Under the Affordable Care Act, beginning January 1, 2013, annual contributions made to a health flexible spending account (FSA) will be limited to $2,500 (this amount will be adjusted for inflation in subsequent years). Plan sponsors should begin working with their third-party administrators to update cafeteria plan documents and summary plan descriptions (SPDs) to reflect this limit, and should begin preparing to communicate the changes to their employees.
Although regulations have yet to be issued on this provision, there are some things that are important to note: the $2,500 limit only applies to salary reduction contributions (and not employer contributions) and the requirement does not apply to
dependent care FSA (which have a statutory cap of $5,000 in a calendar year) or health reimbursement arrangements (HRAs).
Most calendar year plans will change their health FSA effective January 1, 2013, however, for non-calendar year health FSA,it may be a little more complex. The $2,500limit is tracked on a calendar year basis, so non-calendar year plans will need to
ensure their employees’ health FSA contributions will not exceed $2,500 for the 2013 calendar year. It may be a good idea for plan sponsors of non-calendar year plans to consider adjusting the health FSA contribution limit to reflect a $2,500 limit
beginning in 2012.
As information develops, we will continue to keep you updated.
Information provided by Emerson, Reid and Co.
Showing posts with label Health Care Reform. Show all posts
Showing posts with label Health Care Reform. Show all posts
Tuesday, January 31, 2012
Monday, November 14, 2011
CLASS Act Scrapped - What this Means for You
On October 14, 2011, the Department of Health and Human Services announced that it would not implement the portion of the Health Care Reform Act that was intended to provide voluntary long term care benefits for working Americans. The program known as the Community Living Assistance Services and Supports Act (CLASS Act) was designed to create a voluntary government program under which employees would pay a monthly premium and would be eligible for modest benefits for their long term care needs after five years of paying premiums. The program was open to anyone who met certain work requirements - regardless of their health.
Under the terms of the CLASS Act, the program would go into effect only if it were economically viable. Secretary of Health and Human Services Kathleen Sebelius stated that she “did not see a viable path forward for CLASS implementation at this time." The report cited actuarial and solvency impediments as the reason why they had not found a way to make the program work. Premiums were projected to be too high and few healthy people were projected to enroll.
The problem that the CLASS Act was intended to address – aging population and paying for the high cost of long term care assistance - remains a pressing issue. The current cost for a nursing home in New York is $140,000 a year. The cost for home health care is $250 per day for 24/7 care and the cost of assisted living is $3,000-$6,000 per month. These costs are expected to continue to rise.
Enrollment in private long term care insurance, subject to underwriting, can secure a policy for an individual that will provide the benefits needed for the future - be it staying at home with an aid or moving to a nursing home or an assisted living residence. As one grows older, the cost of long term care insurance rises substantially and it may simply be unavailable should one become ill. As a New York resident, one may be eligible for a program called the New York State Partnership for Long Term Care Insurance (NYSPLTC). This allows residents to protect their assets while applying for Medicaid Extended Coverage if their long term care needs exceed the period covered by their qualified NYSPLTC insurance policy.
Long term care insurance is a benefit offered by employers to their employees and/or key people. Employers, self-employed, LLC members, Sub C owners and partners in a partnership are eligible to receive income tax advantages as it relates to long term care insurance premiums. In addition, New York State offers a 20% tax credit. Because long term care insurance is not considered an ERISA benefit, employers can offer it to employees on a select basis. Insurers often offer simplified underwriting and/or discounts to a block of people from a company or an association buying long term care insurance.
Attached is a link to an article from The New York Times that details the ending of the CLASS program: http://www.nytimes.com/2011/10/15/health/policy/15health.html.
If you have any questions regarding CLASS or your long term care needs, please do not hesitate to contact me at 516-682-8400 or Risrael@optonline.net. Additionally, I am available to answer any of your questions regarding health insurance, annuities, life and disability insurance. I look forward to speaking with you soon.
Monday, September 20, 2010
Immediate Implications of Health Care Reform
We at Long Island Planning Group, Ltd. are committed to keeping you informed about health care reform and the Patient Protection and Affordable Care Act (PPACA). The PPACA has a 10 year implementation period. Some PPACA reforms become effective as early as September 23, 2010. This blog is intended to provide a summary of some of the immediate implications of the reform act. Insurance companies have begun mailing notices to policyholders informing them of the companies' filings for proposed future rate adjustments.
Below is a list of benefit and eligibility enhancements that become effective on September 23. It is advised that these changes be communicated to employees. Note that "grandfathered plans" may not need to immediately comply with provisions affecting adult preventive care, discrimination, claims appeals and access to physicians. The September 23 changes are:
1. Annual and lifetime dollar limits on network coverage are eliminated: Group health plans may no longer set lifetime limits on "essential health benefits."
2. Pre-existing condition limitations are waived for enrollees under age 19.
3. Dependents may remain on their parents' health plan until age 26 (some New York plans extend to age 29). If you have children in their 20's, or your employees do, you may want to consider adding such dependents to your plan.
4. There is no in-network cost-sharing for preventive care services. Plans will provide first dollar coverage for in-network preventive care.
5. Emergency services must be covered without prior authorization and treated as in-network.
6. Plan members must be allowed to designate a child's pediatrician as the primary care provider. Plans may not require authorization or referrals for a participating OB-GYN.
The PPACA contains information defining discrimination in health plans. Under these new non-discrimination rules, group plans may not discriminate in favor of highly compensated employees (under IRC Section 105h). The term "highly compensated" is defined as one of the five highest paid officers, a shareholder owning 10% of the value of the stock, and/or an employee among the highest paid 25% of the employees. This may mean the end of certain plan designs where executives have a benefit separate from other employees (executive carve-out). Groups with low participation may also be affected.
The PPACA provides a tax credit for employer paid premiums for qualified firms. From 2010 to 2013, small businesses with 25 or fewer employees and an average wage of $50,000 or less are eligible for premium tax credits (for two years) of up to 35% of their contribution. To qualify, the business must contribute at least 50% of premium based on the rate of a single employee. Employers with 10 or fewer employees and average wages of $25,000 or less will be eligible for the 35% credit. In 2014, the credit will increase to 50% of eligible employer contributions. Groups with 11-25 employees with average earnings of $25,001 to $50,000 will be subject to a phase-out of the credit.
The PPACA will affect a business's reporting requirements. Companies will be required to report the cost of the employee sponsored health coverage to their employees on IRS Form W2.
On a state level, the New York State Legislature passed S58099 on June 7, 2010. This notice provides group policyholders information, or "Advance Notice," about the insurers' filing for changes in premium rates for 2011. These filings are subject to review and approval by the New York State Insurance Department. The actual size of the increase will be released in a renewal letter approximately 60 days before renewal date. The total estimated percent increase includes multiple components: a basic increase or trend increase, an additional increase resulting from the cost of benefit enhancements required by the new PPACA, and the elimination of the New York State subsidy for small group mental health benefits (Timothy's Law).
If you have any questions regarding the contents of this blog or your health, life, or long term care needs, please do not hesitate to call us at 516-682-8400. You can e-mail us at risrael@optonline.net or visit our website at www.liplanning.com.
Below is a list of benefit and eligibility enhancements that become effective on September 23. It is advised that these changes be communicated to employees. Note that "grandfathered plans" may not need to immediately comply with provisions affecting adult preventive care, discrimination, claims appeals and access to physicians. The September 23 changes are:
1. Annual and lifetime dollar limits on network coverage are eliminated: Group health plans may no longer set lifetime limits on "essential health benefits."
2. Pre-existing condition limitations are waived for enrollees under age 19.
3. Dependents may remain on their parents' health plan until age 26 (some New York plans extend to age 29). If you have children in their 20's, or your employees do, you may want to consider adding such dependents to your plan.
4. There is no in-network cost-sharing for preventive care services. Plans will provide first dollar coverage for in-network preventive care.
5. Emergency services must be covered without prior authorization and treated as in-network.
6. Plan members must be allowed to designate a child's pediatrician as the primary care provider. Plans may not require authorization or referrals for a participating OB-GYN.
The PPACA contains information defining discrimination in health plans. Under these new non-discrimination rules, group plans may not discriminate in favor of highly compensated employees (under IRC Section 105h). The term "highly compensated" is defined as one of the five highest paid officers, a shareholder owning 10% of the value of the stock, and/or an employee among the highest paid 25% of the employees. This may mean the end of certain plan designs where executives have a benefit separate from other employees (executive carve-out). Groups with low participation may also be affected.
The PPACA provides a tax credit for employer paid premiums for qualified firms. From 2010 to 2013, small businesses with 25 or fewer employees and an average wage of $50,000 or less are eligible for premium tax credits (for two years) of up to 35% of their contribution. To qualify, the business must contribute at least 50% of premium based on the rate of a single employee. Employers with 10 or fewer employees and average wages of $25,000 or less will be eligible for the 35% credit. In 2014, the credit will increase to 50% of eligible employer contributions. Groups with 11-25 employees with average earnings of $25,001 to $50,000 will be subject to a phase-out of the credit.
The PPACA will affect a business's reporting requirements. Companies will be required to report the cost of the employee sponsored health coverage to their employees on IRS Form W2.
On a state level, the New York State Legislature passed S58099 on June 7, 2010. This notice provides group policyholders information, or "Advance Notice," about the insurers' filing for changes in premium rates for 2011. These filings are subject to review and approval by the New York State Insurance Department. The actual size of the increase will be released in a renewal letter approximately 60 days before renewal date. The total estimated percent increase includes multiple components: a basic increase or trend increase, an additional increase resulting from the cost of benefit enhancements required by the new PPACA, and the elimination of the New York State subsidy for small group mental health benefits (Timothy's Law).
If you have any questions regarding the contents of this blog or your health, life, or long term care needs, please do not hesitate to call us at 516-682-8400. You can e-mail us at risrael@optonline.net or visit our website at www.liplanning.com.
Monday, May 3, 2010
Small Business Health Care Tax Credit
Below is information posted by the IRS about the Small Business Health Care Tax Credit. Please let me know if you have any questions or concerns.
Small Business Health Care Tax Credit: Frequently Asked Questions
The new health reform law gives a tax credit to certain small employers that provide health care coverage to their employees, effective with tax years beginning in 2010. The following questions and answers provide information on the credit as it applies for 2010-2013, including information on transition relief for 2010. An enhanced version of the credit will be effective beginning in 2014. The new law, the Patient Protection and Affordable Care Act, was passed by Congress and was signed by President Obama on March 23, 2010.
Employers Eligible for the Credit
1. Which employers are eligible for the small employer health care tax credit?
A. Small employers that provide health care coverage to their employees and that meet certain requirements (“qualified employers”) generally are eligible for a Federal income tax credit for health insurance premiums they pay for certain employees. In order to be a qualified employer, (1) the employer must have fewer than 25 full-time equivalent employees (“FTEs”) for the tax year, (2) the average annual wages of its employees for the year must be less than $50,000 per FTE, and (3) the employer must pay the premiums under a “qualifying arrangement” described in Q/A-3. See Q/A-9 through 15 for further information on calculating FTEs and average annual wages and see Q/A-22 for information on anticipated transition relief for tax years beginning in 2010 with respect to the requirements for a qualifying arrangement.
2. Can a tax-exempt organization be a qualified employer?
A. Yes. The same definition of qualified employer applies to an organization described in Code section 501(c) that is exempt from tax under Code section 501(a). However, special rules apply in calculating the credit for a tax-exempt qualified employer. A governmental employer is not a qualified employer unless it is an organization described in Code section 501(c) that is exempt from tax under Code section 501(a). See Q/A-6.
Calculation of the Credit
3. What expenses are counted in calculating the credit?
A. Only premiums paid by the employer under an arrangement meeting certain requirements (a “qualifying arrangement”) are counted in calculating the credit. Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage. See Q/A-22 for information on transition relief for tax years beginning in 2010 with respect to the requirements for a qualifying arrangement.
If an employer pays only a portion of the premiums for the coverage provided to employees under the arrangement (with employees paying the rest), the amount of premiums counted in calculating the credit is only the portion paid by the employer. For example, if an employer pays 80 percent of the premiums for employees’ coverage (with employees paying the other 20 percent), the 80 percent premium amount paid by the employer counts in calculating the credit. For purposes of the credit (including the 50-percent requirement), any premium paid pursuant to a salary reduction arrangement under a section 125 cafeteria plan is not treated as paid by the employer.
In addition, the amount of an employer’s premium payments that counts for purposes of the credit is capped by the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the State (or an area within the State) in which the employer offers coverage were substituted for the actual premium. If the employer pays only a portion of the premium for the coverage provided to employees (for example, under the terms of the plan the employer pays 80 percent of the premiums and the employees pay the other 20 percent), the premium amount that counts for purposes of the credit is the same portion (80 percent in the example) of the premiums that would have been paid for the coverage if the average premium for the small group market in the State were substituted for the actual premium.
4. What is the average premium for the small group market in a State (or an area within the State)?
A. The average premium for the small group market in a State (or an area within the State) will be determined by the Department of Health and Human Services (HHS) and published by the IRS. Publication of the average premium for the small group market on a State-by-State basis is expected to be posted on the IRS website by the end of April.
5. What is the maximum credit for a qualified employer (other than a tax-exempt employer)?
A. For tax years beginning in 2010 through 2013, the maximum credit is 35 percent of the employer’s premium expenses that count towards the credit, as described in Q/A-3.
Example. For the 2010 tax year, a qualified employer has 9 FTEs with average annual wages of $23,000 per FTE. The employer pays $72,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit. The credit for 2010 equals $25,200 (35% x $72,000).
6. What is the maximum credit for a tax-exempt qualified employer?
A. For tax years beginning in 2010 through 2013, the maximum credit for a tax-exempt qualified employer is 25 percent of the employer’s premium expenses that count towards the credit, as described in Q/A-3. However, the amount of the credit cannot exceed the total amount of income and Medicare (i.e., Hospital Insurance) tax the employer is required to withhold from employees’ wages for the year and the employer share of Medicare tax on employees’ wages.
Example. For the 2010 tax year, a qualified tax-exempt employer has 10 FTEs with average annual wages of $21,000 per FTE. The employer pays $80,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit. The total amount of the employer’s income tax and Medicare tax withholding plus the employer’s share of the Medicare tax equals $30,000 in 2010. The credit is calculated as follows:
(1) Initial amount of credit determined before any reduction: (25% x $80,000) = $20,000(2) Employer’s withholding and Medicare taxes: $30,000(3) Total 2010 tax credit is $20,000 (the lesser of $20,000 and $30,000).
7. How is the credit reduced if the number of FTEs exceeds 10 or average annual wages exceed $25,000?
A. If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is reduced as follows (but not below zero). If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the number of FTEs in excess of 10 and the denominator of which is 15. If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the amount by which average annual wages exceed $25,000 and the denominator of which is $25,000. In both cases, the result of the calculation is subtracted from the otherwise applicable credit to determine the credit to which the employer is entitled. For an employer with both more than 10 FTEs and average annual wages exceeding $25,000, the reduction is the sum of the amount of the two reductions. This sum may reduce the credit to zero for some employers with fewer than 25 FTEs and average annual wages of less than $50,000.
Example. For the 2010 tax year, a qualified employer has 12 FTEs and average annual wages of $30,000. The employer pays $96,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit.
The credit is calculated as follows:
(1) Initial amount of credit determined before any reduction: (35% x $96,000) = $33,600 (2) Credit reduction for FTEs in excess of 10: ($33,600 x 2/15) = $4,480(3) Credit reduction for average annual wages in excess of $25,000: ($33,600 x $5,000/$25,000) = $6,720(4) Total credit reduction: ($4,480 + $6,720) = $11,200(5) Total 2010 tax credit: ($33,600 – $11,200) = $22,400.
8. Can premiums paid by the employer in 2010, but before the new health reform legislation was enacted, be counted in calculating the credit?
A. Yes. In computing the credit for a tax year beginning in 2010, employers may count all premiums described in Q/A-3 for that tax year.
Determining FTEs and Average Annual Wages
9. How is the number of FTEs determined for purposes of the credit?
A. The number of an employer’s FTEs is determined by dividing (1) the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by (2) 2,080. The result, if not a whole number, is then rounded to the next lowest whole number. See Q/A-12 through 14 for information on which employees are not counted for purposes of determining FTEs.
Example. For the 2010 tax year, an employer pays 5 employees wages for 2,080 hours each, 3 employees wages for 1,040 hours each, and 1 employee wages for 2,300 hours.
The employer’s FTEs would be calculated as follows:
(1) Total hours not exceeding 2,080 per employee is the sum of:
a. 10,400 hours for the 5 employees paid for 2,080 hours each (5 x 2,080)b. 3,120 hours for the 3 employees paid for 1,040 hours each (3 x 1,040)c. 2,080 hours for the 1 employee paid for 2,300 hours (lesser of 2,300 and 2,080)
These add up to 15,600 hours
(2) FTEs: 7 (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number) 10. How is the amount of average annual wages determined?
A. The amount of average annual wages is determined by first dividing (1) the total wages paid by the employer to employees during the employer’s tax year by (2) the number of the employer’s FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000). For this purpose, wages means wages as defined for FICA purposes (without regard to the wage base limitation). See Q/A-12 through 14 for information on which employees are not counted as employees for purposes of determining the amount of average annual wages. Example. For the 2010 tax year, an employer pays $224,000 in wages and has 10 FTEs.
The employer’s average annual wages would be: $22,000 ($224,000 divided by 10 = $22,400, rounded down to the nearest $1,000)
11. Can an employer with 25 or more employees qualify for the credit if some of its employees are part-time?
A. Yes. Because the limitation on the number of employees is based on FTEs, an employer with 25 or more employees could qualify for the credit if some of its employees work part-time. For example, an employer with 46 half-time employees (meaning they are paid wages for 1,040 hours) has 23 FTEs and therefore may qualify for the credit.
12. Are seasonal workers counted in determining the number of FTEs and the amount of average annual wages?
A. Generally, no. Seasonal workers are disregarded in determining FTEs and average annual wages unless the seasonal worker works for the employer on more than 120 days during the tax year.
13. If an owner of a business also provides services to it, does the owner count as an employee?
A. Generally, no. A sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit. Thus, the wages or hours of these business owners and partners are not counted in determining either the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.
14. Do family members of a business owner who work for the business count as employees?
A. Generally, no. A family member of any of the business owners or partners listed in Q/A-13, or a member of such a business owner’s or partner’s household, is not considered an employee for purposes of the credit. Thus, neither their wages nor their hours are counted in determining the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit. For this purpose, a family member is defined as a child (or descendant of a child); a sibling or step-sibling; a parent (or ancestor of a parent); a step-parent; a niece or nephew; an aunt or uncle; or a son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.
15. How is eligibility for the credit determined if the employer is a member of a controlled group or an affiliated service group?
A. Members of a controlled group (e.g., businesses with the same owners) or an affiliated service group (e.g., related businesses of which one performs services for the other) are treated as a single employer for purposes of the credit. Thus, for example, all employees of the controlled group or affiliated service group, and all wages paid to employees by the controlled group or affiliated service group, are counted in determining whether any member of the controlled group or affiliated service group is a qualified employer. Rules for determining whether an employer is a member of a controlled group or an affiliated service group are provided under Code section 414(b), (c), (m), and (o).
How to Claim the Credit
16. How does an employer claim the credit?
A. The credit is claimed on the employer’s annual income tax return. For a tax-exempt employer, the IRS will provide further information on how to claim the credit.
17. Can an employer (other than a tax-exempt employer) claim the credit if it has no taxable income for the year?
A. Generally, no. Except in the case of a tax-exempt employer, the credit for a year offsets only an employer’s actual income tax liability (or alternative minimum tax liability) for the year. However, as a general business credit, an unused credit amount can generally be carried back one year and carried forward 20 years. Because an unused credit amount cannot be carried back to a year before the effective date of the credit, though, an unused credit amount for 2010 can only be carried forward.
18. Can a tax-exempt employer claim the credit if it has no taxable income for the year?
A. Yes. For a tax-exempt employer, the credit is a refundable credit, so that even if the employer has no taxable income, the employer may receive a refund (so long as it does not exceed the income tax withholding and Medicare tax liability, as discussed in Q/A-6).
19. Can the credit be reflected in determining estimated tax payments for a year?
A. Yes. The credit can be reflected in determining estimated tax payments for the year to which the credit applies in accordance with regular estimated tax rules.
20. Does taking the credit affect an employer’s deduction for health insurance premiums?
A. Yes. In determining the employer’s deduction for health insurance premiums, the amount of premiums that can be deducted is reduced by the amount of the credit.
21. May an employer reduce employment tax payments (i.e., withheld income tax, social security tax, and Medicare tax) during the year in anticipation of the credit?
A. No. The credit applies against income tax, not employment taxes.
Anticipated Transition Relief for Tax Years Beginning in 2010
22. Is it expected that any transition relief will be provided for tax years beginning in 2010 to make it easier for taxpayers to meet the requirements for a qualifying arrangement?
A. Yes. The IRS and Treasury intend to issue guidance that will provide that, for tax years beginning in 2010, the following transition relief applies with respect to the requirements for a qualifying arrangement described in Q/A-3:
(a) An employer that pays at least 50% of the premium for each employee enrolled in coverage offered to employees by the employer will not fail to maintain a qualifying arrangement merely because the employer does not pay a uniform percentage of the premium for each such employee. Accordingly, if the employer otherwise satisfies the requirements for the credit described above, it will qualify for the credit even though the percentage of the premium it pays is not uniform for all such employees.
(b) The requirement that the employer pay at least 50% of the premium for an employee applies to the premium for single (employee-only) coverage for the employee. Therefore, if the employee is receiving single coverage, the employer satisfies the 50% requirement with respect to the employee if it pays at least 50% of the premium for that coverage. If the employee is receiving coverage that is more expensive than single coverage (such as family or self-plus-one coverage), the employer satisfies the 50% requirement with respect to the employee if the employer pays an amount of the premium for such coverage that is no less than 50% of the premium for single coverage for that employee (even if it is less than 50% of the premium for the coverage the employee is actually receiving).
http://www.irs.gov/newsroom/article/0,,id=220839,00.html
Small Business Health Care Tax Credit: Frequently Asked Questions
The new health reform law gives a tax credit to certain small employers that provide health care coverage to their employees, effective with tax years beginning in 2010. The following questions and answers provide information on the credit as it applies for 2010-2013, including information on transition relief for 2010. An enhanced version of the credit will be effective beginning in 2014. The new law, the Patient Protection and Affordable Care Act, was passed by Congress and was signed by President Obama on March 23, 2010.
Employers Eligible for the Credit
1. Which employers are eligible for the small employer health care tax credit?
A. Small employers that provide health care coverage to their employees and that meet certain requirements (“qualified employers”) generally are eligible for a Federal income tax credit for health insurance premiums they pay for certain employees. In order to be a qualified employer, (1) the employer must have fewer than 25 full-time equivalent employees (“FTEs”) for the tax year, (2) the average annual wages of its employees for the year must be less than $50,000 per FTE, and (3) the employer must pay the premiums under a “qualifying arrangement” described in Q/A-3. See Q/A-9 through 15 for further information on calculating FTEs and average annual wages and see Q/A-22 for information on anticipated transition relief for tax years beginning in 2010 with respect to the requirements for a qualifying arrangement.
2. Can a tax-exempt organization be a qualified employer?
A. Yes. The same definition of qualified employer applies to an organization described in Code section 501(c) that is exempt from tax under Code section 501(a). However, special rules apply in calculating the credit for a tax-exempt qualified employer. A governmental employer is not a qualified employer unless it is an organization described in Code section 501(c) that is exempt from tax under Code section 501(a). See Q/A-6.
Calculation of the Credit
3. What expenses are counted in calculating the credit?
A. Only premiums paid by the employer under an arrangement meeting certain requirements (a “qualifying arrangement”) are counted in calculating the credit. Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage. See Q/A-22 for information on transition relief for tax years beginning in 2010 with respect to the requirements for a qualifying arrangement.
If an employer pays only a portion of the premiums for the coverage provided to employees under the arrangement (with employees paying the rest), the amount of premiums counted in calculating the credit is only the portion paid by the employer. For example, if an employer pays 80 percent of the premiums for employees’ coverage (with employees paying the other 20 percent), the 80 percent premium amount paid by the employer counts in calculating the credit. For purposes of the credit (including the 50-percent requirement), any premium paid pursuant to a salary reduction arrangement under a section 125 cafeteria plan is not treated as paid by the employer.
In addition, the amount of an employer’s premium payments that counts for purposes of the credit is capped by the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the State (or an area within the State) in which the employer offers coverage were substituted for the actual premium. If the employer pays only a portion of the premium for the coverage provided to employees (for example, under the terms of the plan the employer pays 80 percent of the premiums and the employees pay the other 20 percent), the premium amount that counts for purposes of the credit is the same portion (80 percent in the example) of the premiums that would have been paid for the coverage if the average premium for the small group market in the State were substituted for the actual premium.
4. What is the average premium for the small group market in a State (or an area within the State)?
A. The average premium for the small group market in a State (or an area within the State) will be determined by the Department of Health and Human Services (HHS) and published by the IRS. Publication of the average premium for the small group market on a State-by-State basis is expected to be posted on the IRS website by the end of April.
5. What is the maximum credit for a qualified employer (other than a tax-exempt employer)?
A. For tax years beginning in 2010 through 2013, the maximum credit is 35 percent of the employer’s premium expenses that count towards the credit, as described in Q/A-3.
Example. For the 2010 tax year, a qualified employer has 9 FTEs with average annual wages of $23,000 per FTE. The employer pays $72,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit. The credit for 2010 equals $25,200 (35% x $72,000).
6. What is the maximum credit for a tax-exempt qualified employer?
A. For tax years beginning in 2010 through 2013, the maximum credit for a tax-exempt qualified employer is 25 percent of the employer’s premium expenses that count towards the credit, as described in Q/A-3. However, the amount of the credit cannot exceed the total amount of income and Medicare (i.e., Hospital Insurance) tax the employer is required to withhold from employees’ wages for the year and the employer share of Medicare tax on employees’ wages.
Example. For the 2010 tax year, a qualified tax-exempt employer has 10 FTEs with average annual wages of $21,000 per FTE. The employer pays $80,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit. The total amount of the employer’s income tax and Medicare tax withholding plus the employer’s share of the Medicare tax equals $30,000 in 2010. The credit is calculated as follows:
(1) Initial amount of credit determined before any reduction: (25% x $80,000) = $20,000(2) Employer’s withholding and Medicare taxes: $30,000(3) Total 2010 tax credit is $20,000 (the lesser of $20,000 and $30,000).
7. How is the credit reduced if the number of FTEs exceeds 10 or average annual wages exceed $25,000?
A. If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is reduced as follows (but not below zero). If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the number of FTEs in excess of 10 and the denominator of which is 15. If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the amount by which average annual wages exceed $25,000 and the denominator of which is $25,000. In both cases, the result of the calculation is subtracted from the otherwise applicable credit to determine the credit to which the employer is entitled. For an employer with both more than 10 FTEs and average annual wages exceeding $25,000, the reduction is the sum of the amount of the two reductions. This sum may reduce the credit to zero for some employers with fewer than 25 FTEs and average annual wages of less than $50,000.
Example. For the 2010 tax year, a qualified employer has 12 FTEs and average annual wages of $30,000. The employer pays $96,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit.
The credit is calculated as follows:
(1) Initial amount of credit determined before any reduction: (35% x $96,000) = $33,600 (2) Credit reduction for FTEs in excess of 10: ($33,600 x 2/15) = $4,480(3) Credit reduction for average annual wages in excess of $25,000: ($33,600 x $5,000/$25,000) = $6,720(4) Total credit reduction: ($4,480 + $6,720) = $11,200(5) Total 2010 tax credit: ($33,600 – $11,200) = $22,400.
8. Can premiums paid by the employer in 2010, but before the new health reform legislation was enacted, be counted in calculating the credit?
A. Yes. In computing the credit for a tax year beginning in 2010, employers may count all premiums described in Q/A-3 for that tax year.
Determining FTEs and Average Annual Wages
9. How is the number of FTEs determined for purposes of the credit?
A. The number of an employer’s FTEs is determined by dividing (1) the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by (2) 2,080. The result, if not a whole number, is then rounded to the next lowest whole number. See Q/A-12 through 14 for information on which employees are not counted for purposes of determining FTEs.
Example. For the 2010 tax year, an employer pays 5 employees wages for 2,080 hours each, 3 employees wages for 1,040 hours each, and 1 employee wages for 2,300 hours.
The employer’s FTEs would be calculated as follows:
(1) Total hours not exceeding 2,080 per employee is the sum of:
a. 10,400 hours for the 5 employees paid for 2,080 hours each (5 x 2,080)b. 3,120 hours for the 3 employees paid for 1,040 hours each (3 x 1,040)c. 2,080 hours for the 1 employee paid for 2,300 hours (lesser of 2,300 and 2,080)
These add up to 15,600 hours
(2) FTEs: 7 (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number) 10. How is the amount of average annual wages determined?
A. The amount of average annual wages is determined by first dividing (1) the total wages paid by the employer to employees during the employer’s tax year by (2) the number of the employer’s FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000). For this purpose, wages means wages as defined for FICA purposes (without regard to the wage base limitation). See Q/A-12 through 14 for information on which employees are not counted as employees for purposes of determining the amount of average annual wages. Example. For the 2010 tax year, an employer pays $224,000 in wages and has 10 FTEs.
The employer’s average annual wages would be: $22,000 ($224,000 divided by 10 = $22,400, rounded down to the nearest $1,000)
11. Can an employer with 25 or more employees qualify for the credit if some of its employees are part-time?
A. Yes. Because the limitation on the number of employees is based on FTEs, an employer with 25 or more employees could qualify for the credit if some of its employees work part-time. For example, an employer with 46 half-time employees (meaning they are paid wages for 1,040 hours) has 23 FTEs and therefore may qualify for the credit.
12. Are seasonal workers counted in determining the number of FTEs and the amount of average annual wages?
A. Generally, no. Seasonal workers are disregarded in determining FTEs and average annual wages unless the seasonal worker works for the employer on more than 120 days during the tax year.
13. If an owner of a business also provides services to it, does the owner count as an employee?
A. Generally, no. A sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit. Thus, the wages or hours of these business owners and partners are not counted in determining either the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.
14. Do family members of a business owner who work for the business count as employees?
A. Generally, no. A family member of any of the business owners or partners listed in Q/A-13, or a member of such a business owner’s or partner’s household, is not considered an employee for purposes of the credit. Thus, neither their wages nor their hours are counted in determining the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit. For this purpose, a family member is defined as a child (or descendant of a child); a sibling or step-sibling; a parent (or ancestor of a parent); a step-parent; a niece or nephew; an aunt or uncle; or a son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.
15. How is eligibility for the credit determined if the employer is a member of a controlled group or an affiliated service group?
A. Members of a controlled group (e.g., businesses with the same owners) or an affiliated service group (e.g., related businesses of which one performs services for the other) are treated as a single employer for purposes of the credit. Thus, for example, all employees of the controlled group or affiliated service group, and all wages paid to employees by the controlled group or affiliated service group, are counted in determining whether any member of the controlled group or affiliated service group is a qualified employer. Rules for determining whether an employer is a member of a controlled group or an affiliated service group are provided under Code section 414(b), (c), (m), and (o).
How to Claim the Credit
16. How does an employer claim the credit?
A. The credit is claimed on the employer’s annual income tax return. For a tax-exempt employer, the IRS will provide further information on how to claim the credit.
17. Can an employer (other than a tax-exempt employer) claim the credit if it has no taxable income for the year?
A. Generally, no. Except in the case of a tax-exempt employer, the credit for a year offsets only an employer’s actual income tax liability (or alternative minimum tax liability) for the year. However, as a general business credit, an unused credit amount can generally be carried back one year and carried forward 20 years. Because an unused credit amount cannot be carried back to a year before the effective date of the credit, though, an unused credit amount for 2010 can only be carried forward.
18. Can a tax-exempt employer claim the credit if it has no taxable income for the year?
A. Yes. For a tax-exempt employer, the credit is a refundable credit, so that even if the employer has no taxable income, the employer may receive a refund (so long as it does not exceed the income tax withholding and Medicare tax liability, as discussed in Q/A-6).
19. Can the credit be reflected in determining estimated tax payments for a year?
A. Yes. The credit can be reflected in determining estimated tax payments for the year to which the credit applies in accordance with regular estimated tax rules.
20. Does taking the credit affect an employer’s deduction for health insurance premiums?
A. Yes. In determining the employer’s deduction for health insurance premiums, the amount of premiums that can be deducted is reduced by the amount of the credit.
21. May an employer reduce employment tax payments (i.e., withheld income tax, social security tax, and Medicare tax) during the year in anticipation of the credit?
A. No. The credit applies against income tax, not employment taxes.
Anticipated Transition Relief for Tax Years Beginning in 2010
22. Is it expected that any transition relief will be provided for tax years beginning in 2010 to make it easier for taxpayers to meet the requirements for a qualifying arrangement?
A. Yes. The IRS and Treasury intend to issue guidance that will provide that, for tax years beginning in 2010, the following transition relief applies with respect to the requirements for a qualifying arrangement described in Q/A-3:
(a) An employer that pays at least 50% of the premium for each employee enrolled in coverage offered to employees by the employer will not fail to maintain a qualifying arrangement merely because the employer does not pay a uniform percentage of the premium for each such employee. Accordingly, if the employer otherwise satisfies the requirements for the credit described above, it will qualify for the credit even though the percentage of the premium it pays is not uniform for all such employees.
(b) The requirement that the employer pay at least 50% of the premium for an employee applies to the premium for single (employee-only) coverage for the employee. Therefore, if the employee is receiving single coverage, the employer satisfies the 50% requirement with respect to the employee if it pays at least 50% of the premium for that coverage. If the employee is receiving coverage that is more expensive than single coverage (such as family or self-plus-one coverage), the employer satisfies the 50% requirement with respect to the employee if the employer pays an amount of the premium for such coverage that is no less than 50% of the premium for single coverage for that employee (even if it is less than 50% of the premium for the coverage the employee is actually receiving).
http://www.irs.gov/newsroom/article/0,,id=220839,00.html
Monday, March 29, 2010
Health Care Reform Reconciliation Bill's Key Components
I would like to take this opportunity to provide you with a summary of the key components of the Health Care Reform Reconciliation Bill. I expect that given the number of years that it will take to fully rollout these reforms, there will continue to be changes to the legislation. I will keep you informed of important modifications during this process.
Providing recipients in the doughnut hole with a 50% discount on brand name drugs. Employer health plans will be prohibited from rescinding or canceling health coverage, except in case of fraud. Employer-provided coverage will be required to eliminate lifetime limits on essential benefits. The employer’s group health plan will be required to eliminate the pre-existing condition exclusions for children (2010) and adults (2014). The plans also have to eliminate annual limits on essential benefits coverage for adults. Employers will be required to eliminate waiting periods beyond 90 days when enrolling employees in a group health plan. No later than March 1, 2013, employers will be required to give a notice, "free choice vouchers”, to their employees that they may be eligible to participate in one of the state-based health-insurance exchanges. Employees with incomes below 400% of the Federal Poverty Level will contribute no more then 8-9.8% of income. Penalties will be assessed on employers with 50 or more employees who do not offer coverage to their employees. The fine of $2,000 per full-time employee will be assessed if even one-employee obtains a federal subsidy to buy health coverage from one of the new state-based health-insurance exchanges. The first 30 employees are exempt from the calculation of the penalty. By 2014, the Act requires states to create health-insurance exchanges, which would offer four different levels of qualified health insurance plans. It also would mandate individuals at this time to purchase coverage and provide subsidies for certain individuals to do so.
The current Bill will:
- Mandate that everyone must have insurance or pay a penalty of $95 in 2014, or up to 1% of income, whichever is greater. This will rise to $695 in 2016 or 2.5% of income. The penalties will be capped at $2,250.
- Result in more than 30 million additional people becoming insured.
- Provide for subsidized coverage for those with low earnings. Incomes of $14,404 to $43,320 for an individual and $29,526 to $88,200 for a family of four will be eligible for a sliding scale subsidy. The premium for a family of 4 earning $44,075 is to be no more than 4% of income ($1,323). The premium for a family of 4 earning $88,200 is to be no more than 9.5% of income ($8,379).
- Make cuts to Medicare Advantage Plans and change their payment formula.
- Make many changes to the way insurance companies do business including waiving pre-existing conditions limitations and encouraging preventive medicine.
- Make available a Long Term Care Insurance program. CLASS will provide a voluntary, guaranteed issue benefit.
Many of these elements are phased in over the next eight years. Those that are most immediate and are expected to occur in 2010 are:
- Business with fewer that 25 employees and average wages of less than $50,000 could qualify for a tax credit of up to 35% of the cost of employees’ premiums.
- Dependant coverage for children will continue until age 26. (Note that NY currently has Age 29 provisions.)
- Creation of a temporary reinsurance program to provide coverage for retirees over 55 who are not eligible for Medicare.
- Creation of a temporary national high risk insurance pool. Those with preexisting conditions who have been uninsured for 6 months will be eligible.
- Prohibition of lifetime limits on benefit payments.
The real impact on the health insurance system will not occur until the year 2014. During the interim, there will be a phase-in of additional new taxes that will provide added government revenue to pay for these changes.
Three significant changes occurring by 2014 are:
- Insurers will be required to accept all applicants.
- Tax credits to help pay premiums will start flowing to middle-class working families. Help with co-payments and deductibles will be available.
- Insurance exchanges will be created to help administer subsidies for those individuals that require them.
Issues affecting Seniors:
Tax implications:
- Individuals with adjusted modified gross income over $200,000 and joint filers with over $250,000, will be required to pay a Medicare surtax of 3.8% on investment and other passive income, including rents, interest, dividends, royalties, capital gains and income from annuities.
- Individuals with adjusted modified gross income over $200,000 and joint filers with over $250,000 will pay a Medicare payroll tax of 2.35% – an increase of 0.9%.
- The availability of a Long Term Care Insurance program. CLASS will provide a guaranteed issue LTCI for Home Care and Nursing Care. This will be a voluntary option.
- Reduced payments to Medicare Advantage Plans (Medicare C).
- The threshold for claiming itemized tax documentation for medical expenses rises from 7.5% to 10% of adjusted gross income. Seniors can still deduct medical expenses above 7.5% through 2016.
Issues affecting Employers:
Flexible Spending
- Over-the-counter medicines will no longer be eligible for purchase with funds from Flexible Spending Accounts, Health Savings Accounts or Health Reimbursement Arrangements, unless a prescription is provided. The penalty for use of funds from a Health Savings Account for non-qualified medical expenses will increase - doubling the additional tax on these types of withdrawals from 10% to 20% for anyone under the age of 65.
- A statutory cap of $2,500 will be placed on the amount of funds an employee can save in a Flexible Spending Account. The limit will be adjusted annually in accordance with the U.S. Consumer Price Index.
Tax Implications for Business
- The 35% tax credit that goes into effect in 2010 for businesses with fewer than 25 employees and average wages of less than $50,000 increases to up to 50% of the cost of employees’ premiums.
- Excise tax on high-value health plans; a 40% excise tax will be applied to the excess value of a health plan above a statutory threshold. For most health plans, the threshold in the law will be established at $10,200 for individual health plans and $27,500 for family coverage. The threshold for the new excise tax will be adjusted annually for general inflation.
- An employer’s deduction for retiree prescription drug coverage is disallowed to the extent the employer receives the Retiree Drug Subsidy for providing coverage that is as good as or better than Medicare Part D coverage.
- Employers who employ more than 200 employees must automatically enroll new full-time employees in coverage. Employers must also provide employees with an opportunity to opt-out of coverage. Clarification on the effective date of this provision is forthcoming.
- A health plan W-2 reporting requirement will be imposed, requiring employers to report the aggregate value of medical benefits, vision, dental and supplemental insurance coverage. It is expected that this requirement would apply to Forms W-2 for the year 2011 that are made available in January 2012.
- Employers who provides coverage will pay either: an “assessment” of $3,000 for each employee who qualifies for subsidized coverage from an exchange either because the employer pays less than 60% of the full actuarial value of the coverage provided or because the employee’s cost is greater than 9.8% of their adjusted gross income; or $2,000 per full-time employee, whichever is less.
As mentioned, I will to continue to keep you updated about any modifications in our health care system. Please feel free to e-mail me at Risrael@optonline.net or call me at 516-682-8400 with any questions regarding this legislation or any of your insurance needs. You can also check my website at www.liplanning.com.
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