WHAT HEALTH CARE REFORM
MEANS FOR YOUR BUSINESS
The Whitlock Company
Definitive Healthcare Update
Overview
• Small employer tax credit
• W-2 changes
• Changes to HSA’s
• 1099 changes
• Medicare payroll tax
• Medicare tax on net investment income
• Employer required health insurance coverage
The Whitlock Company
Definitive Healthcare Update
SMALL BUSINESS TAX CREDIT
Effective 1/1/2010
Incentive for small businesses to provide their
employees with group health insurance coverage
Businesses with 10 or less full-time-equivalent (FTE)
employees
– Average annual earnings less than $25,000 a year
– Maximum credit of 35% of health insurance costs
The Whitlock Company
Definitive Healthcare Update
SMALL BUSINESS TAX CREDIT
Effective 1/1/2010
Credit phase-out
Companies with FTEs between 11 and 25
workers
– average annual wages of up to $50,000
– eligible for partial credits
The Whitlock Company
Definitive Healthcare Update
SMALL BUSINESS TAX CREDIT (cont.)
Effective 1/1/2010
TAX EXEMPT EMPLOYERS
-Same criteria for FTEs and annual wages
-Reduced credit rate of 25%
-More guidance to be issued on how to claim
the credit
The Whitlock Company
Definitive Healthcare Update
SMALL BUSINESS TAX CREDIT
Effective 1/1/2010
• Employer must pay at least 50% of health insurance
premiums
• Credit
– Offsets Income tax liability only
– Can NOT offset employment taxes (941, etc.)
– Will flow through for partnerships and S Corporations to
shareholders
– Non-refundable
– Reduces insurance tax expense deduction
The Whitlock Company
Definitive Healthcare Update
SMALL BUSINESS TAX CREDIT
Effective 1/1/2010
• Employer meets the FTE test as long as FTEs are
less than 25 (total employees may be more than
25 considering part time individuals)
• Owner-types are excluded from FTE count:
–
–
–
–
Owners
Partners/members
> 2% shareholders
Owner’s family or household members
The Whitlock Company
Definitive Healthcare Update
SMALL BUSINESS TAX CREDIT (cont.)
Effective 1/1/2010
Calculation of credit
Determine Full Time Equivalents (FTEs)
1. Calculate total hours worked per employee
2. Divide by 2080 to determine FTEs
Determine Average Wages
1. Calculate total FICA wages paid to all employees
2. Divide by FTEs
The Whitlock Company
Definitive Healthcare Update
EXAMPLE #1 (Full credit)
Facts:
# of Employees
Annual
Hours/Employee
Total Hours
Limited to
2,080/employee
5
2,080
10,400
10,400
3
1,040
3,120
3,120
1
2,300
2,300
2,080
15,820
15,600
9
The Whitlock Company
Definitive Healthcare Update
EXAMPLE #1 Answer
Calculation:
Total Hours
15,600
Full-Time Hours (divided by) 2,080
FTE
7.50
FTE Rounded Down
7
The Whitlock Company
Definitive Healthcare Update
EXAMPLE #1 Answer
Facts:
Total Wages
150,000
FTE
7
Calculation:
Total Wages
150,000
FTE
(divided by)
7
Avg Wages
21,429
Avg Wages (Rounded Down to nearest 1000)
$21,000
The Whitlock Company
Definitive Healthcare Update
EXAMPLE #1 Answer
FTE
Average Annual Wages
Health Care Premiums – Employer Paid
Calculation:
Health Care Premiums
Allowable Credit Percentage
Credit
7
21,000
40,000
40,000
35%
$14,000
The Whitlock Company
Definitive Healthcare Update
EXAMPLE #2 (Partial Credit)
Facts:
FTE
Average Annual Wages
Health Care Premiums – Employer Paid
12
30,000
40,000
The Whitlock Company
Definitive Healthcare Update
EXAMPLE #2 (Partial Credit)
Credit Calculation:
40,000 * 35% =
14,000
Credit Reduction for FTE greater than 10:
14,000*((12-10)/15) =
1,866
Credit Reduction for Average Wages greater than $25,000
14,000*((30,000 – 25,000)/25,000) =
2,800
Total Credit Reduction:
1,866 + 2,800
4,666
Total 2010 Tax Credit:
14,000 – 4,666 =
$9,334
The Whitlock Company
Definitive Healthcare Update
REPORTING HEALTH CARE BENEFITS ON W2s
Effective in 2011, reporting in January 2012
• Employers responsible for
reporting the value of the
health care benefits they
provide to employees on
their 2011 W2
The Whitlock Company
Definitive Healthcare Update
REPORTING HEALTH CARE BENEFITS ON W2s
Effective in 2011, reporting in January 2012
• Reporting requirement
does not make the amount
taxable to the employee
The Whitlock Company
Definitive Healthcare Update
REPORTING HEALTH CARE BENEFITS ON W2s
Effective in 2011, reporting in January 2012
• Update payroll systems effective 1/1/2011 for
reporting purposes (discuss with software vendor if
applicable)
• Where do you get the values for the W2?
– Health insurance company for fully insured plans
– Third party administrators for self-funded plans
The Whitlock Company
Definitive Healthcare Update
REPORTING HEALTH CARE BENEFITS ON W2s
• Health plans that are NOT included on W2:
– Flexible spending amounts
– Specified illness or disease, (i.e. cancer)
– Disability insurance
– Workers’ compensation
The Whitlock Company
Definitive Healthcare Update
REPORTING HEALTH CARE BENEFITS ON W2s
Possible W2’s for Non-Employees?
This issue will be spelled out in later regulations
• Retirees
• COBRA participants
The Whitlock Company
Definitive Healthcare Update
INCREASED VENDOR 1099 REPORTING
Effective at 1/1/2012 for January 2013 1099 reporting
• New requirement considered as a “pay for” to
provide other tax cuts
• Joint Committee on Taxation estimates it will raise
$17 to $19 billion in additional revenue
• Will effect every business at this point unless
legislation is changed
The Whitlock Company
Definitive Healthcare Update
INCREASED VENDOR 1099 REPORTING
Effective at 1/1/2012 for January 2013 1099 reporting
PRIOR LAW
• Payments in excess of $600
• Payments to corporations were exempt from
reporting requirement
• Generally issued for services (i.e. contract labor),
rent, interest
The Whitlock Company
Definitive Healthcare Update
INCREASED VENDOR 1099 REPORTING
Effective at 1/1/2012 for January 2013 1099 reporting
NEW LAW
• Payments in excess of $600
• No corporate exemption (All vendors to receive
1099s)
• Payments for ALL goods, services, and property to
be reported
The Whitlock Company
Definitive Healthcare Update
INCREASED VENDOR 1099 REPORTING
Effective at 1/1/2012 for January 2013 reporting
Could dramatically increase accounting and reporting
costs to all businesses.
START PLANNING NOW
Example: Small business owner selling collision parts
speaking to Senate leaders “I am going to go from
preparing four 1099 forms to somewhere over 200.”
The Whitlock Company
Definitive Healthcare Update
INCREASED VENDOR 1099 REPORTING
Effective at 1/1/2012 for January 2013 1099 reporting
Need to start obtaining
taxpayer id numbers for
each vendor via
Form W-9.
The Whitlock Company
Definitive Healthcare Update
INCREASED VENDOR 1099 REPORTING
Effective at 1/1/2012 for January 2013 1099 reporting
This process would need to be completed by 1/1/2012
in order for accounting software to capture data.
Back-up withholding may be required for any vendor
not supplying their federal ID number before
payment is made to that vendor.
The Whitlock Company
Definitive Healthcare Update
INCREASED VENDOR 1099 REPORTING
PROPOSED LEGISATION
Fully Repeal
OR
Exempt Companies with fewer than 25 employees
and
Companies with more than 25 employees raise reporting
amount from $600 to $5,000
Credit card purchases to be exempt
The Whitlock Company
Definitive Healthcare Update
OVER THE COUNTER MEDICATIONS
Effective beginning 1/1/2011
• Ban on OTC medication reimbursed from:
– Flexible spending accounts (FSAs) through a
cafeteria plan
– Health reimbursement arrangements (HRA)
– Health savings accounts (HSA)
Unless the physician formally prescribes the
OTC medications
The Whitlock Company
Definitive Healthcare Update
HEALTH SAVINGS ACCOUNTS
Effective beginning 1/1/2011
• Penalties increase to 20%
– for non- medical distributions from
• Archer MSAs (medical savings accounts)
• HSAs (health savings accounts)
The Whitlock Company
Definitive Healthcare Update
MEDICARE PAYROLL TAX
Effective in 2013
• New tax 0.9% wages
– Not matched by employer
– 401K (deferred comp) are EXEMPT*
– In addition to 1.45% Medicare tax w/hldg
• Employer must:
– Withhold on wages over $200,000 for an employee
The Whitlock Company
Definitive Healthcare Update
MEDICARE PAYROLL TAX
Effective in 2013
• Wage threshold amounts :
– $200K for single
– $250K for married filing jointly
– $125K for married filing separately
• Individuals must:
– Compute 0.9% tax on aggregate wages on Form 1040
– Any balance due, pay with 1040
– Consider higher estimated tax payments
The Whitlock Company
Definitive Healthcare Update
MEDICARE PAYROLL TAX
EXAMPLE:
Jack has $200k W-2 from XYZ Corporation
Sally, his wife, has $210k W-2 from ABC Corporation
XYZ withholds no 0.9% tax:
$200,000 – 200,000 = no excess, no tax
ABC withholds 0.9% tax:
($210,000 – 200,000) = $10,000 excess x .9%
= $90 medicare tax withheld
cont…
The Whitlock Company
Definitive Healthcare Update
EXAMPLE: cont…
1040 – Married filing jointly
Compute their additional tax:
Jack’s W-2
Sally’s W-2
Total wages
Threshold for MFJ
Taxable portion
Total tax
Less (Sally’s withholding)
Balance due 04/15
$200,000
210,000
410,000
250,000
160,000
x _ 0.9%
1,440
- 90
$ 1,350
The Whitlock Company
Definitive Healthcare Update
MEDICARE TAX ON “NET INVESTMENT
INCOME”
Effective in 2013
• 3.8% Medicare tax in ADDITION to all other Medicare
taxes
• Tax is based on “net investment income” for
- individuals
- estates
- trusts
The Whitlock Company
Definitive Healthcare Update
MEDICARE TAX ON “NET INVESTMENT INCOME”
Effective in 2013
What is “Net Investment Income”?
•
•
•
•
•
•
•
•
Interest income
Dividend income
Annuity income
Royalty income
Rent income
Net gains (ordinary and capital) sale of property
Passive investment income
Commodity trading
The Whitlock Company
Definitive Healthcare Update
MEDICARE TAX ON “NET INVESTMENT INCOME”
Effective in 2013
Exemptions:
•
•
•
•
•
•
Sale of a personal residence
Gains on sale of business if “active participation”
Interest income on municipal bonds
IRA, qualified retirement plan distributions
Income subject to self-employment tax
Nonresident aliens
The Whitlock Company
Definitive Healthcare Update
MEDICARE TAX ON “NET INVESTMENT
INCOME”
Effective in 2013
Tax computed on the lesser of:
• An individual’s “net investment income”
• OR the excess of the individual’s modified
adjusted gross income (AGI) over threshold
amounts
The Whitlock Company
Definitive Healthcare Update
MEDICARE TAX ON “NET INVESTMENT
INCOME”
Effective in 2013
• Threshold amounts are the same as the 0.9%
Medicare payroll tax:
• $200K for single
• $250K for married filing jointly
• $125K for married filing separately
The Whitlock Company
Definitive Healthcare Update
MEDICARE TAX ON NET INVESTMENT INCOME
Effective 2013
EXAMPLE:
Sally is single:
ABC Corp W-2
$180,000
XYZ Corp W-2
__ 50,000
Total wages
230,000
Interest and dividend income 250,000
Modified AGI
$ 480,000
The Whitlock Company
Definitive Healthcare Update
MEDICARE NET INVESTMENT INCOME TAX
EXAMPLE (cont.)
She will owe the lesser of:
Net investment income of
$250,000
x
3.8%
$ 9,500
OR
Modified AGI
$480,000
x__ 3.8%
$ 18,240
The Whitlock Company
Definitive Healthcare Update
MEDICARE NET INVESTMENT INCOME TAX COMBINED WITH PAYROLL
TAX:
Sally owes $9,500 for NII Medicare Tax, plus the 0.9% Medicare payroll
tax calculated below:
Total wages (180k + 50k)
Less threshold for single
Medicare payroll tax due
Sally owes $9,770 for both.
$ 230,000
- 200,000
30,000
x
0.9%
$
270
The Whitlock Company
Definitive Healthcare Update
NEW LIMITS ON CAFETERIA PLANS
Effective 1/1/2013
New limits for health portion of FSA (cafeteria plans)
deferrals
• OLD LAW:
– No limit on election amount
• NEW LAW:
– $2,500 limit per year
– Amount indexed for inflation after 2013
The Whitlock Company
Definitive Healthcare Update
LARGE EMPLOYER MANDATE
Effective 1/1/2014
• To avoid health insurance excise taxes, large
employers must provide:
– At least 50% of health insurance premium AND
– At least 60% of the plan’s share of total allowed cost
of benefits of plan
– OR if the minimum essential coverage is unaffordable
for the employee
The Whitlock Company
Definitive Healthcare Update
LARGE EMPLOYER MANDATE
Effective 1/1/2014
Who is a Large Employer?
Defined as a business employing:
• average of at least 50 full-time employees
• during the preceding calendar year
What is considered “full-time”?
• Full-time means work at least 30 hours per week
• All other employees counted on prorated basis
The Whitlock Company
Definitive Healthcare Update
LARGE EMPLOYER MANDATE
Effective 1/1/2014
The Excise Taxes (penalty/fine):
Excise tax of a maximum of $2,000 per employee, per year
•
The first 30 employees don’t count in the penalty
$2,000 Excise tax amount
x 1/12 Monthly portion
x
# of months not providing insur benefit
x (Total employees – 30*) *reduction provided by Act
= Total excise tax for that year
The Whitlock Company
Definitive Healthcare Update
LARGE EMPLOYER MANDATE
Effective 1/1/2014
Additional $3,000 penalty for lower income employees if:
•Receive subsidies
OR
•Purchase insurance direct from insurance exchanges
The Whitlock Company
Definitive Healthcare Update
LARGE EMPLOYER MANDATE
Effective 1/1/2014
Effect on “Small” Businesses:
Most small businesses = fewer than 50 employees
Don’t HAVE to provide health insurance
BUT - there are the incentives:
– tax credits
– shopping the health insurance exchanges
The Whitlock Company
Definitive Healthcare Update
What to Do Now
Financially:
• Consider whether to apply for tax credits
• Analyze cost to offer insurance or not
• Decide how to handle 1099’s
• Owners need to consider personal tax effects
for tax planning in their future
The Whitlock Company