
CARE PLAN
REQUIRMENTS
health plans effective for plan years beginning on
or after January 1, 2014:
New Coverage Mandate
Applicable to Grandfathered
Plans?
No pre-existing conditions for any enrollee
Yes
No exclusion of adult children who have coverage
through employer
Yes
No restricted annual limits
Yes
No waiting period in excess of 90 days
Yes
Limits on cost-sharing and deductibles
No
Mandated coverage of clinical trials
No
No discrimination based on health status
No
36
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Health Care Reform
New Taxes and Fees
PCORI Funding Fee
Health Insurance
Funding Fee
Reinsurance Assessment
Fee
What is it?
Funds the new PatientCentered Outcomes
Research Institute
Funds revenue-generating
provisions of health care
reform
Reimburses companies that
insure high-cost individuals
within Insurance Exchange
When?
Annually beginning after
10/2/2011 for 7 years
Annually beginning 2014
Annual fee from 2014-2016
How much?
Annual fee of $1 per covered
life in 2012; $2 in 2013;
indexed thereafter
Estimated 2014 cost: 2%2.5% of premium; After 2014:
3%-4% of premium
Estimated costs: $63 per
covered life in 2014;
decreasing each year
Who pays?
Insurer for full-insured plans
or employer for self-funded
plans
Insurer pays but is based on
share of premium among
health insurers; self-funded
plans exempt
Insurer for full-insured plans
or third-party administrator for
self-funded plans
First due date?
By 7/31/2013 (for plan years
ending 10/1-12/31/2012),
otherwise by 7/31/2014
By 9/30/2014
By 1/15/2015
To which Agency?
Treasury
Treasury
HHS
Is it tax deductible?
Tax-deductible
Not tax-deductible
Tax-deductible
37
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Employer Mandate
Beginning in 2015, employers with 50 or more full-time and full-time equivalent
employees (taking into account related employers) may be subject to a monthly
excise tax
Coverage Offered to
Less than 95% of FullTime Employees
During the Month
OR
$166.66 Per Month
($2,000 Per Year)
Per Full-Time Employee
(Minus 30 Employees**)
Affordability
Coverage Offered to
95% or More of FullTime Employees
During the Month But
Does Not Satisfy
Affordability and
Minimum Value
Requirements
Employee Premium for Self-Only
Coverage Is 9.5% or Less
of Employee’s Income
Minimum Value
Plan Covers At Least 60%
of Plan Costs
* These 2014 amounts are annualized and will be indexed for inflation.
** For control groups, the 30 is allocated among the members of the controlled group.
38
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$250 Per Month
($3,000 Per Year)
Per Full-Time Employee
Who Purchases Insurance
Through an Exchange and
Receives a Premium Tax
Credit or Subsidy
Employer Mandate
Exposure to Significant Excise Tax
Who? Applies to employers with 50 or more full-time and full-time
equivalent employees
What? An excise tax is assessed for not offering coverage to 95% or
more of full-time employees even if most employees are covered
Impact to Employers? Employers that slip below the 95% threshold
are assessed the full tax ($2,000 [indexed] x number of full-time
employees [minus 30 employees])
Total number of full-time employees
5% threshold
Excise tax per year
100
5
$140,000
250
12
$440,000
500
25
$940,000
1,000
50
$1,940,000
39
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Employer Mandate
New Steps to Determine Eligibility
• Each month, an employer must
1. Identify its full-time employees (30 or more average hours
of service per week)
2. Determine who was offered coverage
• The employer must count hours for each employee
– Hourly employees: Count actual hours
– Salaried employees:
• Count actual hours, or
• Use hours-equivalency rules
The IRS rules define who is and who is not a full-time employee.
40
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Employer Mandate
New Steps to Determine Eligibility (continued)
• Coverage may be expanded to new categories of employees
(A full-time employee is defined at 30 or more hours)
• Must count all common law employees (Authority to direct and
control the manner in which services are performed (actual
control not required))
• Are these individuals common law employees?
• Independent contractors
• Staffing agency individuals
• Leasing company individuals
• Professional employer organization individuals
41
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Employer Mandate
New Steps to Determine Eligibility (continued)
• Employee may be classified as part-time, but employee actually
works an average of 30 or more hours per week
• An employer may not offer coverage to certain categories of
employees. (These employees must be counted in the 95%
threshold test after the first 3 months of employment, if weekly
hours of service average 30 or more.)
– Temporary employees
– Seasonal employees
– Per diem employees
– Commission only salesperson
– Independent contractors
42
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Employer Mandate
Common Law Employees
Employers may be tempted to substitute independent contractors to:
• Avoid the cost of healthcare; or
• Avoid the penalties that would apply for failing to offer coverage to
full-time employees.
Under health care reform, an “employee” means a common-law
employee. Employers, who misclassify workers, may be exposed to
payment of past employment taxes, as well as, health care reform
penalties.
The IRS is increasing its focus on worker reclassification.
43
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Employer Mandate
Common Law Employees (continued)
For worker classification, the IRS has adopted "Three Categories of
Evidence".
Behavioral Control – Addresses the “right of direction and control”
and how the worker performs the tasks assigned. This includes
instructions, training, oral or written reports, as well as, furnishing of
tools and materials.
Financial Control – Addresses the “business aspects” of the
worker’s activities. This includes the right to direct or control the way
the worker conducts his/her business activities from a financial
standpoint.
Relationship of the Parties – Addresses the facts which illustrate
how the parties perceive their relationship. This includes the
existence of a written contract, whether benefits are provided and the
right to discharge/terminate.
44
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Employer Mandate
Take Action Now
• The IRS is establishing an information-gathering process. It will
assess the tax proactively without self-reporting by employers
• Assess the risk of penalties for falling below the 95% threshold
as well as not meeting minimum value and affordability limits
• Discuss the details of the rules and how they apply to the
organization, and identify changes that may be necessary to
avoid the excise taxes
• Follow-through with proper implementation and establish
procedures
45
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Employer Mandate
Take Action Now (continued)
Examples of Complex Rules in the Regulations
Examples of Complex Rules
• Controlled group rules
• Nondiscrimination testing (TBD)
• Common law employee issue
• Break-in-service rules
• Employees who fail to pay premiums • Union employees
• Equivalency rules to determine hours • Impact of special pay practices – Per
for non-hourly employees
diem, commission only sales, fee for
service
• Alignment of measurement periods
with payroll periods
• Administrative periods
• Initial measurement periods
• Standard measurement periods
46
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• New separate rules for
• Ongoing employees,
• New full-time employees,
• New variable hour employees,
• New seasonal employees
New Proposed Reporting Requirements
On September 5, the IRS released new proposed regulations on
the annual reporting requirements of IRC sections 6056 and 6055.
Provides two sets of rules:
1.
IRC sections 6056 - Reporting for "large employer" who must
comply with the employer mandate.
2.
IRC sections 6055 - Reporting for providers of minimum
essential coverage (insurance carriers, employers, etc.)
including the type and period of coverage and furnish
statements to employees.
47
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New Proposed Reporting Requirements (continued)
What information is reported for IRC section 6056
• Employer's name, address, EIN and contact phone number
• A certification as to whether the employer offers coverage to its
full-time employees (and dependents) under an employer plan, by
calendar month
• The number of full-time employees for each month during the year
• The months during the calendar year that coverage was available
• The monthly premium for the lowest cost coverage option
• The name, address and social security number of each full-time
employee during the calendar year and months during which the
employee was covered under the plan
48
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New Proposed Reporting Requirements (continued)
What information is reported on the employee statements?
• A large employer must furnish an statement to each of its full-time
employees that includes name, address, and EIN of the employer
sponsoring plan and the information shown on the 6055 return.
When is the due date?
• No later than February 28 following the reporting year or March
31, if filed electronically. (First filing will be March 1, 2016 since
February 28, 2016 is a Sunday)
What is the practical "proposed" impact?
• Replacing IRC section 6056 employee statements with Form W-2
reporting. (Other streamline rules were provided.)
49
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#5 Concern of Increased
Costs
DATES TO KNOW
October 1, 2013 –
December 15, 2013 –
March 15, 2014 –
March 31, 2014 –
July 31, 2014 December 15, 2014January 1, 2015 –
March 1, 2016 –
January 1, 2018 50
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Government Exchanges Open
Enroll on Exchange for 1/1/14
health care coverage
Must sign up for coverage to avoid
individual mandate penalty
End Open Enrollment -qualifying
event needed to change coverage
2nd installment of PCORI Tax Due
Reinsurance Fee/Tax Due
Employer mandate is effective
Employer reporting is required
Cadillac Tax is effective
#5 Concern of Increased
Costs
AREAS OF FOCUS
1. Plan design
2. Coverage mandates
3. Tax and financial considerations
4. Workforce management (hourly or contingent)
51
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#5 Concern of Increased
Costs
PREPARATION
– Educate your personnel and stay up-to-date with
changes
– A coordinated effort between HR, Finance, IT and
Payroll like never before
– A deep compliance bench of outside consultants who
look at all aspects of compliance
– Choose the best partners in the insurance field including,
TPAs, providers and brokers
52
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SUPREME COURT RECONGNIZES
SAME-SEX MARRIAGE
• IRS Rev. Rul. 2013-17
– Released on Aug. 29, 2013
– Effective Sept. 16, 2013
• IRS recognizes all same-sex marriages for federal tax
purposes
– Includes couples legally married in any of the 50 U.S. states, the
District of Columbia, a U.S. territory or a foreign country
53
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Guidance from the IRS and DOL
Rev. Rul. 2013-17
• "State of celebration"
– Treated as married for federal tax purposes regardless of the
state of residence
– It does not matter whether the marriage is recognized in the
state or foreign country of residence
• All Internal Revenue Code and regulation references to
"husband," "wife," and "spouse" include same-sex spouses
54
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States that recognize same-sex marriage
California (2013)
Maryland (2013)
Rhode Island (2013)
Massachusetts (2004)
Vermont (2009)
Delaware (2013)
Washington (2012)
Iowa (2009)
New Hampshire (2010)
New York (2011)
Minnesota (2013)
Maine (2012)
Connecticut (2008)
• Washington, D.C. also recognizes same-sex marriages
55
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Guidance from the IRS and DOL
Rev. Rul. 2013-17
• The following are not recognized as marriages for federal
tax purposes:
– Civil unions
– Domestic partnerships
– Other similar formal relationships
The IRS guidance does not affect state taxes.
56
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Guidance from the IRS and DOL
Rev. Rul. 2013-17
• Effective Sept. 16, 2013, all same-sex married couples must
be treated as married and spouses for all federal tax
purposes
• Employers must:
– Exclude the value of spousal health care benefits (and certain other
fringe benefits) from the employee's wages for withholding purposes
– Extend certain retirement and health plan benefits to recognized
same-sex spouses
Employer payroll systems should be changed to account for these
tax-exempt benefits.
57
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How do employers determine whether an employee
is married?
• No IRS guidance directed toward same-sex marriages
• There doesn't appear to be any requirement that an
employer verify that the employee is married
• Reasonable standard: rely on employee's representation in
the absence of actual knowledge to the contrary
– Possibly rely on the employee's Form W-4
– Employers may consider requesting that employees update their
Form W-4 to include marriage status
58
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Guidance from the IRS and DOL
Rev. Rul. 2013-17 – effect on employees
• Same-sex married couples are required to file "jointly" or as
"married filing separately" on all 2013 returns and original
returns filed after Sept. 15, 2013
• Same-sex married couples are allowed (but not required) to
file amended returns for prior years to exclude the value of
benefits from income or to benefit from different tax rates
– Must change filing status and recalculate taxable income
– Both spouses must amend to file jointly
– One spouse can amend and file married filing separately
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Cindy Brown, Director
704-632-3525
[email protected]
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