HEALTH CARE ACT TAX OVERVIEW – EMPLOYERS Don’t let tax-related compliance requirements take your organization by surprise 1
The agenda • “Play or pay” provision • Changes to the health care coverage credit • Increased Medicare tax withholding in 2013 • Other changes 2
“PLAY OR PAY” PROVISION Could you be subject to penalties? 3
Shared responsibility basics • The health care act requires “large” employers to offer minimum value of affordable health coverage to full-time employees • Business risks a penalty if even one full-time employee receives a premium tax credit for purchasing individual coverage – Under the health care act, premium tax credits are available to employees who: Meet certain income requirements, and Don’t have access to minimum value of affordable employer-provided insurance TIP: A large employer is one with at least 50 full-time employees, or a combination of full- and part-time employees equivalent to at least 50 full-time employees. 4
Determining large employer status • Status is determined in part by calculating FTEs – Requires totaling hours of service for all part-time employees – Divide that figure by 120 • Hourly employees – Hours calculated on records of hours worked and hours for which payment is made or due for: Vacation Holiday Illness Incapacity Layoff Jury duty Military duty Leave of absence 5
Determining large employer status • Salaried employees – Three methods of determining hours Same method used for hourly employees Days-worked equivalency method (each worker is credited with 8 hours for each day worked), or Weeks-worked equivalency method (each worker is credited with 40 hours for each week worked) • Apply different methods for different classifications of nonhourly employees – Classification must be “reasonable and consistently applied” 6
Determining employee hours of service • Employer must determine annually employees’ hours of service in order to be considered a “large employer” for next year • Transitional relief is provided – You can use any six-consecutive-month period, subject to certain constraints – Consider selecting six months at beginning of year Use remainder of 2013 to decide if you should offer coverage in 2014 Establish a compliant plan 7
Assessing affordability and minimum value • Large employer could be penalized if one full-time employee receives a premium tax credit • If employee’s share of premium costs more than 9.5% of annual household income, coverage isn’t considered affordable 8
Safe harbors • Cost of coverage won’t exceed 9.5% of the Form W-2 wages employer pays the employee that year • Employee’s monthly contribution amount for self-only premium is equal to or lower than 9.5% of monthly wages • Employee’s cost for self-only coverage doesn’t exceed 9.5% of federal poverty line for single individual 9
Minimum value requirement • Health plan must cover at least 60% of total allowed costs of benefits • IRS and DHHS will make available an online minimum value calculator – Employers can enter certain plan information – Obtain a determination of whether plan provides minimum value 10
Calculating penalties • Penalty assessed on large employers who: – Don’t provide 95% of full-time employees health coverage – Have one or more employees who receive premium tax credit Annual penalty is $2,000 per full-time employee in excess of • 30 full-time employees TIP: There’s an exception for employers that don’t meet the 95% requirement , but exclude no more than five employees. 11
Calculating penalties • Large employers who do provide 95% of their full-time employees coverage also can be subject to penalties if: – Coverage isn’t affordable or fails to provide minimum value – Employer has one or more employees who receive a premium tax credit • Penalty is lesser of $3,000 per employee receiving credit or $2,000 for each full-time employee beyond first 30 full-timers TIP: Penalties will increase annually based on premium growth. 12
Moving forward • Employers may opt to pay penalties due to cost of broader scope of coverage but may incur other costs – Lost tax benefits – Costs to remain competitive in the labor market • Other employers may make adjustments to workforce – To reduce their FTEs – To avoid being considered a large employer 13
HEALTH CARE COVERAGE CREDIT Changes take effect in 2014 14
The credit through 2013 • Employers qualify if they: – Have fewer than 25 FTEs – Have average annual wages of less than $50,000 – Pay at least half the cost of health insurance for employees • Credit for businesses is up to 35% of the cost of group health insurance • Credit for nonprofits is up to 25% of the cost of group health insurance 15
The phaseout of the credit • Qualifying organizations with 10 or fewer FTEs and average annual wages of less than $25,000 can claim maximum applicable credit • Organizations that exceed either threshold are entitled to partial credits on a sliding scale • Credit is phased out when organization reaches 25 FTEs or average annual wages of $50,000 16
Calculating the credit • Number of FTEs determined differently than for play-or-pay provision purposes – Calculate total hours of service for which organization pays wages to employees during the year – Divide that number by 2,080 Only employer’s portion of health insurance premiums counts • in calculating the credit – Amount is further limited to the amount employer would have paid based on average premium for small group market in employer’s area 17
2014 and later • Coverage must be purchased through state (or federal) exchange for employer to be eligible for the credit • Federal government will launch and handle exchanges in states that can’t or won’t set one up – May end up running 50% of exchanges nationwide 18
2014 and later • Maximum credit increases – Can be as much as 50% of business’s contributions toward health insurance premiums – For nonprofits, maximum credit becomes 35% • Credit can be taken for only two years – No requirement as to which two years must be chosen – Requires planning as to when to claim credit 19
MEDICARE TAX WITHHOLDING In 2013, increased withholding required 20
Increased Medicare tax withholding • Wages are subject to a 2.9% Medicare tax – 1.45% paid by employers – 1.45% withheld from employees’ wages • Starting in 2013, taxpayers with wages over $200,000/year must pay additional 0.9% Medicare tax on excess earnings – $250,000 for joint filers – $125,000 for married filing separately • Additional Medicare tax doesn’t include a corresponding employer portion • Employers must withhold additional tax to extent that employee’s wages exceed $200,000 in a calendar year 21
Withholding requirements • Not required to withhold additional Medicare tax until pay period in which you pay wages over $200,000 to employee – Applies without regard to employee’s filing status or income from other sources • May be required to withhold tax from wages paid to employees who aren’t liable for it – Employee can’t ask to stop withholding the tax – Employee can recover tax by claiming a credit on income May not be required to withhold tax from wages paid to employees • who are liable for it – Employee can’t ask you to increase Medicare tax withholding – Employee can submit a W-4 requesting you increase income tax withholding to cover additional Medicare tax liability 22
Adjustments and refund claims • Critical to follow withholding requirements – Employer that fails to do so is liable for additional Medicare tax and applicable penalties – If employee pays tax, employer is relieved of liability for the tax – Employer may still be subject to penalties • Consider making interest-free adjustments in cases of under- or overpayments of additional Medicare tax – File corrected tax return (for example, Form 941-X) – Reimburse overpaid amounts to employee or collect underpaid amounts from employee’s wages before year end 23
Underpayments • May be adjusted only if error occurs in same year underlying wages were paid You’re liable for correct amount • of tax, even if you’re unable to deduct the underpaid tax from employee’s wages 24
Overpayments • May be adjusted if you ascertain error in the year the wages were paid • Must reimburse employee for overcollected amounts by year end • If unable to reimburse by year end, don’t make adjustment – Report amount withheld on employee’s W-2 – Employee can obtain a credit on individual income tax return Can claim refund of overpaid additional Medicare tax provided you • didn’t deduct or withhold overpaid amounts from the employee’s wages 25
OTHER CHANGES More to be aware More to be aware of in 2013 of in 2013 26
W-2 reporting • Cost of coverage – Employers that filed 250+ 2011 W-2 forms must begin reporting cost of employer-provided health coverage beginning with 2012 tax year This means the W-2s distributed in January 2013 It doesn’t cause excludable benefits to become taxable or change tax treatment in any way – If IRS extends reporting requirement to smaller employers for 2013 W-2s it must issue guidance before June 30, 2013 27
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