Obamacare
Qualified Small Employer HRA Avoids $100 per Day Penalty
Background
Over the past few years, there has been a $100 per day per employee penalty for employers who provided certain Health Reimbursement Accounts (HRAs) and/or Employer Payment Plans.
Under an HRA, an employer reimburses employees for the medical expenses up to a certain limit. The reimbursement is deductible by the employer and tax-free to the employee.
Under an Employer Payment Plan, the employer either reimburses employees for the cost of health insurance premiums or directly pays the insurance company for the employees’ health insurance coverage. Again, the payment is deductible by the employer and tax-free to the employee.
Under the market reform provisions of Obamacare, these plans became disfavored and subjected the employer to a $100 per day per employee (i.e., $36,500 per employee per year) penalty. The primary reason for the penalty is because the market reform provisions eliminated any annual or lifetime cap on benefits. HRAs are generally subject to an annual cap and Employer Payment Plans are deemed to be capped at the cost of the employee’s premium that is being paid.
Qualified HRAs No Longer Subject to $100 per Day per Employee Penalty
Beginning in 2017, qualified HRAs will be exempt from the $100 penalty. Employer Payment Plans remain subject to the penalty.
For 2017 and later, eligible employers that do not offer group health insurance coverage to any employees can offer a Qualified Small Employer HRA (QSEHRA). Eligible employers are employers that are not applicable large employers under Obamacare (applicable large employers have 50 or more employees).
The employer must offer a QSEHRA to each eligible employee. An eligible employee is defined broadly as any employee; however, the employer can elect to exclude the following:
- Employees who have not completed 90 days of service
- Employees under age 25
- Part-time or seasonal employees
- Employees covered by a collective bargaining agreement covering accident and health benefits
- Nonresident alien employees with no U.S. source income
A QSEHRA must be provided on the same terms to all eligible employees and funded entirely by the employer. Payments and reimbursements are limited to $4,950 per year ($10,000 for family coverage) and are prorated if the employee is not covered for the whole year. For example, if a single person starts employment on July 1, then the limit is reduced by 50%–$2,475 ($4,950 times 50%). These amounts will be adjusted for inflation.
Payments/Reimbursements are Taxable If Employee Does Not Have Minimum Essential Coverage
Unlike a regular HRA, premiums for individual health insurance policies, as well as other medical expenses such as deductibles and copays, can be paid or reimbursed by a QSEHRA. However, any payments or reimbursements from a QSEHRA for medical care (including insurance premiums) that are provided when an individual does not have minimum essential coverage are included in the employee’s income. Generally, an individual health insurance policy qualifies as minimum essential coverage, but the employer must verify that the employee has minimum essential coverage. Payments under a QSEHRA will affect the employee’s amount and qualification for the premium tax credit.
Employer Must Provide Notice to Employees
An employer funding a QSEHRA must provide written notice to each eligible employee no later than 90 days before the beginning of the year (or the date the employee first becomes eligible to participate). The notice must state the amount that will be available for reimbursement or payment for the year. Additionally, the notice must remind the employee that any benefits available under a QSEHRA must be disclosed to the health insurance marketplace if the employee applies for coverage through the marketplace and requests advance payment of the premium tax credit. The notice must also include a statement that if the employee does not have minimum essential coverage for any month, he may be subject to a penalty for the month and that payments and reimbursements under the QSEHRA may be included in income.
Employers that do not provide proper notice to employees are subject to a penalty of $50 per employee. The total penalty that can be assessed for one year cannot exceed $2,500.
Finally, amounts paid under a QSEHRA must be reported on the employee’s W2 (even though the payments are generally tax-free).
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Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Is This the End of the Individual Mandate?
The IRS recently announced that it will not reject 2016 tax returns that are silent on whether the taxpayer has complied with the individual mandate of the Affordable Care Act. These provisions require taxpayers to have qualifying health care coverage, qualify for an exemption, or pay a penalty. The IRS previously stated that such “silent” returns would be rejected; however, the IRS has shifted its policy to comply with a recent Presidential executive order. While the individual mandate is still law, it is possible that the IRS may not enforce the penalty. Caution is advisable. It is still very early in this process and guidance is still vague.
Background on the Individual Mandate
On their tax returns, taxpayers who had qualifying health coverage for every month of 2016 for themselves, their spouses, and dependents had to check the box on line 61 (Health Care: Individual Responsibility). A taxpayer that couldn’t check the box because there were coverage lapses must generally either claim a coverage exemption or pay the penalty for the lapse months.
The Executive Order
President Trump’s first executive order stated his intent to seek prompt repeal of the ACA. The executive orders stated:
To the extent permitted by law, the Secretary of Health and Human Services and the heads of all other executive departments and agencies with authorities and responsibilities under the Act shall exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications.
While the Trump Administration cannot simply repeal the individual mandate, which is part of a law passed by Congress, they could make the regulatory exemptions from it so broad that the exemptions swallow the rule and the individual mandate is essentially unenforced. Possibly…
One cause for concern is that even though the IRS will now process returns that are silent on compliance with the individual mandate, the IRS says that if it has questions about a tax return, taxpayers may receive follow up questions and correspondence at a future date.
Based on existing law prior to the executive order, the IRS will not issue liens or levies to collect the penalty and they will not initiate audits based on nonpayment of the penalties. The IRS’ only recourse for nonpayment of the penalty is to reduce refunds owed to taxpayers.
If you have any questions on how this applies to you, please feel free to give us a call at 248-538-5331.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Keep An Eye Out for Obamacare Tax Forms
Tax season 2016 is well under way. This tax season is the second year that the Affordable Care Act has an effect. Last year was the first year the Form 1095-A was distributed to taxpayers who purchased health insurance from the exchange. This form was used to (1) prove that individuals had qualifying health insurance coverage to avoid the Shared Responsibility Penalty and (2) calculate the Premium Subsidy available to qualifying individuals to help them afford their health insurance premiums.
This year, two more forms will be issued to taxpayers so they can prove that they had qualifying health insurance throughout 2015. Form 1095-C will be issued to employees who work for Applicable Large Employers (ALEs). ALEs are employers that employ 50 or more full time equivalents and are required to provide their employees with health insurance under the Affordable Care Act.
Form 1095-B will be issued by all other providers of health insurance (e.g., small employers, Medicaid, etc.)
The deadline for the Marketplace to provide Form 1095-A is February 1, 2016. The deadline for coverage providers to provide Forms 1095-B and employers to provide Form 1095-C has recently been extended to March 31, 2016.
Yes, Forms 1095-B and 1095-C don’t have to be issued until March 31, 2016 while the deadline to file tax returns this year is April 18 (Emancipation Day is being recognized on April 15 so the filing deadline is April 18). Many taxpayers therefore won’t receive Forms 1095-B or 1095-C by the time they file their tax returns. It is not necessary to wait to receive these two forms in order to file. Taxpayers may instead rely on other information about their health coverage and employer coverage to prepare their returns. Taxpayers should retain health insurance statements and other proof that they had coverage during 2015.
Taxpayers who will receive Form 1095-A must wait until they receive this form to file their tax returns. The form has important information required to calculate the Premium Subsidy.
To see how this applies to you, give us a call at 248-538-5331.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Hiring Someone? You Must Have Employees Fill Out These Forms.
Most employers know that when they hire a new employee, they must have the employee fill out a Form W4 so the employer can determine the amount of taxes to withhold from the employee’s paycheck. Unfortunately, there are other forms new employees must fill out or the employer could be subject to penalties. This post will describe those other forms.
Form I-9
Form I-9 is required to document verification of the identity and employment authorization of each new employee (both citizen and noncitizen) to work in the U.S. Employers are responsible for completing this form and retaining the form.
Newly hired employees must complete and sign Section 1 of the form no later than the first day of employment. Under this section, the employee states his citizenship/residency status under penalty of perjury. The employer must then obtain documentation that verifies the employee’s identity and employment authorization. This can be done by obtaining a copy of the employee’s driver’s license and Social Security Card, although other forms of documentation may be obtained.
Michigan New Hire Reporting Form
Federal law requires employers to report information about newly hired and rehired employees to a state agency within 20 days of the hire/rehire. The information on this form is matched with state and national data to help collect child support through income withholding and reduce fraudulent unemployment and workers’ compensation payments.
A copy of the Michigan New Hire Reporting Form can be obtained here.
Affordable Care Act Notices
This requirement came into existence two years and is described in more detail here. An employer covered by the Fair Labor Standards Act must provide each of its employees (part-time and full-time) with a notice informing the employees of their right to enroll in health insurance coverage through a state insurance marketplace (exchange).
Employers who have at least 1 employee engaged in commerce and who have gross annual sales of $500,000 or more are covered by the Fair Labor Standards Act. So many employers are subject to this requirement.
The Department of Labor has two model forms employers can use to give to their employees. If you already provide health coverage for your employees, use this model form. If you do not provide health coverage for your employees, use this model form.
Form W-4
Finally, employees fill out Form W-4 so their employers can determine how much estimated tax should be withheld from the employees’ paychecks. If an employee’s allowances under state income tax differ from the number of allowances under the Federal Form W-4, the employee may fill out a Form MI-W4 to claim a different number of allowances for state income tax purposes.
If you have questions on how this relief applies to you, give us a call.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
$100 Per-Day Per-Employee Penalty Delayed (but not by much)
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Over the past several months, we’ve written about the $100 per-day per-employee penalty for employers who reimburse or 
directly pay for their employees’ individual health insurance policies. This penalty was to be effective for 2014 and later years. The IRS recently issued Notice 2015-17 that provides employers a little more time before this penalty becomes effective.
Background
For years, many employers have provided health coverage to their employees by either directly paying for or reimbursing employees for their individual health coverage. These payments were deductible to the employer and tax-free to the employee. Under the Affordable Care Act market reforms, if these plans covered more than one employee, the plan would be considered a group health plan. As such, the plan must not have annual or lifetime limits on coverage. These plans were deemed to have limits equal to the premium the employer paid on behalf of the employee. Because of this, the employer would be subject to a $100 per-day per-employee penalty (i.e., $36,500 per employee per year).
The Relief
The IRS and the Department of Labor recently realized (eventually they catch on) that some employers that have offered these plans may need additional time to obtain group health coverage or adopt a suitable alternative.
The latest guidance provides that the penalty will not be applied for 2014 for employers that are not Applicable Large Employers for 2014. An Applicable Large Employer is an employer with 50 or more full time employees (including full time equivalents) during the prior year. The penalty also will not apply for January 1, 2015 to June 30, 2015 for employers that are not ALEs for 2015. After June 30, 2015, all non-compliant employers will be subject to the penalty.
This relief applies only for payment of or reimbursement of health insurance. The relief does not apply to health reimbursement accounts or other arrangements that reimburse employees for medical expenses other than insurance premiums.
Guidance for S Corporations
The IRS and the Department of Labor are contemplating additional guidance on how these rules apply to S corporations. Until such guidance is issued, and at least through the end of 2015, the penalty will not be asserted against an S corporation for a plan that provides individual health coverage to S corporation shareholder-employees. Basically, the penalty will not apply to S corporation shareholders through the end of 2015, but it may apply to other employees after June 30, 2015. If a plan covers 1 shareholder and 1 employee, the plan covers two employees and is a group health plan and the penalty would apply to the 1 employee (after June 30, 2015).
Quick (but expensive) Fix
One way around this penalty is for an employer to increase an employee’s taxable compensation, but not to condition the increase on the purchase of health insurance. If the increase is conditioned on the employee using the increased compensation to purchase health insurance coverage, the penalty will apply (after June 30, 2015.) Basically, the employee must pay income and FICA tax on the income, and the employer will pay payroll taxes on the payment.
If you have questions on how this relief applies to you, give us a call.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Tax Credit to Offset Health Insurance Premiums
Beginning in 2014, certain individuals will qualify for a Premium Assistance tax credit to help them pay for health insurance premiums. The credit 
is calculated on a monthly basis for individuals and families who have a qualified health plan, which is a bronze plan or better.
Ultimately, what the Premium Assistance credit does is set a maximum percentage of household income that an individual or family will have to pay for health insurance. The maximum percentage is based on the individual’s household income compared to the poverty level as follows:
|
Income |
Initial |
Final |
|
Up to 133% |
2.0% |
2.0% |
|
133% up to 150% |
3.0% |
4.0% |
|
150% up to 200% |
4.0% |
6.3% |
|
200% up to 250% |
6.3% |
8.05% |
|
250% up to 300% |
8.05% |
9.5% |
|
300% to 400% |
9.5% |
9.5% |
Thus, for example, someone who is at 150% of the poverty level wouldn’t have to pay more than 4% of her household income for health insurance premiums. The maximum percentages are on a sliding scale—for example, someone who is at 175% of the poverty level is in the middle of an income tier, so the maximum percentage for this person would be 5.15% (the midpoint between 4% of 6.3%.) To be eligible for the credit, taxpayers must be between 100% of 400% of the poverty level. Taxpayers under 100% of the poverty level will be eligible for Medicaid. In states that have expanded Medicaid, individuals may be eligible for Medicaid if they are at 138% of the poverty level or less.
The poverty level for 2013 is $11,490 plus $4,020 for each additional family member. So a husband and wife with two kids would be at the poverty level if their household income is $23,550 ($11,490 plus $4,020 times 3). This family would be eligible for the Premium Assistance credit as long as their household income is 400% of the poverty level or less. 400% of the poverty level for this family would be $94,200. At 400% of the poverty level, the maximum percentage of household income they would have to pay for health insurance premiums is 9.5%.
Taxpayers can calculate the Premium Assistance credit at the end of the year on their personal tax returns and receive a refundable tax credit. Alternatively, taxpayers may estimate the Premium Assistance credit during enrollment for the year and receive advance payment of the tax credit—however, the credit amounts would be paid directly to the health insurer, and taxpayers would pay the net amount of the premium after the credit. However, if a taxpayer receives an advance of the tax credit, a reconciliation will have to be done at year end and the taxpayer may owe some of the tax credit back or be entitled to an additional tax credit based on actual income amounts that will be known at year end.
The Applicable Benchmark Plan
The amount of the Premium Assistance credit is based on the premiums for the applicable benchmark plan. The applicable benchmark plan is the second lowest cost silver plan, regardless of which plan the taxpayer ultimately enrolls in. If a taxpayer actually enrolls in a bronze plan, the taxpayer’s actual maximum percentage of income to pay health insurance premiums will be lower than the maximum percentages listed in the above table. This is because the tax credit is based on excess of the silver plan over the maximum percentage rather than the lower premium cost of the bronze plan over the maximum percentage.
Below are examples of the amounts of Premium Assistance tax credits for individuals at different income levels and with different family sizes. The Silver Plan premium is based on amounts from Healthcare.gov. While the credit is computed monthly, the amounts in the tables are based on annual amounts.
Single with no kids
|
(A) Household Income Amount
|
(B) % of Poverty Level |
(C) Maximum % of Income |
(D) Maximum Premium Cost A times C |
(E) Silver Plan Annual Premium
|
Annual Credit Amount E minus D |
| $20,000 | 174% | 5.15% | $1,030 | $2,600 |
$1,570 |
| $30,000 | 261% | 8.37% | $2,511 | $2,600 |
$89 |
| $50,000 | 435% | Not Eligible (over 400% of poverty level) |
Single with 1 Kid
|
(A) Household Income Amount
|
(B) % of Poverty Level |
(C) Maximum % of Income |
(D) Maximum Premium Cost A times C |
(E) Silver Plan Annual Premium
|
Annual Credit Amount E minus D |
| $20,000 | 129% | 2% | $400 | $5,000 |
$4,600 |
| $30,000 | 193% | 5.98% | $1,794 | $5,000 |
$3,206 |
| $50,000 | 322% | 9.5% | $4,750 | $5,000 |
$250 |
| $70,000 | 451% | Not Eligible (over 400% of poverty level) |
Married with no kids
|
(A)
Household Income Amount
|
(B) % of Poverty Level |
(C) Maximum % of Income |
(D) Maximum Premium Cost A times C |
(E) Silver Plan Annual Premium
|
Annual Credit Amount E minus D |
| $20,000 | 129% | 2% | $400 | $5,376 |
$4,976 |
| $30,000 | 193% | 5.98% | $1,794 | $5,376 |
$3,582 |
| $50,000 | 322% | 9.5% | $4,750 | $5,376 |
$626 |
| $70,000 | 451% | Not Eligible (over 400% of poverty level) |
Married with 1 kid
|
(A) Household Income Amount
|
(B) % of Poverty Level |
(C) Maximum % of Income |
(D) Maximum Premium Cost A times C |
(E) Silver Plan Annual Premium
|
Annual Credit Amount E minus D |
| $20,000 | 102% | 2% | $400 | $7,440 |
$7,040 |
| $30,000 | 154% | 4.18% | $1,254 | $7,440 |
$6,186 |
| $50,000 | 256% | 8.22% | $4,110 | $7,440 |
$3,330 |
| $70,000 | 358% | 9.5% | $6,650 | $7,440 |
$390 |
| $90,000 | 461% | Not Eligible (over 400% of poverty level) |
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Exemptions from the Penalty for Not Having Health Insurance
Beginning January 1, 2014 the Affordable Care Act requires individuals to have minimum essential health coverage or face a penalty. However, there are a number of exemptions that allow certain individuals to avoid the penalty for not having minimum essential health coverage.
These exempt individuals include:
1. Individuals who are not U.S. citizens or nationals who are nonresident aliens or are present in the U.S. illegally.
2. Incarcerated individuals, other than those who are incarcerated pending the disposition of charges
3. Members of Indian tribes
4. Individuals whose household income is below the threshold for having to file an income tax return
An individual with household income that is less than the income threshold required to file an income tax return is not liable for the penalty. Household income includes the taxpayer’s income along with his/her spouse’s income PLUS the income of dependents.
5. Individuals who cannot afford coverage
An individual lacks access to affordable coverage in 2014 if his or her required contribution for minimum essential health insurance coverage for a month exceeds 8% of his or her household income. Again household income includes the individual’s income, his/her spouse’s income, plus any dependents’ income.
6. Individuals with short coverage gaps
Individuals who do not have minimum essential coverage for a short coverage gap are exempt individuals. A short coverage gap is a continuous period of less than three months. An individual is an exempt individual for a month under the short coverage gap exemption if the last day of the month is part of a short coverage gap (i.e., less than three continuous months)
7. Hardship Exemption
An applicable individual who is determined by HHS to have suffered a hardship in obtaining coverage under a qualified health plan (QHP) for any day of a month is considered an exempt individual for that month.
Qualifying hardships include:
- the individual experiences financial or domestic circumstances, including an unexpected natural or human-caused event, such that he or she has a significant, unexpected increase in essential expenses;
- the expense of purchasing a QHP would cause serious deprivation of food, shelter, clothing, or other necessities; or
- the individual has experienced other circumstances similar to items a or b that prevent him or her from obtaining coverage under a QHP.
8. Members of recognized religious sects who have a religious conscience exemption.
To be granted a religious conscience exemption, the individual must be a member of a recognized religious sect on the list maintained by the Social Security Administration (SSA), which includes organizations whose members conscientiously oppose the acceptance of benefits of any private or public insurance that makes payments in the event of death, disability, old age, or retirement or makes payments toward the cost of, or provides services for, medical care (including Medicare or Medicaid). An individual who is a member of a sect not on the SSA list will be provided information on how the sect can obtain recognition from SSA. However, the individual will not be granted a religious conscience exemption until the state marketplace has information indicating the sect has been recognized by the SSA.
9. Members of health care sharing ministries
A health care sharing ministry (HCSM) is one that meets all of the following requirements:
- The HCSM is a Section 501(c)(3) organization that is tax-exempt.
- Members of the organization share a common set of ethical or religious beliefs and share medical expenses among members in accordance with those beliefs, and without regard to the state in which a member lives or is employed.
- Members retain membership even after they develop a medical condition.
- The HCSM has been in existence (or has a predecessor which has been in existence) at all times since December 31, 1999, and medical expenses of its members have been shared continuously and without interruption since at least December 31, 1999.
- The HCSM has an annual audit performed by an independent certified public accountant in accordance with generally accepted accounting principles. The audit report must be available to the public by request.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
ALERT: Small Businesses Must Send Out Obamacare Notices by Oct. 1.
An employer covered by the Fair Labor Standards Act must provide each of its employees (part-time and full-time) with a notice informing the 
employees of their right to enroll in health insurance coverage through a state insurance marketplace (exchange).
Employers who have at least 1 employee engaged in commerce and who have gross annual sales of $500,000 or more are covered by the Fair Labor Standards Act. So many employers are subject to this requirement.
The written notice must:
- Inform the employee of the existence of a state insurance marketplace;
- Include a description of the services provided by the marketplace;
- Explain how the employee may contact the marketplace to request assistance
- State that if the employer plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of the total allowed costs or the employee’s premiums for self-only coverage exceed 9.5% of the employee’s household income, the employee may be eligible for a premium assistance credit and a cost-sharing-reduction subsidy if the employee purchases a qualified health plan in the individual market through the exchange
- State that if the employee purchases a qualified health plan in the individual market through the exchange, the employee may lose any employer contribution to any health benefits plan offered by the employer and that all or a portion of the contribution may be excludable from income for U.S. tax purposes.
The Department of Labor has two model forms employers can use to give to their employees. If you already provide health coverage for your employees, use this model form. If you do not provide health coverage for your employees, use this model form.
Employers must distribute the notice to all employees regardless of whether the employee is part-time or full-time or if the employer does or does not provide health insurance coverage to the employee.
For all employees who are employed before October 1, 2013, the notice must be provided by October 1, 2013. For employees hired on or after October 1, 2013, the notice must be provided at the time of hiring; however, through 2014, a notice provided within 14 days of an employee’s start date will be considered provided at the time of hiring.
The notice must be provided by first class mail or electronically under certain circumstances.
If you have any questions, please call our office at 248-538-5331.
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Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
The New Medicare Tax on Investment Income
Under the 2010 Health Care Act, Medicare taxes will be going up for certain people on January 1, 2013. There are two separate Medicare tax increases. One will be a 3.8% Medicare tax on unearned income. The other is a 0.9% Medicare tax on wages and self-employment income. This post describes the 3.8% Medicare Contribution Tax on unearned income.
The Medicare Contribution Tax (3.8%) on Unearned Income
This tax is levied on unearned income such as interest, dividends, annuities, royalties, rents, and capital gains. It also includes flow through income from an LLC or S corporation in which the owners are not active (e.g., investors ).
The tax is 3.8% of the lesser of:
- Net investment income OR
- The excess of modified adjusted gross income over the applicable threshold amount
Some definitions:
Net Investment Income is investment income reduced by investment expenses (e.g., research expenses, advisory fees, etc.)
Modified Adjusted Gross Income is adjusted gross income increased by excluded foreign earned income (there is an exemption from U.S. tax for certain income earned overseas-but this is a topic for a separate blog post).
The Applicable Threshold Amount is $250,000 for joint filers or surviving spouses, $200,000 for single filers, and $125,000 for married filing separate filers.
Net Investment Income Does NOT Include:
- Distributions from regular or Roth IRAs
- Distributions from 401(k) or other qualified plans
- Social Security Income
- Life insurance proceeds
- Municipal bond interest
- Veterans’ benefits
- Gain from the sale of a personal residence if the gain doesn’t exceed the exclusion amounts of $500,000 for a joint return and $250,000 for a single filer
- Income from businesses where the owners materially participate
Example: John files a joint return and has $150,000 in wages, $30,000 in interest income, $70,000 in rental income, and a $30,000 gain on the sale of a rental property. John’s modified adjusted gross income is $280,000. John’s net investment income is $130,000 (the $30,000 in interest, $70,000 in rental income, and $30,000 gain from the rental property). John’s Medicare Contribution tax equals 3.8% times the lesser of:
- Net investment income of $130,000 OR
- The excess of modified adjusted gross income over the applicable threshold amount. This amount is $30,000 ($280,000 modified adjusted gross income less $250,000 threshold amount).
John’s Medicare Contribution tax is therefore $1,140 (3.8% times $30,000).
Example 2: Jill has $200,000 in wages. She is a passive investor in an S corporation, ABC Corp (i.e., outside of her investment in ABC Corp, she has no involvement in the business). She has $100,000 in flow through income from ABC Corp. She also sold some of her ABC Corp stock for a $50,000 gain. Jill’s modified adjusted gross income is $350,000. Since Jill is not active in ABC Corp, her flow through profit of $100,000 and her gain on sale of stock of ABC Corp of $50,000 are considered investment income. Jill’s Medicare Contribution tax is calculated as 3.8% times the lesser of:
- Net investment income of $150,000 OR
- The excess of modified adjusted gross income over the applicable threshold amount. This amount is $100,000 ($350,000 modified adjusted gross income less $250,000 threshold amount).
Jill’s Medicare Contribution tax is $3,800.
Example 3: Joan works full time in her S corporation, ABC Corp. She has $200,000 in wages and $100,000 in flow-through profit from ABC Corp. She also sold some of her ABC Corp stock for a $50,000 gain. Based on Joan’s full time employment in ABC Corp, she materially participates in the business. Since she materially participates, her flow through profit of $100,000 and gain on sale of stock of ABC Corp of $50,000 are NOT included in net investment income. Therefore, Joan is not subject to the 3.8% Medicare Contribution tax.
Some tips on avoiding the Medicare Contribution Tax:
- Try to accelerate income into 2012 so that modified adjusted gross income in 2013 will be under the threshold
- People owning rental property should try to qualify as a real estate professional
- This requires more than 50% of time spent in real estate activity and 750 hours per year in real estate activity
- Consider investing in municipal bonds
- Municipal bond interest is not subject to the 3.8% tax
- It also does not increase modified adjusted gross income so it may reduce the tax on other investment income
- Business owners should try to qualify as active owners in their businesses so that flow through income and gain on sale of ownership interests are not subject to the tax.
For more information on how this applies in your situation, please give us a call.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230
The Small Business Health Care Credit
Beginning in 2010, small businesses are eligible for a tax credit by providing qualified health care coverage for their employees. The credit starts off smaller during 2010 to 2013, but fully kicks in starting 2014. Despite the hype, very few businesses have qualified for this credit due to its limitations on the number of employees and average wage of employees.
How Much is the Credit?
During 2010 to 2013, the maximum credit is 35% of the employer’s premium expenses. Starting in 2014, the maximum credit is increased to 50% of the employer’s premium expenses.
Who Qualifies for the Credit?
Small businesses must meet three requirements to qualify for the credit:
- employers must have fewer than 25 full time equivalent (FTE) employees
- the average annual wages must be less than $50,000 per FTE
- the employer must pay the premiums under a qualifying arrangement.
Determining Number of FTEs
Employers calculate the number of FTEs by dividing the total number of employee hours worked (by both full time and part time employees) during a year by 2,080. If the result is not a whole number, the result is rounded down.
Example: ABC Corp reviews its payroll reports and determines that all of its employees (full and part time) worked 10,000 hours during the year. ABC Corp divides the 10,000 total hours worked by 2,080 to calculate its FTEs (10,000 hours divided by 2,080 equals 4.81 rounded down to 4 FTEs).
Determining Average Annual Wages
To calculate average annual wages, the employer divides its total wages for the year by the number of its FTEs.
Example: ABC Corp has $80,000 total payroll for the year. To determine if its average annual wages are under $50,000 it divides its total payroll ($80,000) by the number of its FTEs (4). Its average annual wages for the year is $20,000.
In calculating average annual wages, wages for seasonal employees and owners and their families are excluded from the calculation.
What, Pray Tell, is a Qualifying Arrangement?
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%) of the premium cost of coverage. The credit only applies to the employer paid portion.
Example: ABC Corp pays 80% of the premiums for each of its employees. Since it pays more than 50% of each employee’s premium, it qualifies for the credit (but only on the 80% that the employer pays, not on the 20% paid by employees).
Example 2: ABC Corp pays 40% of the premiums for each of its employees. Since it pays less than 50% of each employee’s premium, it does not qualify for the credit.
Example 3: ABC Corp pays 60% of the premiums for some employees, and 30% of the premiums for other employees. ABC Corp does not qualify for the credit because it does not pay a uniform percentage of each employee’s health premium.
There is an upper limit on the amount of premiums that qualify for the credit. If the average premium for a small group market in a State is less than the premiums paid by the employer, the amount of the average premium for a small group market in the state will be used instead of the actual premiums paid by the employer.
Calculating the Credit Phaseout
The full credit is allowed if the employer has up to 10 employees and up to $25,000 average annual wages. If the employer has more than 10 employees OR average annual wages exceeding $25,000 the credit begins to phase out.
The credit reduction for the FTE phaseout is calculated as:
Number of FTE over 10 divided by 15
ABC Corp has $80,000 of insurance premiums, and its maximum credit for 2010 is $28,000 ($80,000 times the 35% credit).
If ABC Corp has 18 employees, the credit reduction is calculated as follows:
(18 minus 10) divided by 15 = 53%
The FTE phaseout reduces the $28,000 credit from above by 53%. The credit must be reduced by $14,840.
The credit reduction for the average wage phaseout is calculated as:
Amount of Average Wages over $25,000 divided by $25,000.
If ABC Corp has average annual wages of $30,000, the phaseout is calculated as:
($30,000 minus $25,000) divided by $25,000 = 20%.
The average annual wage phaseout reduces the $28,000 credit from above by 20%. The credit must be reduced by $5,600.
When the employer has more than 10 FTEs and more than $25,000 in average annual wages, the FTE credit reduction and the wage credit reduction are added together. Thus, ABC Corp’’s total reductions are 20,440 ($14,840 FTE reduction plus $5,600 wage phaseout). So, ABC Corp’s credit is $7,560 (total credit of $28,000 reduced by total credit reductions of $20,440).
At this point you’re probably sick of reading this post, so I’ll leave you with a few quick bullet points:
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The credit is claimed on the employer’s annual income tax return
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it is NOT a refundable credit
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It is a general business credit that can be carried back 1 year and forward 20 years
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However, since 2010 is the first year, it cannot be carried back for 2010.
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Tax exempt organizations qualify for the credit under slightly different rules (check back for upcoming blog posts).
There you have it, a brief 3 page overview of the new small business health care credit. I’ll be posting more frequently (possibly twice a week) over the next few months to keep you up to date on the constant tax law changes. The tax laws are a-changin’.
If you have any questions on how this applies to your business, please feel free to give us a call.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230
