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The Employer Mandate / Employer Penalty Delayed until 2015

The ObamaCare employer mandate / employer penalty, originally set to begin in 2014, will be delayed until 2015. The ObamaCare "employer mandate" is a requirement that all businesses with over 50 full-time equivalent (FTE) employees provide health insurance for their full-time employees, or pay a per month "Employer Shared Responsibility Payment" on their federal tax return.


The employer mandate is officially part of the Employer Shared Responsibility provision. Under the Affordable Care Act, the federal government, state governments, insurers, employers and individuals are given shared responsibility to reform and improve the availability, quality and affordability of health insurance coverage in the United States.


The Employer Mandate Fee / Employer Shared Responsibility Payment

The annual employer mandate fee (officially called an Employer Shared Responsibility Payment) is a per employee fee for employers with over 50 full-time equivalent employees who don't offer health coverage to full-time employees.


  • The fee is based on whether or not you offer affordable health insurance to your employees that provides minium value (explained below).
  • The annual fee is $2,000 per employee if insurance isn't offered (the first 30 full-time employees are exempt).
  • The annual fee is $3,000 per employee if coverage is unaffordable or doesn't provide minium value and the employee qualifies for premium savings on the Marketplace.
  • The fee is a per month fee due annually on employer federal tax returns starting in 2015. So the per month fee is 1/12 of the $2,000 or $3,000 per employee.
  • Unlike employer contributions to employee premiums, the Employer Shared Responsibility Payment is not tax deductible.
  • The Internal Revenue Service has more information about the Employer Shared Responsibility Payment .The employer mandate fee is officially referred to as a "shared responsibility payment", as the fee will help to go to help fund marketplace subsidies and to compensate for unreimbursed emergency health care provided to the uninsured.

Understanding Full-time Equivalent Employees

In simple terms FTE or "full-time equivalent" equals (the total number of full-time employees) plus (the combined number of Part-time employee hours divided by 30). NOTE: seasonal employees, contractors, and business owners don't count toward the total. Part-time employee hours can be averaged from anywhere between a 3 and 12 months span to determine FTE.


How to Know if Your Coverage is Affordable

If an employee's share of the premium costs for employee-only coverage (not the entire family) is more than 9.5% of their yearly household income, the coverage is not considered affordable.Since you typically won't know your employee's household income, you can generally avoid a Shared Responsibility Payment for an employee if the employee's share of the premium for employee-only coverage doesn't exceed 9.5% of their wages for that year as reported on the employee’s W-2 form.For additional information about this and other safe harbors see IRS.gov/aca


How to Know if your Coverage Provides Minimum Value

A health plan meets minimum value if the plan's share of the total costs of covered services is at least 60%. In other words it must meet the basic requirements of a plan sold on the health insurance marketplace. If you purchase a group plan using the SHOP (Small Businesses Health Options Marketplace) should qualify. Please note: firms with over 100 full-time employees (50 in some States) can't use the marketplace. Even if your firm can't use the marketplace you can use https://www.wahealthplanfinder.org to get an idea of what benefits and actuarial value bronze plans (the lowest tier plan that meets minium value) cover. To determine whether other coverage meets minimum value, you can use the minimum value calculator provided by the U.S. Department of Health and Human Services. When you input certain information about the plan into the calculator, like deductibles and copayments, it will help you determine if the plan covers at least 60% of the total allowed costs of benefits provided under the plan.


How Do Employers Purchase Group Health Plans?

Employers with under 100 full-time workers, 50 in some States, will be able to use a SHOP exchange to compare and purchase group plans for their employees. Exchanges (marketplaces) create large pools of buyers which offer the buying power that only large firms have had in the past. In theory the increased buying power leads to better quality, more affordable plans. Smaller firms will see even greater affordability due to subsidies which are offered through the marketplace to employers with less than 25 full-time equivalent employees.The marketplace help to level the playing field for businesses that may have gotten over charged in the past. Employers of all sizes can still shop outside the marketplace, provided the plan they choose provides minimum coverage offered on the marketplace (roughly a 60% actuarial value and complies with the ACA).

See ObamaCare Small Business for more information small business rules and taxes. See Our SHOP Exchange Guide to learn more about purchasing health insurance for your employees.


The Truth About Who The Employer Mandate Affects

96% of all firms in the United States - or 5.8 million out of 6 million total firms - have under 50 employees and Will not Be Penalized for choosing not to provide health coverage to their employees. 96% of those firms already cover full time workers. That means less than .2% of small businesses (10k out of 6 million) will actually have to provide insurance to full-time employees or pay the shared responsibility fee due to ObamaCare.


ObamaCare Mandate Rules: What about Businesses With Under 50 full-time Equivalent Employees?

One thing that seems to get ignored when discussing the employer mandate is the fact that employers with under 50 full-time equivalent employees almost universally benefit from ObamaCare. If a small business has 25 or less full-time employees they can apply for tax breaks of up to 50% (35% for non-profits) of their contribution of their employees premiums starting in 2014. To qualify businesses must pay for at least 50 percent of their employees premiums and their workers average annual wages can't be more than $50,000. By 2014 the tax credit amount is increased to 50% (35% for non-profit).

  • To qualify for tax credits insurance must be purchased on the Affordable Insurance Exchange for at least two years. Credits can be claimed on your income tax return with an attached Form 8941 showing calculations for the credit.
  • Businesses with 10 or fewer full-time employees and average annual wages of $20,000 or less are eligible for the full 35% credit between 2010 and 2013 and then a 50% tax credit beginning in 2014.
  • Small business employers with over 25 full-time equivalent employees will not have access to the same tax breaks as those small businesses with under 25 employees. Tax credits are available for small businesses on a sliding scale depending on the number of employees and average annual wages.
  • Employer-based plans that provide health insurance to retirees ages 55-64 can get financial help via the Early Retiree Reinsurance Program. A program designed to lower the cost of premiums for all employees and reduce employer health costs.

Understanding How the Mandate Affects Your Business and Employer Mandate Loopholes

ObamaCare helps small businesses via the SHOP marketplace and tax credits, costs large firms a little more due to the employer mandate, and leaves a few mid-size firms stuck in the middle. Let's take a look at how ObamaCare's mandate affects a business with just over 50 full-time equivalent employees.

Consider a firm with the equivalent of 60 full-time employees, to comply with the employer mandate they could either cut back worker hours by over 10 full-time equivalent workers, choose not to insure their full-time workers and pay a fee, or cut back full-time workers to part-time and insure less employees.

If the firm kept only 30 workers at full-time, and didn't offer any employees health insurance, they would avoid the fee completely since their first 30 workers are exempt yet their total number of full-time equivalent employee hours wouldn't have changed. Unfortunately it is loophole's like this which has caused some businesses to cut back employee hours down to a safe 27 hour part-time status. While this is cost affective for the firm, it's not great for employees who will see a lower income and be left without employer based health coverage.

The point of the law isn't for small businesses to find loopholes, the point is to hold larger firms accountable for employee healthcare. To a company like Walmart getting a break on their first 30 employees is next to meaningless but to a firm that employees 40 full-time workers it is a pretty fair way to ask them to help ensure all Americans have access to affordable health care. ObamaCare means that small employers with less than 50 full-time equivalent employees won't pay a fine for not providing health insurance and those with less than 25 full-time equivalent employees can get tax breaks of up to 50% of their employees premium costs via their State's Health Insurance Marketplace.


ObamaCare Employer Mandate and Job Loss

Some companies cut back hours to avoid the mandate, but companies like Walmart have decided it was better to embrace the law instead of fight it and are now moving 35,000 workers from part-time to full-time status and giving them and their domestic partners health benefits.


How the ObamaCare Employer Mandate Will Affect You

If you work for a company that doesn't currently provide health insurance to their full-time workers and you work over 28 hours a week you are at the highest risk of having a negative impact from the provision. Although the "mandate" is meant to help provide this demographic insurance it has backfired with some of America's largest employers and ironically many government institutions. While only a small portion of the companies affected have responded by cutting hours, the American's affected is staggeringly high. If you have been affected by the ObamaCare "employer mandate" please write us using the contact button on the left side bar and tell us your story so we can share it.


ObamaCare Employer Mandate Penalty Facts

ObamaCare's "employer mandate" is officially a "shared responsibility fee" and like the "individual mandate" is a tax penalty to ensure that companies who choose not to provide health care for their workers are still paying into the healthcare system (as the law assumes that the employee will purchase insurance elsewhere). Many news outlets report the "employer mandate" as a $3000 fee. This isn't true, the penalty for small businesses not covering their workers is $2000 per employee and $3000 only if they purchase health insurance through the exchange with premium tax credits. This penalty is only applicable if the employee is not offered quality, affordable insurance. Employees who have access to quality, affordable insurance must obtain insurance through their employer, although their spouse and dependents can still obtain coverage through the marketplace (although they won't be able to use cost-assistance)

  • In total 6 million people are estimated to gain insurance through employer based health insurance due to the mandate.
  • The average employer contributed $4,508 towards single coverage in 2011, an amount that is projected to rise up to $5,100 by 2014. Although the rise is significant, the cost of health care has been rising regardless of ObamaCare. This number factors in larger businesses. Smaller businesses will be able to obtain premium tax credits through the SHOP exchange saving up to half of this cost, especially considering the average factors in high-end insurance plans.

ObamaCare Individual Mandate

See our ObamaCare tax penalty page more information on the ObamaCare individual mandate.


What is the Impact of the ObamaCare Employer Mandate

The ObamaCare employer mandate has already caused many companies to cut back the hours off full time workers to ensure that they are part-time status. Although only less than a fraction of a percent of firms in the US have over 50 full time employees, yet don't provide health insurance, many Americans are finding their hours cut. One of the reasons for this is that some of Americas biggest employers, McDonalds for example, don't provide full-timers with insurance. This also points to why the mandate is such a hot button issue, simply put, companies like Walmart and Taco Bell have a lot of money to throw around considering the amount of profit at stake.

 

 

Affordable Care Act (ACA)Provisions

The Patient Protection and Affordable Care Act of 201026 (“Affordable Care Act”) contains comprehensive health insurance reform and includes tax provisions that affect individuals, families, businesses, insurers, tax-exempt organizations and government entities. These provisions contain important changes, including how individuals and families file their taxes. The law also contains benefits and responsibilities for other organizations and employers. The discussion below addresses the aspects of the Affordable Care Act that affect 2015returns 

Disclosure or Use of Information by Tax Return Preparers

Code section 7216 is a criminal provision enacted in 1971 that, except as provided in regulations, prohibits tax return preparers from knowingly or recklessly disclosing tax return information or using tax return information for a purpose other than preparing, or assisting in preparing, an income tax return. This provision applies to tax return preparers who also offer services and education related to the Affordable Care Act. Violators are subject to a $1,000 fine or a year in prison, or both. In addition to criminal penalties, a civil penalty of $250 for each unauthorized disclosure or use of tax return information by a tax return preparer is imposed by Code section 6713. The total amount imposed on any person cannot exceed $10,000 in any calendar year.

The regulations under Code section 7216 were revised to describe three circumstances when tax return information may be disclosed or used without taxpayer consent. Those regulations permit tax return preparers to use a list of client names, addresses, email addresses, phone numbers and each client’s income tax form number to provide clients with general educational information, including general educational information related to the Affordable Care Act. For example, a tax return preparer may mail general educational information to all clients regarding health care enrollment options availablethrough the new health insurance marketplaces without obtainingconsent.

However, tax return preparers who use tax return information to solicit and facilitate health care enrollment services must first obtain taxpayer consent to do so. For example, assume Preparer Z isalso a health care “navigator” who would like to use tax return information to solicit and facilitate enrollment of eligible clients into qualified health plans available through the new health insurance marketplaces. Z must obtain taxpayer consent prior to using the tax return information in assisting taxpayers in connection with the solicitation and facilitation of the enrollment of Z’s eligible clientsinto qualified health care plans. Note that solicitation to offer health care enrollment services by all tax return preparers, including volunteer preparers, using tax return information, requires taxpayer consent. 

Medical Loss Ratio(MLR)

Beginning in 2011, insurance companies are required to spend a specified percentage of premium dollars on medical care and quality improvement activities, meeting a medical loss ratio (MLR) standard. Insurance companies that are not meeting the MLR standard will be required to provide rebates to their consumers beginning in 2012. On December 7, 2011, the Department of Health and Human Services

(HHS) issued final rules on the calculation and payment of medical loss ratio (MLR) rebates to health insurance policy holders. MLR rebates paid by an insurance company, either as cash payments or as premium reductions, are return premiums. Return premiums reduce the insurance company’s taxable income. For a cash rebate paid to an individual policyholder, the insurance company is not required to file a Form 1099-MISC with respect to that payment or furnish a Form 1099-MISC to the individual policyholder unless: (1) the total rebate payments made to that policyholder during the year total $600 or more; and (2) Insurance company knows that the rebate payments constitute taxable income to the individual policyholder or can determine how much of the payments constitute taxable income. If the insurance company is required to file a Form 1099-MISC with respect to the rebate payment, it must also furnish a copy to the individual policy holder.

For a rebate paid to a group policyholder as a premium reduction, the insurance company is not required to file a Form 1099-MISC or furnish a copy to the group policyholder unless: (1) the group policyholder is not an exempt recipient for Form 1099 purposes; (2) the total rebate payments to that group policyholder during the year total $600 ormore; and (3) the insurance company knows that the rebate payments constitute taxable income to the group policyholder or can determine how much of the payments constitutes taxable income. 

Reporting Employer Provided Health Coverage on FormW-2

The Affordable Care Act requires employers to report the cost of coverage under an employer- sponsored group health plan on an employee’s Form W-2, Wage and Tax Statement, in Box 12, using Code DD. The amount reported does not affect tax liability, as the value of the employer excludible contribution to health coverage continues to be excludible from an employee's income, and it is not taxable. This reporting is for informational purposes only, to show employees the value of theirhealth care benefits.

All employers that provide “applicable employer-sponsored coverage” during a calendar year are subject to the reporting requirements, including federal, state, and local government entities, churches and other religious organizations, and employers that are not subject to the COBRA continuation coverage requirements, to the extent that these employers provide applicable employer-sponsored coverage under a group health plan. “Applicable employer-sponsored coverage” means, with respect to any employee, coverage under any group health plan made available to the employee by an employer, and which is excludable from the employee's gross income under Code Sec. 106, or would be so excludable if it were employer-providedcoverage.

For these purposes, a “group health plan” is a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families. An employer must include in the aggregate reportable cost: (1) the cost of coverage provided under hospital indemnityor other fixed indemnity insurance; or (2) the cost of coverage only for a specified disease or illness, if either the employer makes any contribution to the cost of coverage that is excludable under Code section 106, or the employee purchases the policy on a pre-tax basis under a cafeteriaplan.

On the other hand, an employer does not need to include the cost of coverage in the aggregate reportable cost if: (1) those benefits are offered as independent, non coordinated benefits; and (2) the payment for those benefits is includible in the employee’s gross income (or, for a self-employed individual, the payment is one for which a deduction is allowable). Applicable employer-sponsored coverage also does not include coverage for long-term care or any coverage under a separate policy or contract providing benefits for the treatment of the mouth or year. 

Net Investment Income Tax

A new Net Investment Income Tax (“NIIT”) went into effect on January 1, 2013. The 3.8 percent NIIT applies to individuals, estates and trusts that have certain investment income above certain threshold amounts. The new tax applies regardless of whether the individual is otherwise subject to Medicare taxes. For example, if an individual does not have earned income they are not subject to Medicare tax, but could still be subject to the new 3.8% tax on net investment income. Also, nonresident aliens are not subject to the NIIT unless the nonresident alien is married to a U.S. citizen or resident and makes an election under Code section 6013(g) to be treated as a resident alien so that the couple can file ajoint.

The tax applies to individuals who have “modified adjusted gross income” in excess of: (1) $250,000 for joint filers and qualifying widows or widowers with dependent children; (2) $125,000 for married individuals filing separately; and (3) $200,000 for everyone else. For this purpose “modified adjusted gross income” is regular adjusted gross income increased by the net amount, if any, of foreign-sourced income that is exempt for regular tax purposes under Code section911(a)(1).

The tax also applies separately to trusts and to estates. Under the general rules for taxation, income accumulated inside the trust or estate is taxed to the entity, while distributed income is taxed to the beneficiaries up to the amount of the entity’s distributable net income(“DNI”).

Some trusts, however, are specifically excluded from the NIIT. For example, tax-exempt trusts (e.g., charitable trusts, charitable remainder trusts, and qualified retirement plan trusts) and trusts in which all of the unexpired interests are devoted to one or more charitable purposes are exempt from the NIIT. Also, trusts that are classified as “grantor trusts” are excluded from the tax, as are arrangements that are not classified as trusts for federal income tax purposes, such as real estate investment trusts (“REITs”).

Significantly, the triggering investment income amount for the new tax is much lower for trusts and estates. Trusts and estates are subject to the NIIT on undistributed net investment income if theyhave adjusted gross income over the dollar amount at which the highest applicable tax bracket begins. In 2015 the highest tax bracket for trusts and estates begins at $12,300; trusts and estates with undistributed net investment income over this amount will be subject to thetax.

In general, investment income includes, but is not limited to: interest, dividends, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and businesses that are passive activities to the taxpayer. Net capital gains are included as well, including gains from the sale of real estate and gains from the sale of interests in partnerships and S corporations as to which the taxpayer is a passiveowner.

The NIIT does not apply to any amount of gain from the sale of a principal residence that is excluded from gross income for regular income tax purposes. Taxable gain from the sale of a principal residence, however, must be included as investment income for purposes of the NIIT. For example, suppose a single taxpayer bought a home ten years ago for $200,000 and sells that residence in 2013 for $420,000, realizing a gain of $220,000. Under Code section 121, the taxpayer can exclude the entire gain because it is less than the $250,000 maximum exclusion for single taxpayers. Because this gain is excluded for regular income tax purposes, it is also excluded for purposes of the NIIT. If, however, the taxpayer had sold the house for a gain of $300,000, the amount of the gain in excess of the exclusion (i.e., $50,000) would be subject to theNIIT.

If the taxpayer reports interest, dividends, and capital gains of their children using Form 8814, the amount included on the taxpayer’s Form 1040 by reason of Form 8814 are included in the taxpayer’s investment income. However, investment income does not include: (1) amounts excluded from the taxpayer’s Form 1040 due to the threshold amounts on Form 8814; and (2) amounts attributable to Alaska Permanent FundDividends.

Finally, investment income for purposes of the NIIT does not include: (1) gross income derived in a trade or business that is not a passive activity with respect to the taxpayer (other than a trade or business of trading in financial instruments or commodities); and (2) gains from the sale of assets that are held in any such trade or business. When an individual, trust, or estate owns an interest in a trade or business that is conducted through a partnership or S corporation, the determination of whether income earned by the business is derived in a passive activity is made at the partner or shareholderlevel.

In order to arrive at net investment income, total Investment Income (as described above) is reduced by deductions that are properly allocable to items of such income. Examples of properly allocable deductions include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local income taxes properly allocable to items included in investment income. For trusts and estates, net investment income is reduced by: (1) the share of net investment income included in the beneficiary distribution deduction of the trust or estate; and (2) the charitable deduction for amounts paid or permanently set aside for charitablepurposes.

The new 3.8% NIIT is applied to the lesser of: (1) the taxpayer’s net investment income, or (2) the taxpayer’s modified adjusted gross income that exceeds the applicable threshold. Because the tax applies to the lesser of these two amounts, taxpayers whose modified adjusted gross income is below the threshold amount will not be subject to the new tax. Furthermore, if the amount by which the taxpayer’s modified adjusted gross income exceeds the threshold is less than the taxpayer’s net investment income, then the tax does not reach all of the taxpayer’s net investment income. 

Additional MedicareTax

Starting in 2013, the employee portion of the Medicare tax on wages is increased by an additional amount of 0.9% on wages received in excess of the threshold amount. Unlike the general 1.45% Medicare tax on wages, this additional tax is on the combined wages of the employee and the employee’s spouse in the case of a joint return. Also, rather than applying to all wages, the additional tax only applies to wages above the threshold amount, which is $250,000 in the case of a joint returnor surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

Employers have limited responsibility to withhold the additional tax from the employee’s wages. In determining the employer’s requirement to withhold and liability for the tax, only wages that the employee receives from the employer in excess of $200,000 for a year are taken into account and the employer must disregard the amount of wages received by the employee’s spouse. Thus, the employer is only required to withhold on wages in excess of $200,000 for the year, even though the tax may apply to a portion of the employee’s wages at or below $200,000, such as when the employee’s spouse also has wages for the year, they are filing a joint return, and their total combined wages for the year exceed $250,000.

Unlike the employee portion of the general 1.45% Medicare tax for which the employee has no direct liability, the employee is liable for the additional 0.9% tax to the extent the tax is not withheld by the employer. Although an employee cannot direct his or her employer to withhold additional Medicare taxes if their wages are less than $200,000, the employee can always have an additional amount of income tax withheld, and this will apply to the Medicare tax liability. Alternatively, the employee can make quarterly estimated taxes to cover the additionalamount.

This same 0.9% additional amount applies to Self-Employment Contributions Act (“SECA”) as well. The additional SECA tax is also applied only to the amount of earnings in excess of the threshold amount. Self-employment income and wages with respect to the same taxpayer (or the taxpayer and spouse in the case of a joint return) are combined for the purpose of applying the additional tax. 

Minimum Value

On April 26, 2015, the Department of the Treasury and IRS issued Notice 2015-31, which provides information and requested public comment on an approach to determining whether an eligible employer-sponsored health plan provides minimum value. Additionally, on April 30, 2013, the Treasury Department and the IRS issued proposed regulations relating to minimum value of eligible employer- sponsored plans and other rules regarding the premium tax credit. Starting in 2014, whether such a plan provides minimum value will be relevant to eligibility for the premium tax credit and application of the employer shared responsibilitypayment.

On November 4, 2014, the Department of the Treasury and IRS issued Notice 2014-69, which provides additional guidance regarding whether an employer-sponsored plan provides minimum value coverage if the plan fails to substantially covering in the hospitalization services or physician services.

Information Reporting on Health Coverage by Employers

Beginning in 2015, applicable large employers (“ALEs”) with 50 or more full-time employees will use Forms 1094-C and 1095-C to report the information about offers of health coverage and enrollment in health coverage for their employees. Specifically, an ALE will use Form 1094-C to report summary information for each employee and to transmit Forms 1095-C to IRS. A separate Form 1095-C is used to report information about each employee. In addition, Forms 1094-C and 1095-C are used in determining whether an employer owes payments under the employer shared responsibility provisions (sometimes referred to as the “employer mandate”). Under the employer mandate, an employer can be subject to a penalty if it does not offer affordable minimum essential coverage that provides minimum value to substantially all of its full-time employees (and their dependents). Form 1095-C is also used in determining eligibility of employees for premium taxcredits.

If an ALE offers health coverage through an employer-sponsored self-insured plan, the ALE also has to report more information on Form 1095-C (specifically, in Part III). For this purpose, a self-insured plan also includes a plan that offers some enrollment options as insured arrangements and other options are under self-insured options. In Part III, the ALE reports the name, SSN (or date of birth if SSN isnot

available), and coverage information about each individual (including any full-time employee and non- full-time employee, and any employee’s family members) covered under the employer’s health plan.If an individual was covered for some but not all the months of the year, an ALE has to indicate the months for which these individuals were covered in PartIII.

If an employer provides health coverage in another manner, such as through an insured health plan or a multiemployer health plan, the issuer of the insurance or the sponsor of the plan providing the coverage will provide the information about the health coverage to any enrolled employees, and the employer should not complete Form 1095-C, Part III, for those employees. An employer that provides employer- sponsored self-insured health coverage but is not subject to the employer mandate, is not required to file Forms 1094-C and 1095-C and reports instead on Forms 1094-B and 1095-B for employees who enrolled in the employer-sponsored self-insured health coverage. On Form 1094-C, an employer can also indicate whether any certifications of eligibility for relief from the employer mandate apply. 

Information Reporting on Health Coverage by Insurers

On March 5, 2014, the Department of the Treasury and IRS issued final regulations on minimum essential coverage information reporting. The information reporting is to be provided by health insurance issuers, certain sponsors of self-insured plans, government agencies and certain other parties that provide health coverage. Additionally, on July 9, 2013, the Department of the Treasury and the IRS issued Notice 2013-45 announcing transition relief for 2014 from this annual information reporting. 

Small Business Health Care Tax Credit

This credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. On June 26, 2014, the Department of Treasury and the IRS issued final regulations on the credit, which include information on the requirement to purchase health insurance coverage through the Small Business Health Options Program (SHOP) Marketplace. The final regulations are applicable for taxable years beginning in or after 2014. Additionally, IRS Notice 2015-8 provides transition relief for employers in certain counties in Iowa with no SHOP coverage available in2015.

Application of the ACA to HRAs, FSAs and Other Employer Healthcare Arrangements

The Affordable Care Act’s market reforms apply to group health plans. On September 13, 2013, the IRS issued Notice 2013-54, which explains how the Affordable Care Act’s market reforms apply to certain types of group health plans, including health reimbursement arrangements (HRAs), health flexible spending arrangements (health FSAs) and certain other employer healthcare arrangements, including arrangements under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy. The notice also provides guidance on employee assistance programs or EAPs and on section 125(f)(3), which prohibits the use of pre-tax employee contributions to cafeteria plans to purchase coverage on an Affordable Insurance Exchange (also known as a Health Insurance Marketplace). The notice applies for plan years beginning onand

after January 1, 2014, but taxpayers may apply the guidance provided in the notice for all prior periods. On February 18, 2015, the IRS issued Notice 2015-17 which provides transition relief from the excise tax under section 4980D with respect to failures to satisfy the market reforms by certain small employers reimbursing premiums for individual insurance policies, S corporations reimbursing premiums for 2- percent shareholders, and certain health care arrangements for employees with health coverage under Medicare and TRICARE.

 

Health Flexible Spending Arrangements

Effective January 1, 2014, the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements (FSAs) or health reimbursement arrangements unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. This standard applies only to purchases made on or after January 1, 2014. A similar rule went into effect on January 1, 2014, for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs). Employers and employees should take these changes into account as they make health benefit decisions. 

Medical Device Excise Tax

On December 5, 2014, the IRS and the Department of the Treasury issued final regulations on the new 2.3-percent medical device excise tax that manufacturers and importers will pay on their sales of certain medical devices starting in 2013. On December 5, 2014, the IRS and the Department of the Treasury also issued Notice 2014-77, which provides interim guidance on certain issues related to the medical device excise tax. 

Changes to Itemized Deduction for Medical Expenses

Beginning January 1, 2013, a taxpayer can claim deductions for medical expenses not covered by his or her health insurance only when they exceed 10 percent of adjusted gross income. There is a temporary exemption until December 31, 2016, for individuals age 65 and older and their spouses.

Health Insurance Premium Tax Credit

Starting in 2014, individuals and families can take a new premium tax credit to help them afford health insurance coverage purchased through an Affordable Insurance Exchange (also known as a Health Insurance Marketplace). The premium tax credit is refundable so taxpayers who have little or no income tax liability can still benefit. The credit also can be paid in advance to a taxpayer’s insurance company to help cover the cost of premiums. On November 7, 2014, the Department of the Treasury and IRS issued Notice 2014-71, which advises that an individual enrolled in a qualified health plan who becomes eligible for Medicaid coverage for pregnancy-related services that is minimum essential coverage, or for CHIP coverage based on pregnancy, is treated as eligible for minimum essential coverage under the Medicaid or CHIP coverage for purposes of the premium tax credit only if the individual enrolls in thecoverage.

On November 4, 2014, the Department of the Treasury and IRS issued Notice 2014-69, which provides additional guidance regarding whether an employer-sponsored plan provides minimum value coverage iftheplanfailstosubstantiallycoverin-patienthospitalizationservicesorphysicianservices.

On July 24, 2014, the Department of the Treasury and the IRS issued proposed, temporary and final regulations providing further guidance on the premium tax credit. In particular, the regulations provide relief for certain victims of domestic abuse or spousal abandonment from the requirement to filejointly in order to claim the premium tax credit. In addition, the regulations provide special allocation rules for reconciling advance credit payments, address the indexing in future years of certain amounts used to determine eligibility for the credit and compute the credit, and provide rules for the coordination between the credit and the deduction under Code section 162(l) for health insurance costs of self- employed individuals. Rev. Proc. 2014-41, also released on July 24, 2014, provides methods for determining the Code section 162(l) deduction and the premium tax credit for health insurance costs of self-employed individuals who claim the deduction under Code section162(l).

On May 2, 2014, the Department of the Treasury and the IRS issued final regulations on the reporting requirements forMarketplaces.

On April 24, 2015, the IRS issued Notice 2015-37, which advises that an individual who may enroll in a CHIP buy-in program that HHS has designated as minimum essential coverage is eligible for minimum essential coverage under the program for purposes of the premium tax credit only for the period the individual is enrolled.

Individual Shared Responsibility Provision

Beginning in 2014, non-exempt U.S. citizens and legal residents are required to maintain “minimum essential coverage” for health care. This is commonly referred to as the “individual mandate” and is designed to ensure a sufficiently diverse risk pool of insured persons to make overall coverage more affordable. Minimum essential coverage may be provided by government-sponsored programs, eligible employer-sponsored plans, plans in the individual market, grandfathered group health plans and grandfathered health insurance coverage, or any other coverage recognized by the Secretary of HHS in coordination with the Secretary of theTreasury.

Government-sponsored programs include Medicare, Medicaid, Children’s Health Insurance Program, coverage for members of the U.S. military, veteran’s health care, and health care for Peace Corps volunteers. Eligible employer-sponsored plans include: governmental plans, church plans, grandfathered plans and other group health plans offered in the small or large group market within a state.

“Minimum essential coverage” does not include contracts of insurance for long term care, limited scope dental and vision benefits, coverage for a disease or specified illness, hospital indemnity or other fixed indemnity insurance or Medicare supplemental healthinsurance.

Individuals are exempt from the requirement for months they are incarcerated, not legally present in the United States or maintain religious exemptions. Those who are exempt from the requirement due to religious reasons must be members of a recognized religious sect exempting them fromself-employment taxes and adhere to tenets of the sect. Individuals residing outside of the United States are deemed to maintain minimum essential coverage. If an individual is a dependent of another taxpayer, the other taxpayer is liable for any penalty payment with respect to the individual for not maintaining minimum essentialcoverage.

The per-adult annual penalty is phased in as follows: $95 for 2014; $325 for 2015; and $695 in 2016. For years after 2016, the $695 amount will be adjusted for inflation, rounded to the next lowest $50. The percentage of income is phased in as follows: 1% in 2014; 2% in 2015; and 2.5% beginning in 2016. If a taxpayer files a married-joint return, the individual and his or her spouse are jointly liable for any penalty payment. The penalty applies to any period the individual does not maintain minimum essential coverage and is determined monthly. The penalty is an excise tax that is assessed in the same manner as an assessable penalty under the Code.

Notwithstanding the foregoing, the total household penalty may not exceed 300% of the per-adult penaltyfortheyear.Thusfor2015themaximumhouseholdpenaltywillbe$975(3x$325).

Furthermore, the total annual household payment may not exceed the national average annual premium for “bronze level” health plan offered through the state exchange that year for the household size.

For this purpose, family size is the number of individuals for whom the taxpayer is allowed a personal exemption. Household income is the sum of the modified AGI of the taxpayer and all individuals accounted for in the family size required to file a tax return for that year. Modified AGI for this purpose means AGI increased by all tax-exempt interest and foreign earnedincome.

Interestingly, although assessable and collectible under the Code, the IRS authority to use certain collection methods with respect to this excise tax penalty is limited. Specifically, the filing of notices of liens and levies otherwise authorized for collection of taxes does not apply to the collection of this penalty. In addition, the statute waives criminal penalties for non-compliance with the requirement to maintain minimum essential coverage. However, the authority to offset refunds or credits is not limited by the provision. As a result, the only practical enforcement available to the IRS is to offset any refunds otherwise due to thetaxpayer.

Individuals who cannot afford coverage because their required contribution for employer-sponsored coverage or the required premium for the lowest cost bronze plan obtainable through the state exchange exceeds 8% percent of household income for the year are exempt from the penalty. In years after 2014, the 8% exemption is increased by the amount by which premium growth exceeds income growth.

Also, no penalty is assessed for individuals who do not maintain health insurance for a period of 3 months or less during the tax year. If an individual exceeds the 3-month maximum during the tax year, the penalty for the full duration of the gap during the year is applied. If there are multiple gaps in coverage during a calendar year, the exemption from penalty applies only to the first such gap in coverage.

On August 27, 2013, the Department of the Treasury and the IRS issued final regulations on the individual shared responsibility provision. On January 16, 2015, the IRS issued Rev. Proc. 2015-15, which provides the 2015 monthly national average premium for qualified health plans that have a bronze level of coverage. On November 21, 2014, the Department of the Treasury and the IRS issued final regulations addressing the treatment of health reimbursement arrangements, cafeteria plans, and wellness program incentives for purposes of determining the unaffordability exemption for individuals with offers of employer sponsored coverage. The regulations also provide that certain limited benefit Medicaid and TRICARE coverage is not minimum essential coverage (Notice 2014-10, issued on January 23, 2014, provides transition relief from the shared responsibility payment for months in 2014 in which individuals have this limited benefit coverage). On November 21, 2014, the IRS issued Notice 2014-76, which identifies the hardship exemptions from the individual shared responsibility payment that a taxpayer may claim on a federal income tax return without obtaining an exemption certification from a Health Insurance Marketplace.

Health Coverage for Older Children

Health coverage for an employee's children under 27 years of age is now generally tax-free to the employee. This expanded health care tax benefit applies to various work place and retiree health plans. These changes immediately allow employers with cafeteria plans –– plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.

 

Health Plan Requirement Groups

The Affordable Care Act establishes a number of new requirements for group health plans. Interim guidance on changes to the nondiscrimination requirements for group health plans can be found in Notice 2014-1, which provides that employers will not be subject to penalties until after additional guidance is issued. Additionally, TD 9575 and REG-140038-10, issued by DOL, HHS and IRS, provide information on the summary of benefits and coverage and the uniform glossary. Notice 2015-59 provides guidance to group health plans on the waiting periods they may apply before coverage starts. On June 20, 2014, HHS, DOL and IRS issued final regulations on the ninety-day waiting period limitation.

Further, Notice 2013-54 provides guidance regarding the application of the Affordable Care Act’s market reforms to certain types of group health plans, including health reimbursement arrangements (HRAs), health flexible spending arrangements (health FSAs) and certain other employer healthcare arrangements, including arrangements under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy.

Limitation on Deduction for Compensation Paid by Certain Health Insurance Providers

The Affordable Care Act amended section 162(m) of the Code to limit the compensation deduction available to certain health insurance providers. The amendment goes into effect for taxable years beginning after December 31, 2015, but may affect deferred compensation attributable to services performed in a taxable year beginning after December 31, 2009. On September 18, 2014, the Treasury Department and IRS issued final regulations on thisprovision.

Employer Shared Responsibility Payment

The Affordable Care Act establishes that certain employers must offer health coverage to their full-time employees or a shared responsibility payment may apply. On February 10, 2014, the Department of the Treasury and the IRS issued final regulations on the Employer Shared Responsibility provisions.

Excise Tax on High Cost Employer-Sponsored Health Coverage

Section 4980I, which was added to the Code by the Affordable Care Act, applies to taxable years beginning after December 31, 2017. Under this provision, if the aggregate cost of applicable employer- sponsored coverage provided to an employee exceeds a statutory dollar limit, which is revised annually, the excess is subject to a 40 percent excise tax. On February 23, 2015, the IRS issued Notice 2015-16, which is intended to initiate and inform the process of developing guidance about the excise tax on high cost employer sponsored health coverage. Notice 2015-16 describes potential approaches that could be incorporated in future guidance and invites comments on these potential approaches and other issues under section4980I.

Retiree Drug Subsidies

UnderCodesection139A,certainspecialsubsidypaymentsforretireedrugcoveragemadeunderthe Social Security Act are not included in the gross income of plan sponsors. Plan sponsors receive these retiree drug subsidy payments based on the allowable retiree costs for certain qualified retiree prescription drug plans. For taxable years beginning on or after January 1, 2013, new statutory rules affect the ability of plan sponsors to deduct costs that are reimbursed through thesesubsidies.