Transcript Health Care Reform and Closely Held Businesses

Basics of Health Care Reform
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Introduction (IF)
Plan Requirements
Grandfathered Plans and Non-Discrimination
New Taxes and Credits
Employer Mandate
Employer Mandate – Penalties
State Health Care Exchanges
Individual Mandate
Premium Tax Credit
Other Provisions
Introduction
• IF you are an employer with less than 50
employees:
– You do not have a requirement to provide heath
insurance to your employees.
– You are not subject to penalties if you do not
provide insurance to your employees.
– BE CAREFUL of new anti-discrimination rules.
Introduction
• IF you are an employer with 50 or more
employees:
– You do not have to provide your employees with
health insurance, BUT
– If you don’t, you are subject to substantial
penalties.
– BE CAREFUL of new anti-discrimination rules.
Introduction
• IF you are an employer with 100 or fewer
employees, you can purchase your health
insurance through a State Health Insurance
Exchange.
Introduction
• IF you are an individual:
– You must obtain health care coverage for you and
your dependents.
– If you do not obtain coverage, you are subject to a
penalty.
– If desired, you will be able to obtain coverage
through a State Health Care Exchange.
Plan Requirements
• All Health Plans, including grandfathered plans, must
meet the following requirement for plan years
beginning after September 23, 2010:
– No limits on lifetime and annual benefits (some very large
annual limits are allowed for 2010-2014).
– Cannot rescind an individual’s participation in the plan
except for fraud or intentional misrepresentation.
– Children who are not otherwise covered, can be covered
up to age 26 on the parent’s policy (family coverage), even
if the child no longer qualifies as a dependent under the
tax code.
– Preexisting condition exclusions are not allowed for
covered individuals younger than age 19.
Grandfathered Plans and NonDiscrimination
– President Obama promised that individuals could
keep their current coverage. Thus, grandfathered
plans are allowed.
– Grandfathered status is determined at the employer
level, not employee level. Plans that were in existence
on March 23, 2010 are grandfathered.
– Grandfathered plans are not covered by new
discrimination rules, thus they can continue to favor
highly compensated employees.
– There are many rules that make it very difficult to
retain grandfathered status.
– Self-insured plans cannot be grandfathered.
Grandfathered Plans and NonDiscrimination
• Penalties are significant:
– $100 per day, per affected participant.
– Tax is considered an excise tax and is non-deductible.
– “Affected Participants” = employees who are not
highly compensated (top 25% of compensation).
• “SIMPLE Cafeteria Plan” can be established to
help small employers (100 or fewer employees)
meet non-discrimination rules.
– Requires employer contribution to the plan.
Grandfathered Plans and NonDiscrimination
• Regulatory guidance has not been finalized.
• If your plan is discriminatory, and has changed
enough that it is not grandfathered, you will
need to make sure your plan is nondiscriminatory or face large penalties.
New Taxes and Credits
• Tax on unearned income:
– Takes effect in 2013
– 3.8% tax on the lesser of:
• Net investment income (net investment income =
interest, dividends, royalties, rents, gains from property
used in a passive activity, etc.)
• The excess of modified adjusted gross income (AGI)
over a threshold amount:
– $200,000 for single individuals and head of household
– $250,000 for joint filers
– $125,000 for married filing separately
New Taxes and Credits
Andy & Helen
Wages
S-Corporation Income
Barney & Thelma Goober
Lou
300,000
75,000
200,000
800,000
75,000
300,000
4,000
Adjusted Gross income
375,000
375,000
1,004,000
Threshold
(250,000)
(250,000)
(200,000)
125,000
125,000
804,000
75,000
125,000
4,000
Investment Income
A
B
Lessor of A or B
Tax rate
Tax
3.8%
2,850
3.8%
4,750
3.8%
152
New Taxes and Credits
• Additional Hospital Insurance Tax on Earned
Income.
• Takes effect in 2013.
• 0.9% tax applies to wages and selfemployment income that exceeds a threshold:
– $200,000 for individuals
– $250,000 for joint filers (imposed on combined
wages)
– $125,000 for married filing separate.
New Taxes and Credits
Andy & Helen
Barney & Thelma Goober
Lou
Wages
S-Corporation Income
300,000
75,000
200,000
800,000
Investment Income
75,000
300,000
4,000
Adjusted Gross income
375,000
375,000
1,004,000
300,000
(250,000)
75,000
(250,000)
200,000
(200,000)
50,000
Tax rate
.9%
.9%
.9%
Tax
450
None
None
New Taxes and Credits
Andy & Helen
Barney & Thelma Goober
Lou
Wages
LLC Income
300,000
75,000
200,000
800,000
Investment Income
75,000
300,000
4,000
Adjusted Gross income
375,000
375,000
1,004,000
300,000
(250,000)
75,000
(250,000)
1,000,000
(200,000)
50,000
Tax rate
.9%
Tax
450
800,000
.9%
.9%
7,200
New Taxes and Credits
• Current Medicare tax on earned income = 1.45%
• Current employer matching tax on earned income
= 1.45%.
• Total current Medicare tax = 2.9%
• Additional hospital tax = .9%
• Total of above = 3.8%
• Thus, earned income is being taxed at same rate
as investment income.
• S-Corporation earnings not taxed in either case at
present time.
New Taxes and Credits
• Small Employer Credit
– Temporary tax credit for small employers:
– Maximum credit = 10 or fewer employees and average annual
wages of $25,000 or less.
– Credit phases out as number of employees rises to 25 and
annual average wages increases to $50,000.
– Employer must pay 50% or more of health insurance premiums
for its employees to qualify for the credit.
– Credit is 35% through 2013.
– Credit increases to 50% in 2014 and 2015, however, insurance
can only be purchased from a state exchange in those years.
– Non-taxable entities are also eligible for the credit.
Employer Mandate
• “Applicable Large Employer” (50 or more
employees or FTE’s).
• Penalty will be assessed on applicable large
employers if the employer does not OFFER its
full time employees an employer-sponsored
plan that provides “minimum essential
coverage”.
• Companies under common control are
considered to be one employer.
Employer Mandate
• Applicable Large Employer is based on the
number of full time employees, defined as:
– Any employee who averages at least 30 Hrs. per
week.
– An employee who works 130 hours per month.
– Seasonal employees (who work up to 120 days)
can be excluded.
– Part time employees are counted; All hours
worked by part-time employees that month
divided by 120 = FTE.
Employer Mandate
• The above formula is used to determine if a
business is a small employer only.
• The law does not require employers to offer
health care coverage to their part-time
employees or to pay penalties on their parttime employees.
Employer Mandate
• Employers must offer coverage to dependents as
well as full-time employees.
• Dependents can include not only children and
spouses, but parents and other relatives who live
in the same house.
• This will drive up costs.
– Will some employers stop offering insurance and pay
the penalty?
– If an employer ceases coverage for its employees, it
must cease coverage for owners, otherwise the $100
per day discrimination penalty applies.
Employer Mandate
• Minimum Essential Coverage
– Very broad definition.
– If an employer is offering major medical coverage
to its employees, it is probably providing
minimum essential coverage.
Employer Mandate - Penalties
• Employer with 50 or more employees will owe a
penalty if it does not offer its employees (and
their dependents) an employer sponsored plan
that provides minimum essential coverage.
– Penalty applies for any month in which one or more
full time employees has enrolled in a qualified health
plan through a state exchange, and the employee
qualifies for a premium tax credit or cost-sharing
reduction.
– The credit or reduction is generally available to lower
and middle-income employees that are not offered
affordable minimum essential coverage.
Employer Mandate - Penalties
• Penalty is $2,000 per year per employee, but
is imposed per month.
• $2,000 x 1/12th = 166.67 per month, times the
number of full-time employees per month.
• The number of full time employees is reduced
by 30 when calculating the penalty.
• The “penalty” is non-deductible for tax
purposes.
Employer Mandate - Penalties
• Example:
– In 2014, Acme Corp. fails to offer minimum
essential coverage. Ten of its employees receive a
premium tax credit for enrolling in a health plan
offered by a state exchange. Acme has 90 full
time employees. Therefore it owes $166.67 x 60
employees = $10,000 per month or $120,000 per
year.
Employer Mandate - Penalties
• Alternative Penalty:
– $3,000 annual ($250 per month) penalty on an employer
that offers minimum essential coverage to its full-time
employees, if any employee with household income below
400 percent of the federal poverty level instead chooses to
obtain insurance through a state-established exchange.
– Penalty is paid based on the actual number of employees
who purchase insurance through the exchange.
– Payment is non-deductible.
– Penalty amount cannot exceed the $2,000 per employee
penalty for a failure to offer coverage.
Employer Mandate - Penalties
• The $3,000 penalty applies for each employee
who purchases coverage through an exchange
and receives a credit, if the employer
sponsored coverage is “unaffordable”.
• Unaffordable is defined as premiums costing
more than 9.5% of the employee’s household
income, or if the share of benefits paid by the
plan is less than 60%.
Employer Mandate - Penalties
• Example:
– In 2014, Acme Corp. offers coverage to its 100 fulltime employees. 10 employees enroll in a plan
through a state exchange and receive a tax credit.
– Acme owes $250/month x 10 employees = $2,500
per month, or $30,000 per year.
– Acme’s penalty is capped at $140,000 per year
(100 – 30 = 70 x $2,000 = $140,000).
Employer Mandate - Penalties
• Open Questions:
– Will a large employer be subject to the “all-employee”
penalty, even if the employer fails to provide coverage
to only one of its full-time employees or their
dependents? IRS indicates the penalty will not apply if
“substantially all” employees are covered, but has not
defined “substantially all”.
– Will employers be subject to a $40,000 penalty just
because they hire a 50th employee? (50-30=20 x
$2,000 = $40,000).
– What if the employer has 49 employees, but is
deemed to have misclassified a person as an
independent contractor?
State Health Care Exchanges
• Individuals and small groups (100 or fewer
employees) may be able to purchase health
plans through State exchanges.
• A health exchange is an insurance marketplace
where individuals and small businesses can
buy health benefit plans.
State Health Care Exchanges
• Must be established in each state by 2014.
• States must make qualified health plans available
to qualified individuals and qualified employers
(those having 100 or fewer employees).
• An exchange plan must offer an essential health
benefits package that includes specific categories
of benefits, meets certain cost sharing standards
and provides certain levels of coverage.
State Health Care Exchanges
• 4 Levels of “Essential Benefits Coverage” will
be available:
– Bronze: Benefits that are actuarially equivalent to
60% of the full actuarial value of the benefits
provided under the plan.
– Silver: 70%
– Gold: 80%
– Platinum: 90%
State Health Care Exchanges
• Exchanges must:
– Provide standardized comparative information on
health plans.
– Assign a rating to each qualified plan offered by the
exchange.
– Provide IRS with name and SS number of each
individual who was an employee but was determined
to be eligible for the premium assistance tax credit.
– Provide employers with the names of its employees
who ceased coverage under a qualified health plan.
Individual Mandate
• Effective in 2014.
• Penalty imposed on individuals who fail to
obtain minimum essential health coverage for
themselves and their dependents.
– 2014: Greater of $95 or 1% of income.
– 2015: Greater of $325 or 2% of income.
– 2016: Greater of $695 or 2.5% of income.
– After 2016: $695 adjusted for inflation.
Individual Mandate
• Exemptions:
– Individuals whose required contribution exceeds 8%
of household income.
– Individuals with incomes below the federal income tax
filing thresholds.
– Religious objections.
– Undocumented Aliens
– Individuals suffering hardship
– Individuals enduring short lapses of coverage (3
months or less).
Individual Mandate
• Collection of penalties:
– The penalty is included with the individual’s income
tax.
– The IRS cannot use liens or levy’s to collect any unpaid
penalty.
• Taxpayers are not subject to criminal prosecution
or any additional penalty for failing to pay the
penalty.
• The IRS has conceded that the penalty will be
difficult to collect. Perhaps the only collection
method will be offsetting of a refund.
Premium Tax Credit
• Beginning in 2014, taxpayers with household
income between 100% and 400% of the
federal poverty level (FPL) can qualify for a
refundable health insurance premium credit.
• Individual must enroll in a qualified health
plan through an exchange.
• Eligibility for the credit is also based on family
size and filing status.
Premium Tax Credit
• Major importance for employers because it is the
triggering mechanism for the employer mandate
penalty.
• FPL is $22,350 for 2011 for a family of four.
$22,350 x 400% = $89,400.
• Credit is the lower of:
– The amount paid by the taxpayer to the Exchange for
coverage of self, spouse and dependents.
– Difference between the premium for a benchmark
plan (Silver) and the taxpayers expected contribution.
– Expected contribution is a formula based on income.
Premium Tax Credit
• Example:
– Family of 4 has household income of $50,000 and
purchases a benchmark plan for $9,000.
– The expected family contribution = $3,570.
– The premium tax credit = $5,430 (9,000 – 3,570).
Other Provisions
• $2 per participant fee on health insurance (paid by the
insurer).
• Cap on employee contributions to a health spending
account of $2,500.
• New taxes on tanning services and medical devises.
• Employers must report the cost of coverage provided.
• Employers must provide employees a notice describing
coverage options through the exchanges.
• 40% excise tax imposed on insurance companies
offering “Cadillac plans”. Cadillac plans = coverage that
costs $10,200 or more ($27,500 for families). Costs will
presumably be passed on to customers.
Conclusion
• Health Care Law:
– Far reaching and complex.
– Creates tremendous uncertainty for many
individuals, families, employees and employers.
– The federal government will continue to issue
guidance and respond to problems as they evolve.
– Taxpayers, both employers and employees, need
to understand their new rights and responsibilities
so they can make appropriate decisions about
health care coverage.