Health Care Reform Act: Who s Paying the Bill?

Transcription

1 Health Care Reform Act: Who s Paying the Bill? Walter Miller Schwabe, Williamson & Wyatt P.C. 800 Willamette Street, Suite 600 Eugene, OR (541) wmiller@schwabe.com

2 TABLE OF CONTENTS Page I. Overview... 1 II. Provisions Effective in A. Form W-2 Reporting of Health Plan Coverage... 2 B. Small Business Health Care Tax Credit... 5 C. Patient-Centered Outcomes Research Institute Assessment D. Annual Limitation on Health FSA Salary Reduction Contributions E. Increase in Medical Expense Deduction Threshold F. Additional Medicare Tax on Higher-Income Employees G. Medicare Tax on Investment Income H. Limitation of Deduction on Excessive Remuneration Paid by Certain Health Insurance Providers I. Tax on Sales of Medical Devices III. Provisions Becoming Effective in A. Premium Assistance Credit B. Individual Responsibility (aka Individual Play-or-Pay ) C. Employer Shared Responsibility (aka Employer Play-or-Pay ) D. Application of IRC 105(h) Nondiscrimination Standards to Self-Insured Health Plans (Deferred) IV. Provisions Becoming Effective in A. Cadillac Plan Excise Tax i

3 I. Overview The Patient Protection and Affordable Care Act ( PPACA ) was signed into law on March 23, It was amended a few days later by the Health Care and Education Reconciliation Act of 2010 ( HCERA ). The two acts of legislation are now referred to collectively as the Affordable Care Act. The principal objective of the Affordable Care Act is to rein in runaway health care costs. Secondarily, it provides new entitlements for individuals covered under individual and employersponsored group health plans. When enacted, the price tag for the health care reform measures was estimated to be $940 billion over the next decade. If all goes as planned, efficiencies in the delivery and availability of health care, as well as reductions in the levels of reimbursements to Medicaid and Medicare, will offset much of these costs. Nevertheless, a principal source of funding for these health care reform measures are new fees and other assessments, including increased taxes imposed upon higherincome taxpayers. Against that introduction, the tax implications of the Affordable Care Act are summarized below. As is noted, many of the provisions of the Affordable Care Act became effective immediately upon enactment of the law; others will become effective in later years

4 II. Provisions Effective in 2013 A. FORM W-2 REPORTING OF HEALTH PLAN COVERAGE 1. Overview. Among the various new reporting provisions of the Affordable Care Act is one requiring an employer to include the cost of health plan coverage provided to an employee for the year on the employee s Form W-2 Wage Statement. The Form W-2 reporting obligation was originally to become effective for 2011 (meaning for the Form W-2s to be issued in January 2012). However, the IRS granted a waiver of the reporting obligation for Notice As such, the new Form W-2 reporting is first required for 2012 (i.e., for the Form W-2s issued in January 2013). The IRS (via Notice ) issued interim guidance regarding the Form W-2 reporting rules. The key aspects of this guidance are discussed below. 2. Scope of the Reporting Requirement. (a) (b) (c) (d) Employers Subject to the Reporting Requirement. In general, all employers that provide group health coverage to employees, including government entities, taxexempt organizations and churches and other religious organizations, are subject to the reporting requirement. Federally-recognized Indian tribal governments are not subject to the reporting rule. Exemption for Small Employers. Until the IRS advises otherwise, an employer is not subject to the reporting requirement if the employer filed fewer than 250 Form W-2s for the preceding calendar year. Accordingly, if an employer filed fewer than 250 Form W-2s for 2011, the employer is not subject to the reporting requirement for the 2012 calendar year. No Reporting Obligations for Former Employees. If an individual is not otherwise required to be issued a Form W-2 wage statement, then a wage statement is not required solely because the individual receives health coverage. Consequently, a Form W-2 generally will not be required to be issued to a retiree or a COBRA beneficiary who receives health coverage beyond the year in which the individual last received reportable wages from the employer. Calendar Year Plan Reporting. The cost of health plan coverage must be determined and reported on a calendar year basis, regardless of the plan year of the pertinent health plan

5 3. Reportable Health Plan Costs. Except as provided in this Section 3, the cost of all coverage provided under an employer-sponsored group health plan must be reported on the Form W-2. (a) (b) (c) (d) Family Coverage. The cost of the coverage of all individuals provided health coverage by reason of the individual s relationship with the employee must be reported. This will include the cost for coverage of the employee, a spouse or domestic partner, and any dependent children. Domestic Partner Coverage. In regard to a domestic partner, the imputed value of the cost of domestic partner coverage that is included in the employee s gross income must also be reported. In other words, the reportable cost is not reduced by the amount of the value of the domestic partner coverage included in the employee s gross income. Employee s Share of Cost. Both the portion of the cost of the coverage paid by the employer and the portion of the cost paid by the employee is to be reported on the Form W-2, regardless of whether the employee paid for that cost through pretax or after-tax contributions. Benefits Provided under a Health FSA. In general, salary reduction contributions to a health flexible spending arrangement ( Health FSA ), and the reimbursements made under the Health FSA, are not to be reported. A different rule applies if the employer s cafeteria plan provides for flex credits that the employee may allocate among various qualified benefits, including a Health FSA. In the case of such a plan, if an employee elects to allocate a portion of the flex credit to the Health FSA so that the amount of the available Health FSA benefit exceeds the employee s Section 125 salary reduction contribution for the year, then the amount of the Health FSA allocation (i.e., the sum of the flex credit allocation and the employee s own salary reduction election), minus the employee s salary reduction allocation to the Health FSA, is to be reported. Example: Employer maintains a Section 125 cafeteria plan that allows employees to elect to make pre-tax salary reduction contributions to pay for qualified nontaxable benefits (including benefits under a Health FSA). The plan also offers an employer-paid flex credit of $2,000. Employee makes a $1,000 salary reduction election for several qualified benefits under the plan. From the $3,000 available for the year ($2,000 in flex credits and $1,000 of his salary reduction amount), Employee allocates $1,500 to the Health FSA. The cost of the qualified benefits for Employee under the plan for the year is $3,000. The amount of Employee s salary reduction election ($1,000) for the plan year is less than the amount of the Health FSA ($1,500) for the plan year. Thus, $500 ($1,500 Health FSA amount minus $1,000 salary reduction) must be included in the amount to be reported on Employee s Form W

6 (e) Dental or Vision Plan Coverage. The cost of coverage under a dental plan or a vision plan is not required to be reported if either: The coverage is provided under a separate policy, certificate or contract of insurance; or The coverage is self-insured or otherwise not provided under a separate insured policy, but employees may either decline the coverage, or are required to pay an additional amount for the coverage. (f) (g) Contributions to a Collectively-Bargained Multiemployer Plan. Contributions made by an employer to a collectively-bargained multiemployer group health plan are not required to be reported. Exempt Coverage. The following amounts are not reportable on the Form W-2: Amounts contributed to a Health Savings Account ( HSA ); Amounts contributed to an Archer MSA; and Coverage under a Health Reimbursement Arrangement ( HRA ). 4. Calculating the Cost of Coverage. (a) Calculation of Reportable Cost. For an insured plan, an employer may use the premium charged by the insurer for that employee s coverage (for example, for employee-only coverage or for family coverage, as applicable) for each period as the reportable cost for that period. For a self-insured plan, the reportable cost is the COBRA premium for the applicable coverage. (b) Mid-Year Employment Termination. If an employee terminates employment during a year, an employer may use any reasonable method to calculate the reportable cost for that year, provided that the same method is used for all employees with coverage under the plan. For example, the employer may: Ignore and not report the coverage provided after the termination of employment; or Report the post-termination coverage

7 (c) Mid-Year Changes in Coverage. The reportable cost for an employee receiving coverage under the plan is the sum of the reportable costs for each period (such as a month) during the year as determined under the method used by the employer. Example: Employer X determines that the monthly reportable cost under a group health plan for employee-only coverage for the calendar year 2012 is $500, and that the monthly reportable cost under the same group health plan for employeeplus-spouse coverage for the calendar year 2012 is $1,000. Employee is employed by Employer X for the entire calendar year Employee had employee-only coverage under the group health plan from January 1, 2012 through June 30, 2012, and then had employee-plus-spouse coverage from July 1, 2012 through December 31, Under these facts, the 2012 reportable cost under the plan for Employee is $9,000 (($500 x 6) + ($1,000 x 6)). Official Guidance: IRC 6051; IRS Notices and B. SMALL BUSINESS HEALTH CARE TAX CREDIT Small employers that provide health care coverage to their employees and that meet certain requirements ( qualified employers ) may be eligible for a federal income tax credit for health insurance premiums they pay on behalf of their employees. The credit is available only for the payments of premiums to a plan for which benefits are provided under an insurance policy. The credit is not available for contributions made to a selfinsured health plan. The credit is available through It will also be available for any two consecutive years after 2013, but only for premiums paid for insurance policies purchased through a state-sponsored Exchange. 1. Employers Eligible for the Credit. In order to be a qualified employer for a tax year, the following conditions must be satisfied: The employer must have fewer than 25 full-time equivalent employees ( FTEs ) for the tax year; The average annual wages of its employees for the year must be less than $50,000 per FTE; and The employer must pay health care premiums under a qualifying arrangement. A nongovernmental, tax-exempt employer that is exempt from tax under Code Section 501(a) can be a qualified employer. An employer that is an agency or instrumentality of the federal government, or of a state, local or Indian tribal government, is not a qualified employer unless it is a Section 501(c) tax-exempt organization (such as a school, library or animal shelter)

8 Contributions made by an employer to a collectively-bargained multiemployer plan that are used to pay premiums for health insurance coverage for covered employees are treated as payment of health insurance premiums by the employer for purposes of the credit. However, in order to be eligible for the credit, 100% of the cost of coverage for all employees covered by the multiemployer plan must be paid from employer contributions, and not by employees. In addition, if the employer contributions to the multiemployer plan are used to pay additional benefits, such as group-term life insurance, the employer must allocate the contributions among the benefits. Only the amount allocable to health insurance premiums can be claimed as a credit. 2. Qualifying Arrangements. A tax credit for premiums paid by the employer will be allowed only if the premiums are paid pursuant to a qualifying arrangement. A qualifying arrangement is one in which the employer pays premiums for each employee enrolled in health care coverage in an amount equal to a uniform percentage (not less than 50%) of the premium cost of the coverage. If the plan covers only employees (and not spouses or dependents), the plan will meet the qualifying arrangement standard if the employer pays at least 50% of the premium cost for each employee enrolled in the plan. If the plan provides for additional tiers of coverage, such as family coverage, the standard will be met if the employer payment satisfies one of the following standards: A uniform percentage (not less than 50%) of the premium cost for each employee (if any) enrolled in self-only coverage; A uniform amount that is no less than the amount the employer would have paid toward self-only coverage for each employee (if any) enrolled in self plus one coverage; A uniform amount that is no less than the amount the employer would have paid toward self-only coverage for each employee (if any) enrolled in family coverage; or A uniform amount that is no less than the amount the employer would have paid toward self-only coverage for each employee (if any) enrolled in any other tier of coverage (figured separately for each tier). Additional rules apply if the employer offers more than one plan, or if the insurance carrier does not bill on a composite basis. If an employer offers more than one type of coverage, such as a medical plan and a separate dental plan, each plan must separately satisfy the qualifying arrangement requirements in order for the premiums payable to that plan to be claimed as a credit. A credit cannot be claimed for employer contributions made to a health reimbursement arrangement ( HRA ), health flexible spending arrangement ( FSA ), or health savings account ( HSA )

9 3. Premiums Taken into Account. If an employer pays only a portion of the premiums for the coverage provided to employees under a plan, with employees paying the rest, only the portion of the premiums paid by the employer is considered for purposes of calculating the credit. Any premium paid pursuant to a salary reduction arrangement under a Section 125 cafeteria plan is treated as paid by the employee, rather than the employer, and thus is not eligible for the credit. In addition, the amount of an employer s premium payments that is taken into account for purposes of the credit is capped by the premium payments the employer would have made if the average premium for the small group market in the state in which the employer offers coverage were substituted for the actual premium. For example, if an employer pays 80% of the premiums for coverage provided to employees, and the employees pay the other 20%, the premium amount that is taken into account for purposes of calculating the tax credit is the lesser of: 80% of the total actual premiums paid; or 80% of the premiums that would have been paid for the coverage if the average premium for the small group market in the state were substituted for the actual premium. The average small group market premium for each state is reported on the Form 8941 for the applicable year. 4. Credit Limit. Through 2013, the maximum credit for a taxable employer is 35% of the employer s recognizable premium expenses. After 2013, the credit increases to 50% (subject to additional restrictions). Through 2013, the maximum credit that is taken into account for a tax-exempt qualified employer is 25% of the employer s premium expenses. After 2013, the credit increases to 35% (subject to additional restrictions). In all regards, the amount of the credit available to a tax-exempt employer cannot exceed the sum of: The total amount of federal income and Medicare (i.e., hospital insurance) tax the employer is required to withhold from employees wages for the year; plus The employer s share of Medicare tax on employees wages for the year. 5. Phase Out of Credit. The amount of the otherwise available tax credit is reduced, and potentially phased out completely, if the number of the employer s FTEs exceeds 10, or if average annual wages exceed $25,000. If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the number of FTEs in excess of 10 and the denominator of which is

10 If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the amount by which average annual wages exceed $25,000 and the denominator of which is $25,000. For an employer with both more than 10 FTEs and average annual wages exceeding $25,000, the reduction in the credit amount is equal to the sum of the amount of the two reductions. This sum may reduce the credit to zero for some employers with fewer than 25 FTEs and average annual wages of less than $50, Calculating FTEs. The number of an employer s FTEs for a year is determined by dividing: The total hours of service for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by 2,080. The result, if not a whole number, is then rounded to the next lowest whole number (unless the result is less than one, in which case it is rounded up to one FTE). To calculate the total number of hours of service which must be taken into account for an employee for the year, the employer may use any of the following methods: (a) (b) (c) Determine actual hours of service from records of hours worked and hours for which payment is made or due, including hours for paid leave; Use a days-worked equivalency whereby the employee is credited with 8 hours of service for each day for which the employee would be required to be credited with at least one hour of service under method (a) above; or Use a weeks-worked equivalency whereby the employee is credited with 40 hours of service for each week for which the employee would be required to be credited with at least one hour of service under method (a) above. An employer may apply different methods for different classifications of employees, if the classifications are reasonable and consistently applied, and may also change the method from year to year. 7. Determination of Average Annual Wages. An employee s average annual wages for a year are determined by first dividing: (a) (b) The total wages paid by the employer during the employer s tax year to employees who perform services for the employer during the tax year; by The number of the employer s FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000)

11 Wages for this purpose means wages as defined for purposes of the Federal Insurance Contributions Act ( FICA ) (without regard to the wage base limitation). 8. Exclusion of Owners. Sole proprietors, partners in a partnership, 2% shareholders of S corporations, and 5% owners of other businesses are not considered employees for purposes of the credit. The wages or hours of these business owners and partners are not counted in determining either the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit. In addition, an employee who is a family member of any of the business owners or partners, or a member of such a business owner s or partner s household, is not considered an employee for purposes of the credit. Thus, neither the wages nor the hours of the family member are counted in determining the number of FTEs or the amount of average annual wages, and premiums paid on the family member s behalf are not counted in determining the amount of the credit. For this purpose, a family member includes a spouse, a child (or grandchild); a sibling or step-sibling; a parent (or grandparent); a stepparent; a niece or nephew; an aunt or uncle; or a son-in-law, daughter- in-law, father-inlaw, mother-in-law, brother-in-law or sister-in-law. 9. Controlled Group Aggregation. Members of a controlled group are treated as a single employer for purposes of the credit. Consequently, all employees of the controlled group, and all wages paid to employees by the controlled group, are counted in determining whether any member of the controlled group is a qualified employer. 10. Claiming the Credit. An employer (other than a tax-exempt employer) claims the credit on the employer s annual income tax return, with an attached Form 8941 showing the calculation of the credit. The credit can be used to offset an employer s AMT liability for the year, subject to certain limitations based on the amount of an employer s regular tax liability, AMT liability and other allowable credits. The unused credit may be carried back five years (increased from one year by the Small Business Jobs Act of 2010), or carried forward up to 20 years. A tax-exempt employer claims the refundable credit by filing a Form 990-T with an attached Form 8941 showing the calculation of the claimed credit. For a tax-exempt employer, the credit is a refundable credit. An employer s allowable deduction for health insurance premiums is reduced by the amount of the credit. Official Guidance: IRC 45R, IRS Notices and ; Form

12 C. PATIENT-CENTERED OUTCOMES RESEARCH INSTITUTE ASSESSMENT 1. Overview. The Affordable Care Act provides for the creation of the Patient-Centered Outcomes Research Institute ( PCORI ). The PCORI is a stand-alone, nonprofit corporation that is separate from any agency of the U.S. Government. The PCORI is to be funded by new fees imposed on health insurance policies and selfinsured group health plans. The assessments are to be used to fund comparative clinical effectiveness research, the results of which may be used by consumers and policymakers to make informed health-related decisions. 2. Effective Date and Duration of Fee Assessment. The annual comparative effectiveness fee initially becomes payable for the first plan year ending on or after October 1, 2012, and will continue to be imposed through plan years ending on or before September 30, In other words, for a calendar year plan, the fee will first be assessed for the current plan year ending December 31, The fee will then continue to be imposed for subsequent plan years, with the final fee assessed for the plan year ending December 31, Amount of Fee. The fee is calculated on the basis of the average number of lives covered under the plan for the applicable plan year. (See Section H below.) For the first plan year, the fee is $1 multiplied by the average number of covered lives. Thereafter, the multiplier increases to $2 per the average of covered lives. 4. Covered Plans. Except as discussed below, all group health insurance policies and selfinsured group health plans, including health reimbursement arrangements ( HRAs ), are subject to the comparative effectiveness fee. 5. Retiree-Only Plans. Self-insured plans that cover only retirees are exempt from many of the provisions of the ACA and other federal laws governing group health plans. This exemption does not apply for purposes of the comparative effectiveness fee. Therefore, retiree-only plans are subject to the fee. 6. Exempt Plans. The following plans are not subject to the fee: Excepted dental and vision care plans (i.e., separate dental or vision insurance policies, or self-insured benefits that require a separate election and employee contribution); Health care FSAs that qualify as excepted benefits (i.e., FSAs for which an employer contribution is not made); Health Savings Accounts ( HSAs ); Employee Assistance Plans ( EAPs ), disease management programs and wellness programs that do not provide significant benefits in the nature of medical care; and

13 Insurance policies and plans that are designed to principally cover employees who are working and residing outside of the United States (i.e., expatriate policies). 7. Dual Self-Insured Plans. If an employer sponsors two or more self-insured plans that have the same plan year (such as a self-insured medical plan and an HRA), then all of the self-insured plans will be treated as a single plan, and thus will be subject to a single fee. 8. Dual Insured and Self-Insured Coverage. An employer may offer both an insured medical plan and a self-insured plan (such as an HRA) covering the same employees. In such a case, the insurer will pay the fee with respect to individuals covered under the insured medical plan, but the employer, as plan sponsor, must also pay a fee for employees covered under the self-insured HRA. 9. Calculation of Fee. The fee imposed on the plan sponsor of a self-insured plan is based on the average number of lives covered under the plan for the plan year. The proposed regulations allow an employer to choose among three methods to determine the average number of covered lives. (a) (b) Actual Count Method. A plan sponsor may determine the average number of lives covered under the plan for the plan year by calculating the total of the lives covered for each day of the plan year, and dividing that total by the number of days in the plan year. Snapshot Method. Under the snapshot method, the average number of lives is calculated by adding the total number of lives covered on a specific date during the first, second or third month of each quarter, as selected by the employer (or multiple dates in each quarter if an equal number of dates is used for each quarter), and dividing the total by the number of dates on which a count was made. Note: For purposes of applying the snapshot method, the number of lives covered under a plan on a specific date may be determined on the basis of either: (a) (b) The actual number of lives covered on the date; or The sum of: (i) (ii) The number of participants with self-only coverage on the date; plus The number of participants with coverage other than self-only coverage on the date multiplied by (c) Form 5500 Method. The Form 5500 method is the simplest of the three. In order to use the Form 5500 method for a plan year, the applicable Form 5500 must be filed by the due date for the payment of the comparative effectiveness fee assessment filing for the plan year. (i) For the typical plan providing coverage that is not limited to self-only coverage (e.g., family coverage), the average number of lives is equal to

14 the sum of the number of participants reported for the beginning of the plan year and the number reported for the end of the plan year. (ii) If a plan provides only self-only coverage, the average number of covered lives is the sum of the total number of participants at the beginning and at the end of the plan year, as reported on the Form 5500, divided by 2. Note: A plan sponsor may change the method from one plan year to the next. (d) Special HRA Rule. For purposes of determining the average number of lives under an HRA, only participants are taken into account. Therefore, the multiplier for dependents will not apply. 10. Timing of Reporting and Payment. An employer must report and pay the fee via IRS Form 720 by July 31 of each year. The filing will cover the plan year that ended during the preceding calendar year. In other words, by July 31, 2013, an employer with a calendar year plan will need to file the Form 720 and pay the fee assessment for the plan year ending December 31, Party Responsible for Fee Payment. In the case of an insured plan, the fee will be reported and paid by the insurer. For self-insured plans, the fee is reported and paid by the plan sponsor. In the case of a self-insured health plan established by a voluntary employees beneficiary association ( VEBA ), the trustee of the VEBA is deemed to be the plan sponsor responsible for the payment of the fee. 12. Prohibition against Payment of Fees from Plan Assets. The preamble to the final regulations states that because the comparative effectiveness fee is imposed on the plan sponsor, rather than the plan itself, the fee generally does not qualify as a permissible expense of the plan for purposes of ERISA. Therefore, the fee typically must be paid by the employer sponsoring the plan. Nevertheless, the preamble to the regulation further provides that this prohibition may not apply in limited situations, and that the Department of Labor will provide guidance on payment of the fee in the near future. Official Guidance: IRC 4375, 4376 and 4377; IRS Regulations , and D. ANNUAL LIMITATION ON HEALTH FSA SALARY REDUCTION CONTRIBUTIONS 1. Overview. The Affordable Care Act amended IRC 125 to provide that in order for a health flexible spending arrangement (a health FSA ) to be a qualified benefit under a cafeteria plan, the maximum amount that an employee can elect to contribute to the health FSA account on a salary reduction basis for a taxable year is $2,500. If a cafeteria plan does not expressly impose this contribution restriction, the plan fails to be a qualified cafeteria plan within the meaning of IRC 125. In that event, amounts contributed to the cafeteria plan must be included in the employee s taxable wages

15 The $2,500 limitation is indexed to CPI-U for years beginning after December 31, 2013, with any increase that is not a multiple of $50 rounded to the next lowest multiple of $ IRS Guidance. In Notice , the IRS issued guidance as to the application of the new annual limits. This guidance is outlined below. (a) (b) (c) (d) (e) Annual Limitation Period. The statute holds that an annual limitation applies on the basis of an undefined taxable year. The IRS guidance holds that the term taxable year refers to the plan year of the cafeteria plan, as this is the period for which salary reduction elections are made. Initial Limitation Period. The $2,500 limit first applies for the plan year that begins on or after January 1, Effect of Short Plan Year. An employer may change the plan year of a cafeteria plan for a valid business purpose. If a cafeteria plan has a short plan year (that is, fewer than 12 months) that begins after 2012, the $2,500 limit must be prorated based on the number of months in that short plan year. Application of Limit on Employee-by-Employee Basis. The $2,500 annual limit on salary reduction contributions to a health FSA applies on an employee-byemployee basis. Thus, $2,500 (as indexed for inflation) is the maximum salary reduction contribution each employee may make for a plan year. Consistent with this rule, if both spouses are eligible to elect salary reduction contributions to a health FSA, each spouse may elect to make salary reduction contributions of up to $2,500 (as indexed for inflation) to his or her health FSA, even if both participate in the same health FSA sponsored by the same employer. Aggregation of Plans of Related Employers. All employers that are treated as a single employer under Section 414(b), (c), or (m) (relating to controlled groups and affiliated service groups) are treated as a single employer for purposes of the $2,500 limit. Accordingly, if an employee participates in multiple cafeteria plans offering health FSAs maintained by members of a controlled group or affiliated service group, the employee s total health FSA salary reduction contributions for a plan year under all of the cafeteria plans must be limited to $2,500 (as indexed for inflation). In contrast, an employee employed by two or more employers that are not members of the same controlled group may elect up to $2,500 (as indexed for inflation) under each employer s health FSA. Note: The IRS has not provided guidance on the application of the annual limit of the plans if the related employers have different plan years. (f) No Limit on Flex Credits. The annual $2,500 health FSA limit applies only to salary reduction contributions, and not to employer non-elective contributions, sometimes called flex credits. For example, if an employer contributes a $500 flex credit to each employee s health FSA for the 2013 plan year, each employee may still elect to make salary reduction contributions of $2,500 to a health FSA for that plan year

16 (g) Effect on Post-Plan Year Grace Period Elections. If a cafeteria plan provides for a grace period (which can be no longer than 2½ months) for a plan year, unused salary reduction contributions to the health FSA for the plan year that are carried over into the grace period do not count against the $2,500 limit applicable for the subsequent plan year. Example. Employer X offers a calendar year cafeteria plan that includes a health FSA with a grace period of 2½ months. For the 2012 plan year, the plan provides that employee salary reduction contributions for the health FSA are limited to $5,000. Effective for the 2013 plan year, the plan provides that employee salary reduction contributions to the health FSA are limited to $2,500. Some employees have unused amounts from their 2012 health FSA salary reduction contributions that remain available during the grace period in the first 2½ months of In this situation, the availability during the grace period of amounts attributable to the2012 health FSA salary reduction contributions does not cause Employer X s cafeteria plan to fail to satisfy the $2,500 limit. (h) Required Plan Amendment. A cafeteria plan offering a health FSA must be amended to expressly impose the $2,500 limit (or, at the employer s option, a lower limit specified in the plan). The amendment must be adopted on or before December 31, It must be made effective retroactive for plan years beginning after December 31, Official Guidance: IRC 125(i); IRS Notice E. INCREASE IN MEDICAL EXPENSE DEDUCTION THRESHOLD Individuals currently are allowed an itemized deduction for unreimbursed medical expenses, but only to the extent that such expenses exceed 7.5% of their adjusted gross income ( AGI ). For purposes of the alternative minimum tax ( AMT ), medical expenses are currently deductible only to the extent that they exceed 10% of AGI. The Affordable Care Act increases the threshold for the itemized deduction for unreimbursed medical expenses from 7.5% of AGI to 10% of AGI for regular income tax purposes. The Act does not change the AMT treatment of the itemized deduction for medical expenses. The increase is generally effective for taxable years beginning on or after January 1, However, through 2016, if either the taxpayer or the taxpayer s spouse attains age 65 before the end of the taxable year, the increase does not apply, and the threshold remains at 7.5% of AGI. Official Guidance: IRC

17 F. ADDITIONAL MEDICARE TAX ON HIGHER-INCOME EMPLOYEES 1. Overview. The Federal Insurance Contributions Act ( FICA ) imposes a payroll tax on employers based on the amount of wages paid to an employee during the year. The tax imposed is composed of two parts: (a) the Old Age, Survivors, and Disability Insurance ( OASDI ) tax equal to 6.2% of covered wages up to the taxable wage base ($113,700 in 2013); and (b) the hospital insurance (Medicare) tax amount equal to 1.45% of covered wages. A compensation limit does not apply to the Medicare tax. The tax is assessed against all compensation. In addition to the tax on employers, each employee is subject to FICA taxes equal to the amount of tax imposed on the employer. The employee portion of the FICA tax must be withheld and remitted to the Treasury Department by the employer. The Self-Employment Contributions Act ( SECA ) imposes taxes on the net income from self-employment of self-employed individuals. The rate of the OASDI portion of SECA taxes is equal to the combined employee and employer OASDI FICA tax rates (i.e., 12.4%), and applies to self-employment income up to the FICA taxable wage base. The rate of the Medicare portion is the same as the combined employer and employee Medicare rates (i.e., 2.9%). There is no cap on the amount of self-employment income to which the Medicare rate applies. 2. Additional Medicare Tax. The Affordable Care Act increases the employee portion of the Medicare tax by an additional tax of 0.9% on wages received in excess of the applicable income threshold. In the case of a married couple filing jointly, this Additional Medicare Tax is based on the combined wages of the employee and the employee s spouse. The threshold amount is established by the following table: Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household (with qualifying person) $200,000 Qualifying widow(er) with dependent child $200,000 As under current law, the employer is required to withhold the additional Medicare tax on wages. However, 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. An employer is required to begin withholding Additional Medicare Tax for the pay period in which it pays wages in excess of $200,000 to an employee. There is no requirement that an employer notify its employee when it begins withholding Additional Medicare Tax

18 3. Additional SECA Tax. This same additional tax applies to the Medicare portion of SECA tax on self-employment income in excess of the threshold amount. Thus, an additional tax of 0.9% is imposed on a self-employed individual having self-employment income in excess of the threshold amount. 4. Wages from Multiple Affiliates. If an employee is performing services for multiple members of a controlled group of companies, and each affiliate is an employer of the employee with regard to the services the employee performs for that affiliate, the wages paid by the payor on behalf of each affiliate should be combined only if the payor is a common paymaster. The wages are not combined for purposes of the $200,000 withholding threshold if the payor is not a common paymaster. 5. Other Special Rules. (a) (b) (c) Imputed Cost of Group-Term Life Insurance. The imputed cost of group-term life insurance coverage in excess of $50,000 is subject to FICA taxes, including Medicare taxes. Accordingly, to the extent that, in combination with other wages the imputed cost exceeds $200,000, it is also subject to Additional Medicare Tax. Nonqualified Deferred Compensation. An employer calculates wages for purposes of withholding Additional Medicare Tax from nonqualified deferred compensation ( NQDC ) in the same way that it calculates wages for withholding the existing Medicare tax from NQDC. Thus, if an employee defers wages under a nonqualified deferred compensation plan and the NQDC is taken into account as wages for FICA tax purposes under the special timing rule described in the IRS FICA tax regulations, the NQDC would likewise be taken into account under the special timing rule for purposes of determining an employer s obligation to withhold Additional Medicare Tax. Noncash Fringe Benefits. The value of noncash fringe benefits must be taken into account, with Additional Medicare Taxes withheld, if applicable. 6. Effective Date. The Additional Medicare Tax rules apply to remuneration received on or after January 1, Official Guidance: IRC 3101, 3102, 1401, 1402, 164; Proposed IRS Regulations (12/5/12); IRS Q&As G. MEDICARE TAX ON INVESTMENT INCOME In addition to buttressing Medicare through the additional tax on higher-income employees, the Affordable Care Act imposes a new Medicare tax on net investment income. The provision applies to taxable years beginning on or after January 1, Tax on Individual. In the case of an individual, the tax is 3.8% of the lesser of: A taxpayer s net investment income; or

19 The excess of the taxpayer s modified adjusted gross income over a threshold amount. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case. Modified adjusted gross income is adjusted gross income increased by the amount excluded from income as foreign earned income under IRC 911(a)(1) (net of the deductions and exclusions disallowed with respect to foreign earned income). 2. Tax on Estate or Trust. In the case of an estate or trust, the Medicare tax is 3.8% of the lesser of: Undistributed net investment income; The excess of adjusted gross income (as defined in IRC 67(e)) over the dollar amount at which the highest income tax bracket applicable to an estate or trust for the tax year begins. The Medicare tax does not apply to a trust: That is exempt from tax under IRC 501; That is a charitable remainder trust that is exempt from tax under IRC 664; or If all of its unexpired interests are devoted to charitable purposes. 3. Investment Income. For purposes of the Medicare tax, net investment income is investment income reduced by the deductions properly allocable to such income. Investment income is the sum of: Gross income from interest, dividends, annuities, royalties, and rents (other than income derived from any trade or business to which the tax does not apply); Other gross income derived from any business to which the tax applies; and 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 the tax does not apply. Investment income does not include distributions from a qualified retirement plan or amounts subject to SECA tax. Gross income does not include items which are excluded from gross income under the general income tax rules, such as interest on tax-exempt bonds, veterans benefits, and the portion of the proceeds from the sale of a principal residence that is excluded gain

20 4. Trades or Businesses. In the case of a trade or business, the Medicare tax applies if the trade or business is a passive activity with respect to the taxpayer, or the trade or business consists of trading financial instruments or commodities. The Medicare tax does not apply to other trades or businesses conducted by a sole proprietor, partnership, or S corporation. Income, gain, or loss on working capital is not treated as derived from a trade or business. Official Guidance: IRC 1411; Proposed IRS Regulations (12/5/12); IRS FAQs H. LIMITATION OF DEDUCTION ON EXCESSIVE REMUNERATION PAID BY CERTAIN HEALTH INSURANCE PROVIDERS 1. Overview. The Affordable Care Act denies a deduction by a covered health care provider for remuneration attributable to services performed by an applicable individual to the extent that such remuneration exceeds $500,000. The deduction limitation applies without regard to whether such remuneration is paid during the taxable year or a subsequent taxable year. Thus, for example, in the case of remuneration that relates to services that an applicable individual performs during a taxable year, but that is not deductible until a later year, such as nonqualified deferred compensation, the unused portion (if any) of the $500,000 limit for the year is carried forward until the year in which the compensation is otherwise deductible, and the remaining unused limit is then applied to the compensation. In determining whether the remuneration of an applicable individual for a year exceeds $500,000, all remuneration from all members of any controlled group of corporations, other businesses under common control, or affiliated service groups, are aggregated. 2. Definitions. An insurance provider is a covered health insurance provider if at least 25% of the insurance provider s gross premium income from health business is derived from health insurance plans. Self-insured plans are excluded from the definition of covered health insurance provider. Applicable individuals include all officers, employees, directors, and other workers or service providers (such as consultants) performing services for or on behalf of a covered health insurance provider. Thus, the limitation on the deductibility of remuneration from a covered health insurance provided is not restricted to a small group of officers and covered executives, but instead generally applies to remuneration of all employees and service providers. Moreover, if an individual is an applicable individual with respect to a covered health insurance provider for any taxable year, the individual is treated as an applicable individual for all subsequent taxable years (and is treated as an applicable individual for purposes of any subsequent taxable year for purposes of the special rule for deferred remuneration). 3. Effective Date. The provision deduction restriction is effective for remuneration paid in taxable years beginning after 2012, with respect to services performed after Official Guidance: IRC 162(m)(6)

21 I. TAX ON SALES OF MEDICAL DEVICES 1. Excise Tax. An excise tax equal to 2.3% of the sale price is imposed on the sale of any taxable medical device by the manufacturer, producer, or importer of such device. The tax applies to sales made on or after January 1, Taxable Medical Devices. For purposes of the tax, a taxable medical device is any device (as defined in Section 201(h) of the Federal Food, Drug, and Cosmetic Act) intended for humans. The excise tax does not apply to eyeglasses, contact lenses, hearing aids, and any other medical device that is generally purchased by the general public at retail. 3. Tax upon Transfer of Title. If title to, or ownership of, a taxable article passes from the manufacturer to a transferee by operation of law (such as through an inheritance or as part of the sale of a business), or as a result of any non-taxable transaction, the excise tax attaches to the sale of the article by the transferee to the same extent and in the same manner as if the transferee were the manufacturer of the article. 4. Exemption for Articles for Resale. The tax does not apply to the sale of taxable medical devices for use by the purchaser for further manufacture (or for resale by the purchaser to a second purchaser for further manufacture) or for export (or for resale for export). An article is sold for use in further manufacture if the article is sold for use by the purchaser as material in the production of, or as a component part of, another taxable article. To make a tax-free sale for further manufacture or export, the manufacturer, the first purchaser, and in some cases the second purchaser, must be registered by the IRS. A manufacturer or purchaser applies for registration by filing a Form 637, Application for Registration (For Certain Excise Tax Activities), in accordance with the instructions on the form. 5. Exempt Articles. The IRS is authorized to exempt specific medical devices from the tax if the device is generally sold at retail establishments (including over the internet) to individuals for their personal use. Examples of items likely to be exempt are bandages and tipped applicators, pregnancy test kits, diabetes testing supplies, denture adhesives and snake bite kits. Also, devices intended for use exclusively in veterinary medicine are not taxable medical devices. 6. Form 720 Reporting. The medical device excise tax is a manufacturers excise tax to be reported on Form 720, Quarterly Federal Excise Tax Return. Official Guidance: IRC 4191 and 4221; Final Regulations and (12/5/2012); Notice ; IRS FAQs

22 III. Provisions Becoming Effective in 2014 A. PREMIUM ASSISTANCE CREDIT 1. Overview. The Affordable Care Act establishes a premium assistance credit for eligible individuals and families who purchase health insurance through a state-sponsored insurance Exchange. These Exchanges are to be made available by The premium assistance credit is a refundable tax credit, and may also be payable in advance directly to the insurer. The premium assistance credit is designed to operate as follows: An eligible individual enrolls in a plan offered through an Exchange, and reports his or her income to the Exchange; The individual receives a premium assistance credit based on income, and the Department of Treasury pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled; The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan. Initial eligibility for the premium assistance credit is based on the individual s income for the tax year ending two years prior to the enrollment period. Individuals or married couples who experience a change in marital status or other household circumstance, incur a decrease in income of more than 20 percent, or receive unemployment insurance, may update their eligibility information or request a redetermination of their tax credit eligibility. 2. Eligibility for Credit. The premium assistance credit is available for individuals (single or joint filers) with household incomes between 100% and 400% of the Federal poverty level ( FPL ) for the family size involved who do not receive affordable health insurance through an employer or a spouse s employer. For 2012, % of FBL means between $23,050 and $92,200 (for a family of four). Household income is defined as the sum of: (a) (b) The taxpayer s modified adjusted gross income; plus The aggregate modified adjusted gross incomes of all other individuals taken into account in determining that taxpayer s family size (but only if such individuals are required to file a tax return for the applicable year). Modified adjusted gross income is defined as adjusted gross income increased by the amount (if any) normally excluded by IRC 911 (the exclusion from gross income for citizens or residents living abroad), plus any tax-exempt interest received or accrued during the tax year