Healthcarereformlinkedinversion

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.

Contents are material, non-public, confidential & proprietary. Unauthorized distribution or dissemination prohibited. 1

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 carryover
limitation, 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 this
determination 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

AMT Exemptions

Filing Status Pre-2001 2011 2012
Exemptions Exemptions Exemptions

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

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

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

Adjusted for inflation for future years


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

IRC5000A IRC36B
Individual Mandate Premium
Assistance Credit
Corresponding
PPACA
Provisions

IRC4980H
Employer Shared
Responsibility


State Exchange

State Exchange – A distribution
channel thru which consumers
will buy health insurance

Insurance carriers - Will sell Consumers – Individuals or Small
their product thru State Exchange business employer go to Exchange to
to consumers. The coverage purchase insurance. At this point
must meet the parameters of consumer may either go to Exchange
essential health benefit coverage or outside market (individual market)

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

1 $11,170 $14,856 $16,755 $22,340 $33,510 $44,680

2 15,130 20,123 22,695 30,260 45,390 60,520

3 19,090 25,390 28,635 38,180 57,270 76,360

4 23,050 30,657 34,575 46,100 69,150 92,200

5 27,010 35,923 40,515 54,020 81,030 108,040

6 30,970 41,190 46,455 61,940 92,910 123,880

7 34,930 46,457 52,395 69,860 104,790 139,720

8 38,890 51,724 58,335 77,780 116,670 155,560
For each additional
person, add
$3,960 $5,267 $5,940 $7,920 $11,880 $15,840


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 the
insured 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 for
inflation) 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
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
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)
the individual’s liability is limited to 20 percent on
average)
the indiviual’s liability is limited to 30% on average)


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

Exchange
Individual/s


Small Employer Business Tax Credit


Small Employer HITC
The discussion under this topic is not applicable to exempt
organizations

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

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 owning
more 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 taxable
year
- 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


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

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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 cafeterial
plan 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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