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Health Care Reform –

What’s That Got to Do with Taxes?

ATRA and Tax on Wealthy

January 2013

By: Ragini Subramanian, Enrolled Agent

This presentation is not intended to be a legal advice nor is an exhaustive discussion of PPACA and related IRC provisions PPACA and related Tax code at this point is an ever changing landscape. These materials are dated as of first week of January 2013. Any changes thereafter are not reflected in this presentation. Individuals must discuss their specific situation with their advisor before deciding whether or not they have any obligations under these or other applicable provisions.


Agenda

� General stuff about PPACA

� Quick review of certain provisions

� Tax on wealthy

� Individual mandate

� Premium tax credit and cost-sharing reduction

� Employer shared responsibility• Employer reporting

� Small employer health insurance credit


Generally about PPACA

� The President signed the Patient Protection and Affordable Care Act (referred to as “PPACA” or “ACA”) into law March 23, 2010

� Provisions in this law affect • individuals,

• employers,

• the health insurance industry,

• governments, and much more.

� Today’s discussion concentrates on changes • That affect individuals and employers, and

• Largely as they relate to Internal Revenue Code


Implementation Timeline

� PPACA is divided into 9 titles and contains provisions that become effective in• 2010

• 2011

• 2012

• 2013

• 2014

• 2015 thru 2020

� 2013 and 2014 are the two biggest impact years for PPACA

� Things start in 2012


Tri-Agency Effort

IRS

HHS

DOL

With some involvement from other agencies such as Social Security Commission, Department of

Homeland Security


Quick Review Provisions


Itemization of Medical Expenses

• Effective January 1, 2013 • For those under age 65, medical expenses deduction

limited to expenses over 10% of AGI (up from 7.5%) - if one spouse at least age 65, both spouses get to keep the

7.5% limitation• Effective January 1, 2017 limit goes up to 10% for

everyone, including those over age 65


Health FSA, HRA, HSA, Archer MSA

� 2011 changes• Effective January 1, 2011

- a distribution from FSA, HRA, HSA and Archer MSA plans will be tax-free qualified medical expense only if distribution is to purchase (i) medicine/ drug that require a prescription, (ii) over-the-counter (“OTC”) medicine or drug and individual obtains a prescription, or (iii) insulin

- A distribution from these plans will be tax-free qualified medical expense if distributions are made for the purchase of medical equipments such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits used for diagnosis, cure, mitigation, treatment, or prevention of diseases

- Non-qualified distribution from the plan is subject to 20% (previously 10%) additional tax

• Effective January 15, 2011, subject to meeting certain requirements FSA and HRA debit cards can be used to purchase OTC medicines with prescription


Health FSA, HRA, HSA, Archer MSA

� 2013 changes • Apply to FSA plans only and for the plan year that begins in 2013• Employee salary reduction contribution to FSA is limited to

$2,500. $2,500 limit is indexed for inflation• The plan must be amended to allow for this new limit. Failure will

render the plan non-qualified and employee contribution taxable.• The FSAs have been given grace period through the end of

calendar year 2014 to amend to reflect the new contribution limit and to comply with the limit in operation

• $2,500 is a per employee limit. Each of the two spouses working for two separate employers will have two separate $2,500 limit

• If an employee participates in multiple FSAs maintained by member of controlled group or affiliated service group the employee will be able to make one $2,500 contribution

• $2,500 limit does not apply to (i) HSAs, or (ii) contributions to FSA for dependent care assistance or adoption care, or (iii) employee share under self-insured employer-sponsored health plan


Children Under Age 27

� Effective March 30, 2010, gross income of employees excludes, • Both coverage and reimbursements of medical care

expenses, from employer provided accident or health plan • Not only with respect to employee, employee’s spouse, or

employee’s dependent • But also with respect to employee’s child

- Who is not employee’s dependent, and- Who has not attained age 27 as of the end of the calendar

year

• Child attains age 27 on the 27th anniversary of the date the child was born

• Employer can rely upon employee’s representation of child’s birth date


W-2 Reporting

� 2011 voluntary for all employers� 2012 required by all employers � except for small employers those filing less than 250 W-

2s (until further guidance available

Employer share of health insurance


Tax on Wealthy


Tax on Wealthy

� Two additional taxes• Additional Medicare Tax (AdMT)

of 0.9% - on wages, compensation and/or self employment income above threshold level (tax on earned income)

• Net investment Income Tax (NIIT) of 3.8% - if investment income and if MAGI above threshold level (tax on unearned income)

� Potentially a “wealthy”taxpayer can be subject to one or both of these taxes


Net Investment Income Tax (NIIT)

� Effective Date - January 01, 2013� The discussion here is only as applicable to individuals� NIIT is 3.8% and is imposed on the lesser of (a) net

investment income, or (b) amount by which the MAGI is above the threshold level

� MAGI is adjusted gross income plus foreign income exclusion and deductions related thereto

� Threshold levels are • $250,000 MFJ or surviving spouse

• $125,000 MFS

• $200,000 any other case• Threshold amount is not reduced in case of an individual with

short tax year, exception short tax year as a result of change in accounting method

� NIIT applies to US citizens and residents of the United States



� Calculating NII• Generally gain not recognized for income tax purposes for a tax

year is not recognized for NIIT, e.g. gain on like-kind exchange, sale of principal residence

• Deferral or disallowance provisions determined in determining AGI apply in determining NII, eg. Investment interest and investment expense deduction limitations, capital loss carryoverlimitation, S corp loss limitation, passive activity loss limitations

• Generally an item of income specifically excluded from gross income is also excluded from NII

� Generally speaking NII does not include income from trade or business

� But income from trade or business is included in NII, if • Trade or business is a passive activity with respect to the

taxpayer, or• Trade or business consists of trading in financial instruments or

commodities as defined under IRC code 475(e)(2)



� Income on investment of working capital is subject to NIIT

� In calculating NII, investment income is reduced by deductions (including taxes paid), properly allocable to such income • NOL deduction is not taken into account in determining net

investment income for any tax year



� Investment income for purposes of NIIT is • Gross income from interest, dividends, royalties, rents, substitute

interest and dividend payments, not derived in the ordinary course of trade or business, penalty on early withdrawal of savings

• Gross income derived from trade or business to which NIIT applies

• Net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business to which NIIT does not apply

• Generally, net gain from the disposition of partnership interest or “S” corporation shares is included in NII

• In the case of an individual who owns or engages in business through an entity, that is disregarded entity, or that is a pass thru entity, determining whether gross income is derived in a trade or business is made at the individual/owner level

- In case of gross income derived from trade or business that is engaged in trading of financial instruments, or commodities thisdetermination is made at entity level



� Special rules apply to bona fide residents of US possessions and territories

� NRA not subject to NIIT

� Special rules apply to non resident alien married to US citizen or resident• US citizen or resident spouse of NRA is treated as married

filing separately for NIIT purposes

• NRA spouse of US citizen or resident electing to file as resident will be treated as MFJ for NIIT purposes also


Additional Medicare Tax (AdMT)

� Effective Date January 01, 2013� AdMT is 0.9% of wages, compensation, RRTA

compensation that is currently subject to Medicare tax, and self-employment income, above the threshold level for individual’s filing status

� Threshold level for filing status – MFJ or surviving spouse - $250,000, MFS - $ 125,000 ; all others -$200,000 (single, QW, HH)

� AdMT applies only to employee’s portion of FICA and not to employer’s portion• Note: regular medicare portion of FICA tax of 1.45%

applies to each the employee (through withholding) and the employer. No wage base limit applies


Additional Medicare Tax (AdMT)

� Employer required to withhold AdMT if wages of an employee in a calendar year is in excess of $200,000 (without regards to filing status of the employee).

� Employer that is required to and fails to withhold is liable for the tax

� The payment of this tax, for his/her filing status, is employee/taxpayer responsibility

� Employee/taxpayer failing to pay or underpays for his/her filing status is subject to all applicable penalties including estimated tax penalties

� NRAs and US citizens living abroad are subject to AdMT


AMT Patch (ATRA Provision)

� AMT patch is permanent and now contains two relief provisions• Increased AMT exemptions

• Nonrefundable credits allowed

Adjusted for inflation for future years

$50,600$48,450$33,750All Others

$39,375$37,225$22,500MFS filers

$78,750$74,450$45,000MFJ and QW

2012 Exemptions

2011 Exemptions

Pre-2001 Exemptions

Filing Status

AMT Exemptions


Other ATRA Provisions

� Effective 2013

� Capital gains and dividends • current rate of 0% - 15% is made permanent• Taxpayers with taxable income over $400,000 ($425,000 for HOH,

$450,000 MFJ, $225,000 for MFS) rate is 20%.

• Income thresholds will be adjusted for inflation

� Phase outs for personal exemptions and itemized deductions• Permanently repealed

• Phase outs will apply for taxpayers with AGI above $250,000 ($275,000 HOH, $300,000 MFJ, $150,000 MFS)

• AGI thresholds will be adjusted for inflation

� Tax rates and bracket system• Current rates of 10%, 15%, 25%, 28%, 33% and 35% made permanent

• 39.6% rate applies to taxable income over $400,000 ($425,000 HOH, $450,000 MFJ, $225,000 MFS)

• These taxable income thresholds will be adjusted for inflation


Individual Mandate,Premium Assistance Credit,

Reduced Cost Sharing, Employer Shared Responsibility, and

Reporting Obligations


Tax Codes

Corresponding PPACA

Provisions

IRC36BPremium

Assistance Credit

IRC5000AIndividual Mandate

IRC4980HEmployer Shared

Responsibility


State Exchange

Insurance carriers - Will sell their product thru State Exchange to consumers. The coverage must meet the parameters of essential health benefit coverage

Consumers – Individuals or Small business employer go to Exchange to

purchase insurance. At this point consumer may either go to Exchange or outside market (individual market)

State Exchange – A distribution channel thru which consumers

will buy health insurance


State Exchange

� Coverage under State Exchange• Is guaranteed issue, meaning coverage may not be denied

for pre-existing conditions• Coverage is available at four benefit levels

- Bronze -50% payment of covered medical expenses

- Silver – 70% payment of covered medical expenses- Gold – 80% payment of covered medical expenses

- Platinum – 90% payment of covered medical expenses

• Annual out-of-pocket payment of expenses is limited to $5,950 for individual coverage and $11,900 for family coverage at all four benefit levels. This limit corresponds to the limit on high deductible/health savings account insurance plans


Federal Poverty Guidelines

� Generally issued each year in winter by Department of Health and Human Services

� One poverty guideline for each of the 48 contiguous States and District of Columbia. Separate guidelines apply for each of the State of Alaska and Hawaii

� 2012 guidelines (48 contiguous States) issued on 01/26/2012 applicable to health insurance coverage for 2013 calendar year, are as follows

$15,840$11,880$7,920$5,940$5,267$3,960For each additional

person, add

155,560116,67077,78058,33551,72438,8908

139,720104,79069,86052,39546,45734,9307

123,88092,91061,94046,45541,19030,9706

108,04081,03054,02040,51535,92327,0105

92,20069,15046,10034,57530,65723,0504

76,36057,27038,18028,63525,39019,0903

60,52045,39030,26022,69520,12315,1302

$44,680$33,510$22,340$16,755$14,856$11,1701

400% 300%200% 150%133%100%Household

size


Employer Shared Responsibility

� Effective January 01, 2014

� Employers will use 2013 employment information for this effective date• For tax years after 2014 it will be preceding calendar year

� Generally applicable to large employers defined as• Those employing 50 or more full time employees and full

time equivalent employees (FTE) in a preceding calendar year

• Employer is not considered large employer if it has more than 50 employees for 120 days or less during the preceding calendar year, and the employees in excess of 50 employed during each 120 day period are seasonal



� Full time employee is an employee who worked an average of at least 30 hours per week during any month

� Full time equivalent employee• Safe harbor determination – Track the number of monthly full

time employees, defined as a minimum of120 hours in the month

• Alternate safe harbor determination – Employers choose a prior period, the measurement period, of three to 12 months to determine if a variable-hour employee met the hours of service threshold (

- Generally speaking, variable hour employee is an employee for whom it cannot be determined whether they will work full time at hire or will work full time only for a limited duration)

� Considerably more guidance is expected before the provision goes into effect



� To not be subject to Employer Shared Responsibility payment (ESRP/penalty), a large employer must offer health insurance coverage that meet three key standards. • Adequate – the plan must pay a minimum of 60% of covered

expenses

• Affordable – employee’s share of premium may not exceed 9.5% of employee’s household income (safe harbor W-2 income)

- If employer provides more than one type of plan the affordability standard apply to the lowest option

- The 9.5% is indexed to the per capita growth in premiums for theinsured market as determined by Secretary of HHS

• Provides minimum essential coverage –- IRS and HHS will provide minimum value calculator to help

employer determine if their plan provides minimum essential coverage. Stay tuned for more guidance on this.



� None or less than minimum essential coverage, $2,000 penalty• If a large employer does not provide a plan or provides a

plan that does not meet minimum coverage standards, penalty is as follows, if at least one full time employee is certified to the employer as having purchased coverage thru state Exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to the employee

- Penalty is an excise tax and is assessed on a monthly basis

- Assessable penalty for any month is (1/12th of $2,000) X (employer’s total number of full time employees for the month less 30)

- $2,000 will be adjusted for inflation for years after 2014



� Inadequate and unaffordable coverage, $3,000 penalty: If a large employer offers the opportunity to its full time employees to enroll in a plan that provides minimum essential coverage but the plan is unaffordable or inadequate, penalty is as follows • if at least one full time employee is certified to the

employer as having purchased coverage thru state Exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to the employee

- Penalty is an excise tax and is assessed on a monthly basis

- Assessable penalty for any month is (1/12th of $3,000) X (number of full time employees receiving a premium tax credit or cost sharing reduction to purchase health insurance through a state Exchange

- The overall penalty for any month is limited to (1/12th of $2,000) X (employer’s total number of full time employees for the month less 30)

- $3,000 and $2,000 amounts will be adjusted for inflation for years after 2014



� An employer must be notified if one of its employees is determined to be eligible for a premium assistance credit or a cost-sharing reduction because the employer plan does not meet the key standards

� The inadequate and unaffordable coverage, $3,000 penalty applies to the employer with respect to an employee that receives an affordability waiver• Employee must seek an affordability waiver from the State

Exchange


Employer Reporting Requirement

� Effective for periods beginning 2013� Sections 6055 and 6056 reporting mandates

• Report certain health insurance coverage information to both its full time employees and the IRS

• Examples of information to be reported include- Name, address and EIN # of the employer- Number of full time employees of the employer for each

month during the calendar year

- Name, address and taxpayer identification number of each full-time employee employed by the employer during the calendar year and the number of months, if any, during which the employee (and any dependent) was covered under a plan sponsored by the employer

- A certification as to whether the employer offers it full time employees and their dependents the opportunity


Individual Mandate

� Effective January 1, 2014 and enrollment begins October 23, 2013

� Most US citizens and lawful residents will be required to have a health insurance plan that provides minimum essential coverage for themselves and their dependents

� US citizens and lawful residents residing outside the US are deemed to maintain essential coverage

� Individual who are incarcerated or seeking religious exemptions under IRC 5000A are not subject to individual mandate

� Individuals not lawfully present in the US are not subject to the individual mandate


Individual Mandate

� Minimum Essential Coverage may be obtained thru • Own employer, or employer of spouse, domestic partner, or

parent. Employer coverage must meet three key standards reviewed later. A student can obtain coverage thru university

• A government sponsored health insurance plan- Medicaid and expanded Medicaid

- Medicare

- Children’s Health Insurance Program (CHIP)

- TRICARE and TRICARE for Life

- Veterans Affairs healthcare program

- Health care plan for members of the Peace Corps

- Health care plan for members of the Department of Defense

• Private health insurance purchased in the open market

• A State-based health insurance exchange

• Grandfathered health plans

• Other coverage recognized by Secretary of HHS and Treasury


Individual Mandate

� Exemptions from penalty available under certain circumstances• Individual cannot afford coverage

- Generally, individual’s required contribution (determined on an annual basis) for coverage for the month exceeds 8% (indexed forinflation) of individual’s household income for the taxable year

• Individual’s income is below the filing threshold

• Members of Indian tribes

• Months during short coverage gap- Generally, any month the last day of which occurred during a period

in which the individual was not covered by minimum essential coverage for a continuous period of less than 3 months

• Hardship- An individual has suffered hardship for any month as determined by

Department of Health and Human Services


Individual Mandate

� Failure to maintain minimum essential coverage will subject the taxpayer to “Play or pay” penalty

� Penalty begins tax year 2014, increases in 2015 and then again in 2016

� Penalty imposed is included in taxpayer’s income tax return

� In the case of failure to pay, IRS has the authority to offset refunds or credits but not to impose criminal penalties or file notices of lien or levy


Individual Mandate

� Penalty is calculated on a monthly basis for the months of failure to have the minimum essential coverage

� Penalty is the lesser of • Monthly Penalty Amount, or

• An amount equal to the national average premium for qualified health plans which have a bronze level of coverage, provide coverage for the applicable family size involved, and are offered through Exchange for the plan year beginning in the calendar year with or within which the taxable year ends

� Monthly Penalty Amount is lesser of • Flat Dollar Amount, or

• Percentage of Household Income

� After 2016 the Flat Dollar Amount will be indexed for inflation


Individual Mandate

� Percentage of Household Income and Flat Dollar Amounts• TY 2014 penalty – larger of either

- 1% of household income less filing threshold for the taxpayer filing status

- $95 per individual household member ($47.50 per child under 18) without coverage up to $285

• TY 2015 penalty – larger of either- 2% of household income less filing threshold for the taxpayerr’s filing

status

- $325 per individual household member ($162.50 per child under 18) without coverage up to $975

• TY 2016 and thereafter – larger of either- 2.5% of household income less filing threshold for the taxpayer’s

filing status

- $695 per individual household member ($347.50 per child under 18) without coverage up to $2,085


Individual Mandate

� Household income for purposes of individual mandate penalty calculation • Modified adjusted gross income (MAGI) of the taxpayer

and the aggregate MAGI of all other individuals who were taken into account in determining the taxpayer’s family size and were required to file an income tax return for the taxable year

• MAGI means adjusted gross income increased by • amounts excluded from gross income under section 911 and

• tax-exempt interest received or accrued during the tax year,


Individual Mandate

� Family Size� With respect to any taxpayer is equal to the number of

individuals for whom the taxpayer is allowed a deduction under IRC code section 151 (claims a deduction for personal exemption)


Affordable Health Coverage

� Affordable health coverage choices for all Americans is provided thru • Premium tax credit – (PPACA and IRC), and• Cost-sharing reduction (PPACA)

� The requirements, definitions and terms used under premium tax credit are the same for reduced cost sharing


Premium Assistance Credit

� Generally PAC is available for US citizens, residents and an alien lawfully present in the US (single and joint filers) with household income between 100% and 400% of federal poverty guideline for the family size involved• A taxpayer, who is an alien lawfully present in the US, has a

household income not greater than 100% of an amount equal to the poverty line for his/her family size, but is not eligible for the medicaid program, is deemed to have household income which is equal to 100% of the poverty line for a family of the size involved

• A person is lawfully present in the US only if, the individual is, and is reasonably expected to be for the entire period of enrollment for which the credit under the section is being claimed, a citizen or national of the US or an alien lawfully present in the US

• PAC not available to MFS taxpayer

• PAC not available to an individual who is claimed as dependent on another’s return



� Eligible individuals and families who purchase health insurance through a State Exchange are eligible for Premium Assistance Credit (“PAC”) in an amount equal to premium assistance credit amount for the taxable year• Eligible individuals are those who are not covered in a health

insurance plan that provide minimum essential coverage as defined under IRC code section 5000A, or that meet three key standards under IRC code section 4980H

� PAC is a refundable credit and payable in advance directly to the insurer, throughout the year, and subsidizes the purchase of certain health insurance plans through a State Exchange• Individuals who fail to pay all or part of the remaining premium

amount are given 3 month grace period before participation in the plan is terminated

� Amount of subsidy depends on household income and family size



� 2012 tax return will be used to determine what the premium assistance credit amount will be for enrolling for 2014 coverage

� Individuals (couples) who experience a change in marital status or other household circumstances, experience a decrease in income of greater than 20%, or receive unemployment insurance, may update eligibility information, or request a redetermination

� Final PAC is determined based on actual income reported on 2014 return.

� 2014 return will calculate a “true-up” or reconciliation of credit • if too much is paid/advanced, the taxpayer will have to repay

some or all of the excess, subject to limitation

• if too little is paid/advanced, taxpayer will receive a refundable credit



� Household income for purposes of PAC calculation • Modified adjusted gross income (MAGI) of the taxpayer

and the aggregate MAGI of all other individuals who were taken into account in determining the taxpayer’s family size and were required to file an income tax return for the taxable year

• MAGI means adjusted gross income increased by - amounts excluded from gross income under section 911 and

- tax-exempt interest received or accrued during the tax year, and

- An amount equal to the portion of the taxpayer’s social security benefits which is not included in gross income under IRC code section 86 for the tax year



� Family and Family Size for purposes of PAC calculation• Family means the individuals for whom the taxpayer claims

deduction for a personal exemption under IRC code section 151

• Family size means the number of individuals in the family

• Family and family size for this purpose may include individuals who are not subject to or are exempt from the penalty under code section 5000A for failing to maintain minimum essential coverage



� Premium assistance credit amount is the sum of all premium assistance amounts for all coverage months of the taxpayer occurring during the taxable year

� Premium assistance credit amount for the coverage month is the lesser of –• Monthly premium for such month for 1 or more qualified health

plan offered in the individual market within a State that covers the taxpayer and his family which were enrolled thru the State Exchange, or

• The excess (if any) of- The adjusted monthly premium for such month for the applicable

second lowest cost silver plan offered thru an Exchange, over- (Adjusted monthly premium is the premium an issuer would charge for the applicable

benchmark plan to cover all members of the taxpayer’s family coverage, adjusted only for the age of each member of the coverage family)

- An amount equal to 1/12 of (applicable percentage X taxpayer’s household income for the taxable year)

- (Applicable percentage is determined based on income tier on a sliding scale, e.g. in case of household income from 133% to 150% the applicable percentage is between 3% and 4%)



� Exchange is required to report information to Secretary of Treasury and taxpayer, with respect to health plan provided to the taxpayer• Level and effective period of coverage

• Total premium for the coverage without regard to the credit or cost-sharing reduction under section 1402 of PPACA

• The aggregate amount of any advance payment of credit or reductions under section 1412 of the of PPACA

• The name, address, and TIN of the primary insured and name and TIN of other individuals obtaining coverage under the policy

• Any information provided to the Exchange, including any change of circumstances, necessary to determine eligibility for, and the amount of, such credit

• Information necessary to determine whether a taxpayer has received excess advance payments


Reduced Cost-Sharing

• Reduced cost sharing- The standard out of pocket limits of ($5,950 for individuals

and $11,900 for families) would be reduced to- two-third for those between 100-200 percent of poverty,

- one-half for those between 200-300 percent of poverty,

- one-thirds for those between 300-400 percent of poverty. - The plan’s share of total allowed costs of benefits would

be increased to � 90% for those between 100-150 percent of poverty (i.e.,

the individual’s liability is limited to 10 percent on average)

� 80% for those between 150-200 percent of poverty (i.e., the individual’s liability is limited to 20 percent on average)

� 70% for those between 200-400 percent of poverty (i.e., the indiviual’s liability is limited to 30% on average)


Eligibility Process for PAC, Cost-sharing Reduction and participation on an Exchange

ExchangeIndividual/s


Small Employer Business Tax Credit


Small Employer HITC

� IRC Code section 45R� “Eligible small employer” health insurance tax credit

(“SmHITC” or “HITC”) • up to 35% of premiums paid—2010-2013. • Increases to 50% in 2014.

� “Eligible small employer” is an employer • With fewer than 25 “full-time equivalent” (FTE) employees

for the taxable year• With “average annual wages” for the year of less than

$50,000 per FTE AND• That paid premiums for employee health insurance

coverage through a “qualifying arrangement”- Generally a plan that pays more than 50% of the premium

cost of the coverage

The discussion under this topic is not applicable to exempt organizations


Small Employer HITC

� Typically an employer with exactly 25 FTEs or average annual wage of $50,000 will likely not receive any credits due to phase out rules

� A household employer satisfying above requirement is eligible for this credit

� An “eligible small employer” located outside the US with income effectively connected with US trade or business is also eligible for this credit if “qualifying arrangement” is offered to its employees in one of the 50 States or District of Columbia


Small Employer HITC

� Step 1: Which employees to take into account for purposes of credit• Do not include –

- Sole proprietors, partners in a partnership, shareholders owningmore than 2% of “S” corp., more than 5% owners of any business, and family members of these owners

- Seasonal workers with not more than 120 hours during the taxableyear

- A minister if considered self-employed under the common law test

• Include –- Seasonal workers with more than 120 hours during the taxable year

- employees terminated during the year for which credit is being claimed

- leased employees

- Minister not considered self-employed under the common law test


Small Employer HITC

� Step 2: Determining the number of hours of service performed by employees• Number of hours of service includes each hour for which

employee paid or entitled to be paid - For performance of duties for the employer including hours

of vacation, sickness, incapacity, layoff, jury duty, etc.

• Employer can use any of the following methods in determining total hours of service- Use actual hours of service

- Use days worked equivalency, whereby employee is credited with 8 hours of service for each day, or

- Use weeks worked equivalency, whereby employee is credited with 40 hours of service for each week

Contents are material, non-public, confidential & proprietary. Unauthorized distribution or dissemination prohibited.

Small Employer HITC

� Step 3: Determining number of FTEs• Divide the total hours of service determined in step 2 for

employees taken into account in step 1 by 2,080 and round down the result to the next lowest whole number

• If this result is less than 25 go to Step 4

• Note: an employer with part-time employees may still be able to claim credit if FTE calculation as above is less than 25 FTE


Small Employer HITC

� Step 4: Determining average annual wage• Divide the toal wages paid by the employer during the

employer’s taxable year to employees taken into account under Step 1 and round down the result to the nearest $1,000 (if the result is not multiple of $1,000)


Small Employer HITC

� Step 5: Premiums used to calculate credit• Premium taken into account are those that are paid by the

employer, under “qualified arrangement”- For seasonal employees that worked for less than 120 hours

in a taxable year- For FTEs taken into account in step 2 above

• Premiums not taken into account are those paid pursuant to salary reduction arrangement under section 125 cafeterialplan and those paid by the leasing organization for leased employees of the employer

• Finally the amount taken into account to calculate credit is smaller of

- Premiums taken into account as above, or

- Average premium for the small group market in the State (or areas within the State) under the same arrangement


Small Employer HITC

� Step 6: Calculating credit on tax return• For taxable years 2010-2013 maximum credit is 35% and

generally speaking calculated as follows:- (a) Calculate maximum credit by multiplying premiums in step 5 with

35%

- (b) Reduce the maximum credit calculation in (a) above if > 10 FTEs or average annual wage of >$25,000, as follows

- (i) If > 10 FTEs multiply credit under (a) with [(# of FTEs – 10)/15]

- (ii) If > $25,000 wages, multiply credit under (a) with [(total annual wage - $25,000)/$25,000]

- (iii) If employer has > 10 FTEs and > $25,000 average annual wage, reduce the credit under (a) by sum of (i) and (ii) above

- (c) Finally for employers receiving State credit or subsidy for health insurance determine the employer’s actual premium payment


Small Employer HITC

� Use Form 8941 to calculate credit and report the same on From 3800• Credit can be carried back and forward• Since the amount of health insurance premiums are more than credit, it is

possible to claim both credit and deduction for premium in excess of credit

� “Qualifying arrangement” is one under which the employer pays premium, for each employee, for “health insurance coverage”, offered by the employer, in an amount equal to

• “Uniform percentage” (not less than 50%) of the premium cost of coverage.

• Transition relief was available for 2010 coverage under Notice 2010-44• Guidance for “uniform percentage” for 2011 thru 2014 is provided in Notice

2010-82

� “Health insurance coverage” is as defined under IRC code sections 9832(b)(1), 9832(c)(2), (3) and (4)

� Employer’s self-insured plan is not health insurance coverage for purposes of section 45R

� HSA, FRA and HRAs are self-insured plans and therefore no credit available for employer contributions to these plans


Other PPACA and IRC Provisions


Expanded Medicaid

� Medicaid is currently available to individuals in eligible categories with income up to 100% of the federal poverty level (FPL). The health care law provides for an expansion of Medicaid converage for individudals with income of 100% to 132% of FPL. However, the Supreme Court rules that individual states, which administer Medicaid, may opt out of this expansion. It is not clear at this time which states are going to definitely opt out


Medical Loss Ratio

� Beginning in 2011, insurance companies are required to spend a specified percentage of policyholders premiums on medical care and quality improvement activities, meeting a medical loss ration (MLR) standard. Insurance companies that do not meet the MLR standard are requierd to provide rebates to their individual policyholders and premium reductions to their group policyholdres in July, 2012

� If a client receives a rebate of insurance premiums in 2012 that were deducted as a medical expense in 2011, you must calculate whether there is taxable income as a result.


Uniform Benefit & Coverage Reporting

� Effective January 01, 2013 (beginning September 23, 2012 for 2013 enrollment period)

� Health insurance issuers and group health plans must provide employees, participants and beneficiaries with uniform, that is, same standard, summary of Benefits and Coverage (SBC) during their health insurance plan open enrollment period

� SBC is intended to be a comparison tool that would generally show what the plan would generally cover in the common medical situation

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