Health Services Tax Conference May 18-19, 2015, Presentations included: Mega Trends and the Impact on Healthcare, The Healthcare Industry: A View from Washington and The New Health Economy.
4. PwC Health Research Institute
Would you be comfortable with using a mobile
device to check for ear infections?
4
One in four US clinicians
surveyed by HRI said they
would be comfortable
prescribing based on data from
such a device.
5. PwC Health Research Institute
Have you been to a medical clinic in a retail store
or pharmacy in the past 12 months?
In 2013, 35% of
survey respondents
told HRI they had
visited a retail clinic
in the past year
5
In 2007, that number
was just 10%.
6. PwC Health Research Institute
Do you own a wearable device and do you wear it
everyday?
6
By the end of 2014, wearable
companies will have shipped a
projected 7.6 million units
within the US, up 200% from
2013.
7. PwC Health Research Institute
The New Health EconomyTM
: Where are we
heading?
7
8. PwC Health Research Institute
Consumers are ready to abandon traditional care
models for convenient alternatives
8
…threatening $64 billion of traditional provider revenue
36.7%
Have at-home
chemotherapy
Get an MRI at a retail clinic or
pharmacy
34.4%
Ah
Send a digital photo of a
rash/skin problem to a
dermatologist
Use an at-home strep test
54.8%
58.6%
Have stitches or staples
removed at a retail clinic or
pharmacy
Check for an ear infection
using a device attached to
your phone
46.9%
48.3%
9. PwC Health Research Institute
High deductible plans continue to rise
Source: Kaiser Family Foundation – 2014 Employer Health Benefits Survey
16%
21%
35%
40%
46%
50% 49%
58%
61%
6%
9% 9%
13%
17%
22%
26%
28%
32%
10%
12%
18%
22%
27%
31%
34%
38%
41%
2006 2007 2008 2009 2010 2011 2012 2013 2014
All small firms (3-199 workers) All large firms (200 or more) All firms
9
10. PwC Health Research Institute
Healthcare follows other industries
Standardized marketing
and inventory
Limited travel
agency availability
Limited teller hours
Customized and data-
driven
Online booking
24/7 ATMs and mobile
banking
Past Present
1980s - 2010
Blockbuster drug
model
Limited hours and
standardized
treatment plans
Personalized medicines
Personalization of
treatments and protocols
Present Future
Ongoing shift
10
11. PwC Health Research Institute
The transformation taking place in health
11
New Health Economy
Value over volume
Sophisticated customer segmentation
Fueled by
technology
Built on
analytics
2
12. PwC Health Research Institute
Healthcare’s new entrants: Who will be the
industry’s Amazon.com?
12
13. PwC Health Research Institute
Nearly half of Fortune 50 companies are healthcare
new entrants
“Our goal is to be the number
one healthcare provider in
the US,” - Retail company
“Our goal is to become a global
leader as a healthcare
company,” - Consumer
Electronics company
“We can own the wellness
space,” - Grocery company
13
14. PwC Health Research Institute
How New Entrants are disrupting the health sector
Democratization of
care
Accessible healthcare
through technology
New business
models
Non-traditional
players disrupt
status quo
Addressing the
void
New entrants are
meeting an
unfulfilled need in
the delivery system
Wellness and
fitness
Viable entry point to
participate in health
14
15. PwC Health Research Institute
Consumer use of retail clinics on the rise
In 2007,
proportion of
survey
respondents
who had
visited a
retail clinic:
In 2013,
proportion of
respondents who
had visited a
retail clinic in
the last
12 months:
9.7% 35%
15
16. PwC Health Research Institute
Case study: Walmart is exploring whether it can
make price matter in basic medical care
“How do we introduce
service and access at
fundamentally
transformative price
points so there is no
one in America who
can’t have access to
care?”
Marcus Osborne,
Vice President of Health &
Wellness Payer Relations
Wal-Mart Stores, Inc.
Opened micro-clinics called Kaiser Permanente Care
Corners in two stores in California
16
17. PwC Health Research Institute
Care innovation via remote technology
Provider tools Consumer tools
17
19. PwC Health Research Institute
An example: Global emergence of apps formulary
Apps Formulary
AliveCor Cardiac
Withings Blood Pressure
bant Diabetes
Pain Squad Pain Mgmt
MyIBD Crohn’s Disease
19
21. PwC Health Research Institute
Healthcare spending shifts toward preventive care
5% 7%
12%
15%
17%
21%
70% 65% 51%
10% 11%
16%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2012 2025F
Prevention Diagnosis Treatment Prognosis
Preventive Healthcare Market: Healthcare
Spending by segment, U.S. 2007-2025
Global
consumers spent
$9.6 trillion on
wellness
21
22. PwC Health Research Institute
Where are consumers spending on wellness?
$45.40B
Natural &
organic
food
$30.40B
Vitamins
and
nutritional
supplements
$1.02B
Nutrition
and energy
bars
$16.80B
Functional
beverages
$59.20B
for sporting
goods
$61.6B
for
alternative
healthcare
$11.25B
for weight
loss
$40.33B
for fitness
$1.30B
for mobile
health apps
$93.62B
for
nutrition
Wellness market
$267B
US Healthcare system
$2.8T
US total healthcare cost $3T
$25.27B
Gym
membership
$7.31B
Personal
trainer
$6.85B
Pilates &
yoga
studios
$0.64B
Boxing
gyms
& clubs
$0.26B
Fitness
DVD
production
22
23. PwC Health Research Institute
U.S. consumers have high hopes for wearables
23
24. PwC Health Research Institute
Clinician use of mobile devices is on the rise
24
25. PwC Health Research Institute
Healthcare organizations should focus on key areas
and understand the business model implications
Consumer Innovation
Smart
Analytics
Operational
Agility
Build a full
continuum of
care
Understand, attract
and retain new
markets
Incentivize value
and quality
Increase efficiency
Commercialize
core competencies
Improve outcomes
through discovery
Pursue new
partnerships
Exploit new
technologies
Convert data into
insights
1 2
34
25
26. PwC Health Research Institute
For more information
www.pwc.com/hri
Ceci Connolly
Health Research Institute, Leader
(202) 312 7910
ceci.connolly@us.pwc.com
Twitter: @CeciConnolly
26
30. Breakout Session
2a. ACA Tax Considerations -
Information Reporting and
Section 6055/6056
www.pwc.com
Sandi Hunt
Steve Chapman
31. PwC
ACA Reporting – What’s at Stake?
What’s at stake?
No coverage offered
“A” Penalty
- Applies if the employer fails to offer
Minimum Essential Coverage to 95% *of
its full time employees (and their
dependents) and any FTE obtains
subsidized coverage on an exchange.
• (1/12 X $2,000) X (Total FTEs – 30**)
Insufficient coverage offered
“B” Penalty
– Applies if a FTE receives a premium tax
credit because coverage was not offered to
them, or employer offered coverage that
was unaffordable or did not provide
minimum value.
• (1/12 X $3,000) X (Number of FTEs
receiving subsidized coverage)
*70% in 2015
**Total FTEs – 80 in 2015
32. PwC
ACA Reporting – 2015 Overview
32
• New reporting process under the ACA:
– Large employers must report monthly information regarding affordable
healthcare both to full-time employees and the IRS starting for 2015 (reporting to
be completed in early 2016) via Form 1095-C and 1094-C
– Self-insured employers must also report on minimum essential coverage provided
to employees, retirees, and others
– Reporting is by each FEIN, including “disregarded entities”
– Reporting obligation created to support the ACA’s individual and employer
mandates and to support imposition of employer penalties
• New reporting requirements’ data elements include:
– Identify all full-time employees (working 30+ hours per week, per ACA)
– Coverage offered and employee cost
– Employee and dependent social security numbers
– Applicable safe harbors, transition rule
– Actual coverage provided to employees, dependents, retirees, COBRA beneficiaries
– Full-time and total employee countsACA reporting to IRS and employees is the latest and
one of the most challenging ACA-related developments
33. PwC 33
ACA Reporting – Overview of Requirements
Minimum Essential Coverage Employer Shared Responsibility
Responsible • Self-insured employers and insurers
• Employers with 50 or more full-time employees
during the prior calendar year
Reporting
Contents
• Months of minimum essential coverage for
all covered individuals
• Months during which coverage was offered and
type of coverage
• Employee’s share of lowest-cost self-only
coverage offering minimum value during each
month
• Employer’s use of any safe harbors and
transition relief
Reporting
Recipients
• All covered individuals and IRS • All full-time employees and IRS
Timing
• Full-time employees and covered individuals – by January 31, 2016 for 2015
• IRS –by March 31, 2016 for 2015
Allowable
Distribution
Methods
• To covered individuals – by first-class mail or electronically with participant consent
• To IRS – mandatory electronic filing
Reason for
Reporting
• Enforcement of individual mandate
• Evaluation of individual eligibility for
public exchange subsidies
• Enforcement of employer shared responsibility
mandate
• Evaluation of individual eligibility for public
exchange subsidies
34. PwC
ACA Reporting – Illustrative Timeline
34
January 2015
Employer shared responsibility
requirement begins for employers with
100+ FTEs
(reporting/payment in 2016)
January 2016
Reporting for 2015 coverage
year begins (sections 6055 and
6056)
By January 31st
Employers distribute Forms 1095-C
to employees
By March 31st
Employers electronically submit
Forms 1094-C (and copies of all
1095-Cs) to IRS
Information must be collected and
tracked to ensure readiness for 2016
reporting.
January-December 2015
Develop implementation plan
including project milestones
and deadlines
March 31
January
31, 2016
35. PwC
Overview of 1094-C Form – Page 1
At least one 1094-C Form is submitted to the IRS for each EIN. Multiple 1094-Cs can be sent for
different groups within an EIN, but one “authoritative” form must aggregate all information related to
the EIN
Information on employer
- Number of 1095-Cs
attached to Form
- Confirm filer is part of
larger controlled group
- Certification of how filer is
meeting employer
mandate requirements and
filing method
- Signature
35
36. PwC
Overview of 1094-C Form – Page 2
Confirmation by month that
coverage was offered to 70%
of full-time employees (95%
for 2016+)
Total employees and total
full time employees by
month
Confirm whether filer is part
of larger controlled group by
month
Confirmation of eligibility
for 70% threshold transition
relief in 2015; other
transition rules
36
37. PwC
Overview of 1095-C Form
Employee
Information
Employer
Information
Indicator by month
of:
-Offer of coverage
-Cost of coverage
-ACA Safe Harbor
Name, SSN or DOB
and Coverage
status of employees
and dependents by
month
At least one 1095-C Form is submitted to the IRS and employees for each employee who is full time or
enrolled in coverage for at least one month
37
38. PwC
ACA Reporting – Practical Challenges
In addition to the technical and data challenges that exist under the ACA, there
are also a number of reporting challenges that employers will need to
understand for notices
And, don’t forget the reporting…
• Administrative burdens surrounding a large scale filing obligation with
employees and the IRS need to be considered.
• Delivery of forms to employees – electronic delivery is permitted, but
only if employees affirmatively elect to receive electronically.
• Exchange notifications will be coming – need to develop a plan for
working through those notices.
• In addition to the exchanges, the IRS will likely have a separate process
for examination and/or notices that will need to be separately managed.
38
39. PwC
ACA Reporting – Data Considerations
February 4, 2015
The ACA reporting process is dependent on the data available as of the filing
date. Much of the data required for ACA reporting has not previously been
needed for tax filings, which are signed under penalties of perjury.
Some important considerations with respect to data are:
• Your data is not getting cleaner on its own…don’t let data quality issues stop
you from getting started
• Identifying important factors such as special unpaid leave or
reclassifications will be difficult to incorporate retroactively
• Establish clear ownership and accountability for data points – internal or
external
• Identify what data is missing, and develop a plan to gather quickly –
dependent SSNs are a common example
41. Breakout Session
2b. M&A update focusing on vertical
and horizontal consideration
www.pwc.com
Chris Monte, LifePoint Hospitals
Bryan Mello, Fresenius
Pat Pellervo, PwC
Jennifer Wyatt, PwC
42. PwC
M&A activity*
• Healthcare provider-sector deals for 2015 Q1 reflect a 46% increase over
2014 Q1.
• Hospitals, insurers, and private equity firms are acquiring medical practices
– 41 private equity deals in 2015 Q1.
• Private equity typically exits a portfolio investment in approximately 5 years,
so M&A activity will continue for the foreseeable future.
* Source: Modern Healthcare, April 18, 2015
43. PwC
Tax due diligence considerations
• Affordable Care Act compliance
• Highly compensated employees of health insurance providers (Section
162(m)(6))
• Section 501(r) requirements for hospitals
• Tax treatment of professional corporations and similar entities, and
potential effect on acquiring group
45. PwC
Restrictions on “Corporate Practice of Medicine” (“CPOM”)
Many states impose restrictions on corporations or LLCs providing medical (or
other professional) services.
• As it relates to medical providers, PCs and PLLCs generally must be legally
owned by licensed providers (e.g., physicians).
• Certain states also refer to “beneficial ownership.”
46. PwC
Affiliated groups & controlled groups
Section 1504(a): Affiliation
• Prerequisite for consolidated return election
• Group member(s) must directly own at least 80% of voting power and value
• Section 1504(a) ownership threshold also applies for other purposes,
including sections 332, 338, and 165(g)(3)
Section 1563: Controlled groups
• Generally requires ownership of at least 80% of voting power or value
• Certain applications reduce the threshold to more than 50% of voting power
or value
• Ownership attribution rules apply
• Includes foreign entities
• Application is mandatory
47. PwC
Consolidated groups
• Current offset of income/losses of group members
• Deferral of intercompany transactions between group members
• Stock basis adjustments to reflect income/loss
• Tier-up of E&P (including deficits)
• Unified Loss Rule (“ULR”) and Excess Loss Account (“ELA”) rules apply to
many dispositions/deconsolidations
48. PwC
Controlled groups
• Deferral of intragroup losses (but not gains)
• Single employer for benefit plans
• Single application of graduated rates
• Treated as a single corporation for purposes of determining eligibility for
cash method of accounting
49. PwC
“Friendly PC” example
Medical Director Agreement: Dr. X oversees and coordinates Sub’s business objectives for PC, including
clinical decisions. May be terminated by Sub without cause. Dr. X may be an employee of Parent or Sub.
Support Services Agreement: Sub performs all administrative services for PC (e.g., billing), managing PC to
the extent its management does not constitute the practice of medicine (e.g., decisions affecting clinical care).
Stock Transfer Restriction Agreement: Restricts Dr. X’s ability to transfer shares of the PC or to cause the
PC to take certain actions (e.g., prohibited to declare a dividend, issue equity, merge/liquidate, etc.). Upon the
occurrence of a “Transfer Event,” the PC shares will be transferred for nominal consideration to another
shareholder of Sub’s choosing (e.g., another physician in its employ); such transferee is required to enter into a
similar agreement. Transfer Events include Dr. X’s termination as Medical Director.
Sub
Parent
PC
Dr. X
Support Services
Agreement
(Sub & PC)
Stock Transfer
Restriction Agreement
(Dr., Sub & PC)
Medical Director
Agreement
(Dr. and Sub)
50. PwC
IRS guidance
• Private Letter Ruling 201451009
- IRS ruled that PC was a member of Parent’s affiliated (and thus permitted
to join its
consolidated) group.
- Holding premised upon the legal enforceability of the arrangements under
applicable state law.
• But also see PLR 9752025, revoking PLR 9605015
- FSA 199926014 explained that under applicable state law, an attempt to
transfer beneficial ownership to a non-physician would be void, thus
defeating affiliation.
51. PwC
Example of an unfavorable statute
PA Code – Title 15, Chapter 29, Section 2923
§ 2923. Issuance and retention of shares.
a. General rule.--Except as otherwise provided by a statute, rule or
regulation applicable to a particular profession, all of the ultimate
beneficial owners of shares in a professional corporation shall be
licensed persons and any issuance or transfer of shares in
violation of this restriction shall be void. A shareholder of a
professional corporation shall not enter into a voting trust, proxy or any
other arrangement vesting another person (other than a person who is
qualified to be a direct or indirect shareholder of the same corporation) with
the authority to exercise the voting power of any or all of his shares, and any
such purported voting trust, proxy or other arrangement shall be void.
52. PwC
Not-for-profit affiliation
• Hospital is sole member of taxable not-for-profit
- Governance Provisions
◦ Hospital appoints physician board members and also has ability to
removed board members
◦ Hospital appoints officers
◦ All financial decisions made by hospital member
◦ All clinical decisions made by physicians
◦ Hospital has authority to liquidate the entity
- Financial Provisions
◦ Entity is precluded from paying dividends
◦ Hospital is entitled to all liquidation proceeds
• Private Letter Ruling 201024001: the IRS held that affiliation was satisfied
53. PwC
A few of the unanswered questions
• How far do these rulings extend?
- For example, are stock basis adjustments made to “sub” stock that legally
is not owned by a group member? If so, if an ELA is created with respect
to nonexistent stock, what is the trigger mechanism?
- Does PC’s E&P (or deficit) “tier-up” to Parent?
• If a consolidated return election is in place for Parent’s group, is inclusion of
PC mandatory in the absence of a PLR?
• If consolidation is not desired/elected, do controlled group rules
nevertheless apply?
• If the PC was instead a PLLC, is its default classification a single member
LLC (i.e., disregarded) or a partnership (due to the physician’s nominal
interest)?
- Consider Luna and Culbertson cases
- Who has rights to benefits and burdens of ownership?
55. PwC
Common JVs
• Hospital forms a joint venture with a group of physicians
• The assets and business of a nonprofit are contributed to a newly created
joint venture, and a partner organization (generally for-profit) contributes
capital sufficient to provide it with a majority ownership interest in the joint
venture
- Day-to-day operations of the joint venture often are managed by the for-
profit entity pursuant to a management contract
- Nonprofit provides clinical and physician development services to the
joint venture
56. PwC
Capital structure of JVs
• Common interests –
- Income allocated pro rata based on value of contributions
- Distributions pro rata based on value of contributions
• Preferred interests –
- Minimizes downside risk to a member
- Potential for phantom income
• Profits interest
- Provide physicians with profits interests in the partnership
- Typically nontaxable if no liquidation value upon receipt
• Additional compensation may be provided by management contracts
57. PwC
JV considerations
• Form a new LLC
- Contribution of property and brand names
◦ Negotiating section 704(c) method for allocating income, gain, loss and
deductions from contributed built-in gain property
◦ Potential to allocate income in excess of ownership percentage to
contributing partner
◦ Determine whether property contributed is amortizable
- Disguised sale rules
◦ Cash distributions within two years of contribution unless an exception
› Reimbursement of preformation expenditures
› Debt-financed distribution
› Operating cash flow
◦ Assumption of nonqualified liabilities
58. PwC
JV considerations (continued)
• Buy into existing LLC
- Step-up to FMV tax basis under section 743(b) with a valid section 754
election in place
- Benefit of amortization deductions allocated only to buying partner
• Divesting a group of clinics to partners
- Leverage partnership prior to divesting interest
- Consider disguised sale rules
59. Breakout Session
2c. Tax planning for executive an
physician compensation and
benefit arrangements
Bruce Clouser, PwC
Travis Patton, PwC
MaryAnn Piccolo, University of Pennsylvania
60. PwC
Tax planning for executive and physician compensation and
benefit arrangements
Deferred Compensation Planning
• Techniques
• Reporting Considerations
• Other Items
62. PwC
Deferred compensation planning – Techniques
Overview
• Goals of a Deferred Comp Program
• Types of Deferred Comp Arrangements
- Qualified Plans/Section 403(b) Plans
- Section 457(b) Plans
- Section 457(f) Plans
- Section 409A
- Split Dollar Life Insurance
63. PwC
Deferred compensation planning – Techniques (continued)
Qualified Plans/Section 403(b) plans
• Defined Contribution vs. Defined Benefit Plans
• Advantages
- Tax-deferred accumulation until distribution (or later if rolled into IRA)
- Benefits are secure from creditors
• Disadvantages
- Contributions/benefits subject to limits and non-discrimination testing
(governmental plans generally exempt from non-discrimination testing)
- Compliance requirements may be complex
64. PwC
Deferred compensation planning – Techniques (continued)
Section 457(b) Plans
• Availability/Funding Rules
• Advantages
- Amounts may be fully vested without tax
- Permits additional wealth accumulation on tax-deferred basis
• Disadvantages
- Relatively low contribution limits ($18,000 for 2015)
- Can’t be rolled over (unless governmental plan)
- Not secure from creditors (unless governmental plan)
65. PwC
Deferred compensation planning – Techniques (continued)
Section 457(f) Plans
• Availability/Funding Rules
• Advantages
- Unlimited deferral opportunity
- Limited compliance requirements
• Disadvantages
- Must be at risk of loss to avoid premature taxation
- Not exempt from section 409A
66. PwC
Deferred compensation planning – Techniques (continued)
Section 409A
• Imposes requirements on deferred compensation plans
- Time of payment must be set up front
- Limited payment events may satisfy section 409A
- Limited ability to accelerate or defer payment
- 20% additional income tax applies to affected participant if a violation
occurs
- Section 457(f) plans may be subject to section 409A
• Exception – short-term deferrals
67. PwC
Deferred compensation planning – Techniques (continued)
Split dollar life insurance
• Organization and executive jointly own a policy
- In typical approach, organization loans premiums to executive which are
repaid at death or termination
- Cash value build up is generally tax free to executive, as is any payment of
life insurance
- However, executive is subject to tax annually on imputed income in form
of loan interest
- Administration charges and fees may reduce potential upside
- Ultimate payout would depend on investment performance within policy
68. PwC
Deferred compensation planning – Techniques (continued)
Summary of Deferral Opportunities
• 457(b) – up to $18,000
• 403(b) – up to $53,000 (employee plus employer, with employee limited to
$18,000 pre-tax) plus $6,000 catch-up, subject to non-discrimination
testing (unless a government)
• 401(a) – defined contribution – up to $53,000, may need to coordinate with
section 403(b) contributions, subject to non-discrimination testing (unless a
government)
• 401(a) – defined benefit – up to $200,000, depending on age, etc., subject
to
non-discrimination testing
• 457(f) – unlimited
• Split-dollar – unlimited, subject to insurance policy limits
70. PwC
Deferred compensation planning – Reporting
Considerations
Reasonableness of Compensation
• Rebuttable Presumption
• IRC Section 4958 Excess Benefit Transactions
- Intermediate Sanctions
- Excise Tax Considerations
• Tax Reform Proposal – Entity-level excise tax on excessive executive compensation
- 25% tax on organization paying compensation over $1m
• Form 990 Reporting
- Publicly Available
- Media Scrutiny
• Completeness
- Reporting of all taxable/non-taxable benefits on Form 990
- Form 990, Schedule J reporting of deferred comp programs, participants &
distributions
71. PwC
Deferred compensation planning – Reporting
Considerations (continued)
Reasonableness of Compensation
• State Reporting Implications
- Form 990 typically must be attached to annual state solicitation
registration filings
- Compensation practices may need to be disclosed for sales tax exemption
renewal purposes
(PA-as example)
78. PwC
Background
Tax Function Evolution
• Since adoption of Sarbanes Oxley, Tax functions have been under increased
pressure both internally & externally (cost pressures, PCAOB, auditors, etc.)
• Some Tax functions began implementing systems in an attempt to improve their
efficiency and effectiveness
• Others, stuck with what worked for them, even if not efficient or optimal, because of the
perceived complexity of their processes/structure.
• In the past several years, Tax technology has improved such that tax functions are able to
utilize enabling technologies for key areas:
• Tax sensitization of data
• Storage of data
• Management of tax provision and return process
• Forecasting and modeling
• Management of tax controversies
79. PwC
Background
Tax Function Trends
Tax Functions are now trying to approach provision and compliance differently.
They are realizing that simply integrating the tax provision and return process just puts them
at the starting gate. There is an opportunity to rebuild the provision and compliance
process to improve efficiencies, mitigate risks and enhance performance.
• Focus on compliance and provision integration
• Tax sensitization of data and tax data consolidation
• Leveraging existing technology utilized within the Enterprise
• Structured document management platforms replacing shared drives
• Use of automated workflow and collaboration platforms to help formalize existing processes
• Enhanced analytics enabled through better defined data and data architecture
• More effective data collection approaches and methods
80. PwC
Need to change
Megatrends and the impact to organizations
Staff is more
decentralized with
growing skill gaps.
Demographic
shifts
Trade and investment
is shifting to developing
countries increasing
risk and complexity.
Shift in global
economic
power
Governments are competing
for business and requiring
greater transparency.
Accelerating
urbanization
Technology vendors are
developing new capabilities
and new market entrants
are emerging.
Technological
breakthroughs
Organizations continue to
demand higher quality
analysis while staffing levels
are holding steady or falling.
Operational
optimization
Global Megatrends
Demographic
shifts
Shift in global
economic
power
Accelerating
urbanization
Technological
breakthroughs
Climate
change &
resource
scarcity
82. PwC
Legislative/regulatory
• Global tax information reporting requirements
(e.g., BEPS and similar transparency initiatives) will
grow exponentially and will have a material impact on
the operations and related budget allocations of
Tax functions.
• Global markets will demand complete transparency
and information sharing among stakeholders and
taxing jurisdictions, resulting in an increase in overall
tax liabilities.
• The majority of taxing jurisdictions, in both developed
and emerging markets, will have systems and data-
mining capabilities to conduct global audits which will
reconcile income and expense across jurisdictions.
83. PwC
Risk & governance
• Many jurisdictions will legislatively require the
adoption of a tax control framework which follows
guidelines similar to Sarbanes-Oxley and COSO
(Committee of Sponsoring Organizations of the
Treadway Commission).
• Enhanced stakeholder scrutiny and reputational risk
will force companies to continuously re-evaluate their
tax decisions.
• Strategic focus on jurisdictional reporting and
documentation of business activities, including transfer
pricing, will be critical to managing the increased tax
controversy resulting from transparency initiatives.
84. PwC
Data
• The majority of Tax functions will receive all
information in a ‘tax-ready format’ from either their
enterprise-wide financial systems or a dedicated tax
data hub.
• Dedicated tax data hubs will become mainstream and
be developed internally, licensed from a third-party
vendor, and/or accessed through an accounting firm
as part of a co-sourcing arrangement.
• Data security will be high on the agenda of Tax
functions due to concerns over confidential information
being inadvertently released or shared publicly.
Data in
tax-ready format
Licensed
third-
party
Internally
owned
Co-
sourcing
BuyBuild Rent
Centralized tax data hubEnterprise systems
85. PwC
Technology
• The vast majority of Tax functions will rely on
professional data analysis tools to assist in the decision-
making process in areas such as detection of risk,
opportunity identification, projections and scenario
planning, and overall business support.
• More companies will use their enterprise-wide financial
systems to prepare tax calculations (e.g., income tax
accounting and indirect taxes), thereby replacing
spreadsheets and/or traditional tax technology
solutions.
New technology
Reduce global
tax rate
Identify risks
Projections
and predictive
analytics
SpreadsheetsSpreadsheets
Better decision
making and
enhanced
strategic planning
Enterprise systems
86. PwC
Process
• Tax functions will use real-time collaboration tools to
automate their workflow, document management,
calendaring, and internal controls.
• Most global tax preparatory compliance and reporting
activities, including data collection and reconciliations,
will be performed within the company’s shared service
center or will be co-sourced with a third party.
On-line collaboration tools
Workpaper
creation
Data
collection
Analysis Workflow
Shared service
center
Tasks and
processes
Tax function
Co-source Greater efficiency
Improved controls
Reduced costs
87. PwC
People
• Tax functions will employ dedicated tax IT, data and
project management specialists who will develop,
champion, and execute the tax technology and
transformation strategies.
• A successful tax professional of the future will be highly
proficient in data analysis, statistics, and technology, as
well as process improvement and change management.
TechnologySoft skills
Technical skills Leadership skills
Data analysis Statistics
89. PwC
The future state ecosystem
Tax Finance Third parties
Key
deliverables
Business intelligence
and analytics
Tax data
hub
Tax
applications
Tax
sensitization
Tax data
management
Tax data
mapping
s
Enterprise
systems
Document management
Process management
and workflow CalendarData collection
Tax operations management
94. Breakout Session
3b. State and local tax update
www.pwc.com
Troy Deason, HCA
Doug Jacobs, Steward Health
Maureen Pechacek, PwC
Edward Bringhurst, PwC
George Famalett, PwC
95. PwC
State tax panel
Maureen Pechacek – Partner, PwC, Moderator
Troy Deason – Director, State Income & Franchise Tax, HCA
Doug Jacobs – Director, Corporate Tax, Steward Health Care
Edward Bringhurst – Director, PwC
George Famalett – Partner, PwC
96. PwC
Refund of California sales tax on medical supplies for
medicare patients
• Many medical supplies are subject to sales tax in California unless an exemption applies.
• The historical position in California has been Healthcare providers (both For Profits and
Not For Profits) are considered “consumers” rather than retailers of medical supplies
which means healthcare providers are responsible for the sales tax on medical supplies
purchases.
• A position has been developed by PwC to classify Healthcare providers as retailers on
medical supplies utilized by healthcare providers who provide services to certain
medicare patients.
• The theory here is the U.S. government is financially responsible for services provided to
medicare patients which is an exempt transaction as a sale to the U.S. government.
• What is the benefit for healthcare providers? Example – Healthcare provider has 200
million of annual medical supplies that relate to the care of certain medicare patients. If
25% of these purchases (e.g., 25% of 200 million or 50 million) are subject to sales tax, a
refund of 4.25 million per year is available to a healthcare provider (50M 8.50%).
• A detailed data model must be built to support sales tax refunds relating to medical
supplier or medicare patients. This data model needs to determine the medicare usage
percentage by department (they are different) with appropriate audit documentation); a
methodology for bulk purchases, medicare revenue tie out (In patient vs. out patient) to
name a few issues.
97. PwC
Cloud Computing: Evolving the IT Stack
Cloud LayersTraditional IT Stack
0
0
Data Center Facilities
Networking
Servers and Storage
Operating Systems
Applications
Application Development &
Deployment
Infrastructure Software
(VM, Database, IT Mgmt)
Software as a
Service (SaaS)
Platform as a
Service (PaaS)
Infrastructure as
a Service (IaaS)
Traditional IT Stack
• Corporate IT hosted on-premise
• Each component linked, and built to satisfy
future capacity
• Riddled with complexity, high management
costs, lack of efficiency, unused capacity
Cloud IT
• Can be hosted on-premise, off premise or
hybrid
• Components are no longer linked, and can
be provisioned as a service in whatever
combination needed
• Built for most effective utilization
• Degree of complexity, management costs
decrease, much more efficient use of
resources
98. PwC
State and Local Indirect Tax Considerations for Cloud
Computing
• Classification of Service Offerings
• Sourcing
• Billing and Multiple Points of Use
• Risks
99. PwC
Classification
One of the main struggles in taxing cloud computing services is how to classify
the transaction—to answer the question “What are you selling?”
• Is it software?
• Is it information services?
• Is it data processing services?
• Are you leasing tangible personal property?
• None of the above?
100. PwC
Classification of SaaS
States are taking different approaches to cloud computing, mainly SaaS at this point.
• Electronically delivered software
• Non-taxable information or data processing service
• Taxable information or data processing service
• Nothing: state does not tax electronically delivered software or information/data
processing services
101. PwC
Classification of IaaS and PaaS
States are beginning to take a closer look at the classification of hosting services.
• Some ITFA grandfathered states that tax Internet access are taxing hosting
services as related Internet access services if sourced to that state
• Most classify it as a computer service, taxable or not taxable depending on the
state
• Some can’t make up their mind
102. PwC
Sourcing
The next issue that arises once a service offering has been classified is to which
state you source the revenue.
• By server location
• By user location
• By billing address or headquarters
If the service is deemed to be the sale or lease of tangible personal property, the
revenue would be sourced to the server if the provider can identify which
server was being used. If multiple servers are used, the issue becomes more
complex.
103. PwC
Billing and MPU Issues
Compliance:
• Customers may need detailed user or server location information in order
to determine their own sales tax exposures and for providers to correctly
apportion revenue.
• Customers may want sales tax collected based on user location (MPU
issues). Is there an industry standard?
• Can the suppliers automate the collection of sales and use taxes for
multiple user locations?
104. PwC
Sales/Use tax
Conversion of not-for-profit system to for profit
• Identification of Services Performed
(i.e. parking, lodging, sales of personal property, cafeteria and non-patient
meals, food court,
gift shop, etc.)
• Sales/use tax applicability to medical supplies & devices as well as ALL non-
medical
items purchased
• Sales/use tax applicability to assets
• Purchasing Department – Sales/use tax awareness and training
• Systems and IT – Turning on the tax flags; changing the tax flags
• Registering with taxing authorities; Reporting to taxing authorities; record
retention for
audit support
• Other Indirect Taxes – Local business taxes; recordation taxes; registered and
titled property
105. PwC
Texas margins tax – Industry issues
• Overview: Computation – The lower of the Following:
- Total Revenue minus COGS
- Total Revenue minus compensation
- 70% of Total Revenue
• Exclusions from Revenue
- Health Care Institutions
◦ 50% of revenues from Medicaid, Medicare, CHIP, TRICARE,
Workers Compensation claims, cost of uncompensated care
- Health Care Providers:
◦ 100% of Revenues from Medicaid, Medicare, CHIP, TRICARE,
Workers Compensation claims, costs of uncompensated care
106. PwC
Texas margins tax – Industry issues (continued)
• Uncompensated Care valuation
• Interplay on bad debt deduction and excluded uncompensated care
• Treatment of Co-Pays and deductibles
• Expenses related to excluded revenue
• Treatment of partial payments and the uncompensated care exclusion
• Treatment of expenses attributable to uncompensated care
• Treatment of partnerships
• Deduction for certain flow-through funds
• Recent TX ruling regarding reimbursements
107. PwC
Multistate income tax issues
• Pending GAAP change to revenue recognition rules
• Treatment of rebates
• Sourcing:
- Market-based sourcing and COP state challenges
- Pennsylvania, Florida, Indiana, New York, others
• Transfer Pricing Issues
- Recent litigation in DC
- MTC Proposed Changes
- Audit Activity
108. PwC
District of Columbia – Transfer pricing
Hess Corp. v. OTR, No. 2012-OTR-00027 (November 14, 2014); Exxon Mobil
Oil Corp. v. OTR, No. 2012-OTR-00049 (November 14, 2014); Shell Oil Co. v.
OTR, No. 2011-OTR-00047 (November 14, 2014)
• Three orders of the Office of Administrative Hearings reversed District of
Columbia Office of Tax and Revenue (OTR) proposed franchise tax
assessments based on transfer pricing analyses prepared by OTR’s third-
party contractor, Chainbridge Software LLC.
• Taxpayers argued that non-mutual offensive collateral estoppel should be
preclude OTR from relitigating whether the Chainbridge methodology can
be utilized to assess franchise taxes.
• The Administrative Law Judge (ALJ) reviewed several ‘fairness’ factors and
determined that applying estoppel against OTR would not be unfair.
109. PwC
Other multistate income/franchise tax & other unique
issues/opportunities
• Move to Unitary Combined Reporting
• Treatment of Foreign Income
• Franchise Taxes – LLC’s – Louisiana
• Credits & Incentives
• New Markets Tax Credit
• Purchasing Companies
110. PwC
Healthcare provider taxes
Where Provider Taxes Exist?
49 States and the District of Columbia have imposed Healthcare Provider
Taxes of some sort.
Why Provider Taxes Exist?
Provider taxes to help ease the State burden associated with
Medicare/Medicaid
Who do Provider Taxes Apply?
Federal requirements allow states to impose provider taxes on 19 classes of
healthcare providers, but most typically:
• Nursing Facilities
• Hospitals
• Intermediate Care Facilities
• Managed Care Organizations
111. PwC
Healthcare provider taxes – Overview
CMS reimbursement
Hospitals
State Government
Federal Government
Center for Medicare &
Medicaid Services (CMS)
$302.9 mm
Healthcare
Provider
Taxes
$248.7 mm State
Contribution
$341.4 mm
Federal
Contribution
$590.2 mm
Supplemental
Payments
Federal Contribution
based on state
per capita income
$590.2 mm
CMS Disbursement
112. PwC
Healthcare provider taxes
New Hampshire – April 2014
Catholic Medical Center et al v. N.H. Department of Revenue
• Equal Protection argument
- Hospitals were subject to tax, clinics were not
- Hospitals and clinics provided several of the same services
- Parties must be treated equally unless the “rational basis test” is
satisfied
113. PwC
Healthcare provider taxes
New Hampshire – April 2014 (continued)
Catholic Medical Center et al v. N.H. Department of Revenue
• Rational Basis Test
- Hospital tax was imposed to balance state budget by taxing and
returning tax to hospital, but receiving Federal matching
- CMS fought these policies beginning in 2011, and obtained a Federal
prohibition against guaranteeing a hospital is “held harmless” by a tax.
- Since hospitals were no longer acting as a conduit to balancing the
budget, the “rational basis” was destroyed for the New Hampshire tax
- Medicaid Enhancement Tax (MET) struck down
114. PwC
Healthcare provider taxes
Kentucky – April 2015
Saint Joseph Health Systems, Inc – KY Board of Tax Appeals
• Statutory Construction – HB 380
- Hospital provider tax collections for FY 2006-2007 and 2007-2008
shall not be less than $180,000,000. Notwithstanding the tax shall not
exceed the amount of the aggregate provide taxes paid by hospitals in
FY 2005-2006
- Issue was whether it was taxes original paid and/or amounts paid after
refunds of overpaid tax. BOTA held it was original tax paid
115. PwC
Healthcare provider taxes
Kentucky – April 2015 (continued)
Saint Joseph Health Systems, Inc – KY Board of Tax Appeals
• Federal Preemption
- “No tax or fee or other monetary payment may be imposed directly or
indirectly on a carrier… with respect to any payment made under the
fund” 5 U.S.C Section 8908(f)(1)
- Taxpayer argues that tax is “indirectly” on the carrier because they pass
it on through higher medical costs. In addition, the department believes
the original position on granting refunds in 2005-2006 years was
incorrect. The Board held that they would follow the West Virginia case
and “the mere fact that a provider may opt to pass through the cost it
bears to carriers, including FEHB carriers, dot not transform the
provider tax into an illicit indirect imposition of a state tax upon the
FEHB fund”
116. PwC
Healthcare provider taxes
Kentucky – April 2015 (continued)
Conclusion
• Evaluate potential CA opportunity
• Evaluate flow through exemptions related to Medicare
• Significant sales tax issues related to conversion of Not-for-Profit to For-
Profit – evaluate and understand issues & increased costs
• Evaluate Texas Margins Tax for potential opportunities
• Understand changes related to new GAAP revenue recognition rules
• Keep Transfer Pricing reports current
• Evaluate purchasing companies
• Healthcare provider taxes – Additional litigation is expected
118. 2015 Health Services
Tax Conference
3c. Unrelated Business
Income
Moderator: Gwen Spencer, Tax Partner
Panelists: Michael Walton, Vice President,
Tax Services at Kaiser Permanente
Amity Ollis, Tax Manager,
Dartmouth- Hitchcock
119. PwC
Agenda
• Background
• New business operations
• Investments
• Accountable Care Organizations (ACOs)
• International transactions – beyond captive insurance
120. PwC
UBI – New business operations
Telemedicine, Virtual Care, E-Medicine
The use of telecommunication and information technologies in order to provide clinic
health care at a distance. Telemedicine helps eliminate barriers and can improve access
to medical services that would often not be consistently available in distant and/or rural
communications. It is also used in critical care and emergency situations.
• HUB = Hospital, clinic, or other healthcare provider that is providing the clinical
services.
• SPOKE = Hospital, doctor’s office, clinic, etc. that is receiving the services or serves
as an intermediary and point of access for patients.
Medical Directorships and Clinic Support
• Individuals employed by one particular hospital are provided to unrelated hospitals
in return for a fee.
• Hospital staffing clinics in retail chains (Walmart, Walgreens, etc.) and corporations.
121. PwC
UBI – New business operations
Mercy set to open ‘virtual care center’ to reduce variation in care delivery
http://medcitynews.com/2015/05/mercy-set-open-virtual-care-center-reduce-
variation-ca
Texas votes to limit telemedicine solely to in-state practices
http://www.nytimes.com/2015/04/11/us/texas-medical-panel-votes-to-limit-
telemedicine-practices-in-state.html?_r=0re-delivery/
NY telemedicine reimbursement legislation
http://www.natlawreview.com/article/new-york-passes-telemedicine-reimbursement-
legislation
Partnerships of exempt hospitals/health systems with telemedicine
technology companies to expand care markets
http://finance.yahoo.com/news/carena-partnerships-expand-telemedicine-solutions-
130000560.html
Kaiser Permanente joins forces with Target Corp on in-store clinics
http://www.latimes.com/business/la-fi-kaiser-target-clinics-20141118-story.html
Wal-Mart partners with hospitals to rapidly expand in-store clinics
http://www.amednews.com/article/20080225/business/302259998/1/
122. PwC
UBI – New business operations – Tax considerations
• Definition of Patient?
- Are they a patient of the Hub? Are they registered with the Hub?
- What is the patient billing/registrations structure?
- Who is being billed for the service (the Spoke or the patient)?
- Are the services being provided to communities where the services are not otherwise
available/provided?
- Does the provider interact with the patient? Or, does he or she rely solely on records, images,
and other healthcare providers?
• Does the activity further the organization’s charitable purpose?
• How does the shift in capacity impact the analysis?
• Who is the nfp providing the service for? For-profit?
• Private benefit concerns
• Future Concerns
- Loss activity now, but what about the future?
- Joint venture rules come into play
- The impact on TE status when engaging with for-profits to grow their business
• State reporting obligations
• International operations
123. PwC
UBI – Investments
Background:
• Certain investments of the organization generate UBI – Federal and State
• Activities of LPs/LLCs are attributed to the tax-exempt partner – IRC
section 512(c)
Tax Considerations:
• UBI – Federal and State
• Federal & State Filings
• Domestic Filings to Report Foreign Activities
• Reportable Transactions
• Foreign Bank Account Reporting
• Boycott filings
• Form 5471
124. PwC
UBI – Investments
Things to consider:
• Healthcare systems may not be as experienced as others in understanding
compliance requirements arising from investments by a nfp organization
• Process improvement - how does your organization approach the process?
• Communication/education of Treasury/CIOs
• Inventory – what was entered and what was exited - Secure all the k-1s (IRS
now often asks for a list of K-1s in audit process)
• Pre-investment consultation with tax
- Considering blocked v. unblocked
- Use of existing NOLs – Federal and State
• Foreign investments – direct or indirect
• Direct communication with investment contacts
125. PwC
UBI – Accountable Care Organizations (ACOs)
Background:
• A group of physicians, hospitals, and other health care providers that come together
to provide coordinated care to patients for whom they have a collective responsibility
for their health needs.
Tax Considerations:
• Whether the arrangement furthers a charitable purpose;
• Whether the exempt organization has ceded control over a substantial portion of its
activities or has retained sufficient control to avoid inappropriate benefit to the non-
exempt partners;
• Whether the non-exempt partners participate on terms that are consistent with fair
market value (i.e., no private benefit or inurement).
Considerations:
• ACOs - more to come?
• ACO – beyond MSSP?
126. PwC
UBI – Accountable Care Organizations (ACOs)
IRS Notice 2011-20:
• A tax-exempt entity’s participation in an ACO will not result in private inurement, more than
incidental private benefit, or in UBI, if:
- The terms of participation are set in advance in a written agreement negotiated at arm’s
length
- CMS has accepted the ACO into the MSSP
- The economic benefits, ownership interest, return of capital, distributions and allocations
are proportional in value to the tax-exempt entity’s capital contributions
- The tax-exempt entity’s share of losses does not exceed its share of economic benefits ‒ All
contracts and transactions among the parties are consistent with fair market value
IRS Fact Sheet 2011-11
• The IRS provides questions and answers on the following topics:
- Shared Services Programs and ACOs
- Participation by charitable organizations in ACOs
- Shared savings program activities
- Non-shared savings activities
- Tax status of ACOs
- Clarification of Notice 2011-20
- Electronic health records technology
127. PwC
UBI – International transactions – Beyond captive insurance
Tax Considerations
• Permanent establishment (“PE”) risk
• Registration/licensing/permitting/withholding
• Payroll/personnel considerations
• Foreign exchange risk
• Structuring considerations
- Joint Ventures
- Partnerships with Foreign healthcare entities (virtual and physical presence)
- Controls around expenditures abroad
• Completeness of Form 990, Schedule F reporting
• Intellectual property/capital risks
• Transfer pricing considerations
• FBAR reporting
• Reputational/headline risks
128. PwC
UBI – International transactions – Beyond captive insurance
International patients
http://www.bostonglobe.com/business/2014/12/31/international-patients-boost-
profits-children-hospital/eKD4tUTt6CsbBXoumYvrTL/story.html
How US hospitals are helping US trade policy
http://foreignpolicyblogs.com/2014/03/25/how-hospitals-are-helping-u-s-trade-
policy/
UPMC overseas growth (2010)
http://www.post-gazette.com/local/city/2010/05/30/How-UPMC-s-overseas-
operations-blossomed-in-14-years/stories/201005300208
America’s top hospitals go global (2008)
http://www.forbes.com/2008/08/25/american-hospitals-expand-forbeslife-
cx_avd_0825health.html
US Providers enter variety of collaborations (2012)
http://www.modernhealthcare.com/article/20120609/MAGAZINE/306099941
133. PwC
Responses to health care reform
Consideration of private exchanges
Shift to high deductible health plans
Interest in direct contracting, new delivery models, value based payments
New markets – direct to consumer, private and public exchanges
Clinical improvements
Value based payments
Purchase of provider organizations
New markets
New entrants
New payment models
Convergence with payers
135. PwC
Paying for reform – tax perspectives
Health Insurance Provider Fee/HIT tax
MLR
Reinsurance contributions
PCORI
Shift to retail and consumer model
Bearing risk
Impact of convergence and becoming subject to payer taxes
Reinsurance contributions
PCORI
Employer mandate
Cadillac tax
136. PwC
Annual Fee on Health Insurance Providers
Health
insurer’s Net
Premiums
Percent
Taken Into
Account
Not more than
$25 million
0
$25M - $50M 50
Over $50M 100
Every health insurer offering a covered plan pays an allocable
share of the health insurer fee
Year Applicable
Amount
2014 $8 billion
2015-2016 $11.3 billion
2017 $ 13.9 billion
2018 $14.3 billion
Later
years
Increased by rate
of premium
growth
137. PwC
Data year begins
January 2016
File Form 8963 with IRS
Deadline for
paying fee
Premium information must be
collected and tracked to ensure
readiness for 2015 reporting.
January-December 2014
April 15,
2015
June 15
IRS preliminary
fee calculation
Sept 30Aug 31
Notification of
final fee amount
Corrected form deadline
July 15
HIT Timeline
138. PwC
Annual Fee on Health Insurance Providers
What are
penalties for
understatem
ent?
Are there
other
penalties?
Do I have
revenues
attributable
to certain
exempt
activities?
What’s
excluded in
premium
revenue?
What’s
included in
premium
revenue?
What’s a
health
insurance
issuer?
Am I a
covered
entity?
139. PwC
Polling question
Is your department involved in the Annual Health Insurance
Provider Fee?
1. Yes, we are responsible for preparing, filing and addressing
error corrections
2. Yes, others prepare the form, we are responsible for reviewing
and we are responsible for filing
3. No, we are not involved
4. Our organization is not subject to the Health Insurance
Provider Fee
140. PwC
Payers and employers contribute to additional ACA programs
PCORI fees T Transitional
reinsurance
• Started in 2013
• Applies to insured policies and self-
insured health plans
• $2.08 per covered life for 2015, then
indexed through 2018
• Based on average number of covered
lives; alternative methods available to
determine covered lives
• Reported on IRS Form 720, generally
due by July 31 of following year
• Assessed on calendar year basis
2014-2016
• Requires payments from insurers
and employers on behalf of self-
insured medical plans for major
medical coverage
• $63 per covered life for 2014; $44
per covered life for 2015
• Covered lives first reported to
HHS in November 2014, with fee
paid in one or two installments in
2015 using pay.gov
• 2015/16 exemption for self-insured
and self administered group plans
141. PwC
Polling question
Is your department involved in the Transitional Reinsurance Fee?
1. Yes, we are responsible for preparing and filing
2. Yes, others prepare the filing, we are responsible for reviewing
and we are responsible for filing
3. No, we are not involved
4. Our organization is not subject to the TRF
142. PwC
Keeping it all under control…
Assessment of Risk & Focus of Potential Regulatory Inquiries
Regulator Provision
HHS, IRS & DOL 90 day maximum waiting period
HHS/CMS/CCIIO/ State Administrative Simplification
HHS, IRS & DOL Annual Limits
HHS, IRS & DOL Claims and Appeals
HHS, IRS & DOL Clinical Trials
HHS, IRS & DOL Coverage of Adult Children to age 26
IRS Employer Shared Responsibility - IRC 4980H
HHS/CMS/CCIIO/ State Essential Health Benefits
HHS, IRS & DOL Excepted Benefits
HHS/CMS/CCIIO/ State Exchanges
IRS Excise tax on Health Insurance Issuers
HHS, IRS & DOL Grandfathered Status
HHS/CMS/CCIIO/ State Guaranteed Availability
HHS/CMS/CCIIO/ State Guaranteed Renewability
IRS Health Flexible Spending Account Pre-tax Contributions
HHS/CMS/CCIIO/ State Health Status Discrimination
HHS/CMS/CCIIO/ State Individual and small group transitional policies
IRS IRC 6055
HHS, IRS & DOL Lifetime Limits
DOL Medical Loss Ratio
HHS/CMS/CCIIO/ State Medical Loss Ratio
IRS Medical Loss Ratio
HHS, IRS & DOL Mental Health Parity
DOL Multiple Employer Welfare Arrangements
HHS, IRS & DOL Nondiscrimination Rules for Insured Plans
IRS Over the Counter Drugs under health plans or accounts
HHS, IRS & DOL Patient Protections
IRS PCORI Fee
HHS, IRS & DOL Pre-existing condition limitations
HHS/CMS/CCIIO/ State Premium Stabilization
HHS, IRS & DOL Prevention
HHS, IRS & DOL Provider nondiscrimination
HHS/CMS/CCIIO/ State QHPs
HHS/CMS/CCIIO/ State Rate Review
HHS/CMS/CCIIO/ State Rating Limitations
IRS Reporting of employer sponsored health coverage
HHS, IRS & DOL Rescission
HHS/CMS/CCIIO/ State Student Health
HHS, IRS & DOL Summary of Benefits and Coverage and Uniform Glossary
HHS, IRS & DOL Various provisions
HHS, IRS & DOL Wellness program incentives
Prioritizing Assessment
• Likelihood of audit
• Compliance risk
• Breadth of impact
• Level of previous scrutiny
• Suspected weaknesses
• Consumers impacted
• Financial/reputational risk
• Delegated/contracted providers
144. PwC
• New tax information reporting process under the ACA:
– Large employers must report monthly information regarding affordable healthcare
both to full-time employees and the IRS starting for 2015 (reporting to be completed
in early 2016) via Form 1095-C and 1094-C
– Insurers and Self-insured employers must also report on minimum essential
coverage provided to employees, retirees, and others
– Reporting is by each FEIN, including “disregarded entities”
– Reporting obligation created to support the ACA’s individual and employer
mandates and to support imposition of employer penalties
• New reporting requirements’ data elements include:
– Identify all full-time employees (working 30+ hours per week, per ACA)
– Coverage offered and employee cost
– Employee and dependent social security numbers
– Applicable safe harbors, transition rule
– Actual coverage provided to employees, dependents, retirees, COBRA beneficiaries
– Full-time and total employee countsACA reporting to IRS and employees is the latest and
one of the most challenging ACA-related developments
Overview of ACA Reporting for 2015
145. PwC
IRS progress
Affordable Care Act Information Returns (Forms 1094-B, 1095-B, 1094-C and
1095-C) must be filed using “AIR” (Affordable Care Act Information Return
System) – ACA Information Returns may not be filed using FIRE.
• Acceptable Format for Transmission is XML (Returns will not be accepted
electronically in any other format).
• Each transmission is limited to 100MB, transmissions larger than 100MB
must be split.
• Testing for Calendar Year 2014 returns (voluntary year) will begin July 2015
and Calendar Year 2014 returns may be filed beginning October 2015.
• Returns for Calendar Year 2015 must be filed with the IRS by February 28,
2016 (paper) or March 31, 2016 (electronic) .
148. PwC
ACA reporting survey
• Only 10% of participants reported having already implemented
an in-house or outsourced solution
• 16% of survey participants reported that they have not yet even
considered a solution, or do not know what solutions they
should consider
• 65% of survey participants indicated that data quality was a
concern
• 43% of survey participants indicated that they are concerned
about responding to exchange notices
149. PwC
Polling question
FOR YOUR ORGANIZATION’S ACA REPORTING AS AN
EMPLOYER
1. We will do ACA reporting in-house with no assistance from an
outside vendor
2. We are considering an outsourced vendor
3. We are working with an existing vendor already
4. We have not decided what to do
150. PwC
Who is responsible?
82% of survey participants indicated that the human
resources/benefits department is leading the ACA reporting
compliance effort
• 5% indicated that the department leading the effort is still
undecided
62% of survey participants reported that the human resource
department is responsible for determining whether an
individual is properly treated as an independent contractor
• 12% of participating employers did not know who would be
responsible for this determination
151. PwC
Employer concerns
Concerns <1,000 EEs 1,000 – 5,000 EEs 5,000+ EEs
Data quality 55% 63% 72%
Responding to
exchange notices
40% 35% 54%
Understanding different
reporting options
70% 58% 51%
Determining different
reporting entities within the
controlled group
24% 26% 25%
Expense of reporting 43% 42% 46%
Data security 25% 31% 35%
Other 6% 6% 6%
152. PwC
Delivery of forms
• 46% of employers are undecided about how they are going to
deliver the necessary forms to employees and the IRS
• 30% of participating employers plan to use a vendor
• 24% plan to perform this in-house
• For companies with a large variable hour/part-time
workforce, there could be a challenges associated with
reaching out to employees to have them elect electronic
forms initially and on an on-going basis because such
workers generally have a high level of workforce turnover
153. PwC
Hour tracking
• 79% of employers have already begun tracking employee
hours of service for purposes of determining full-time
employee status in 2015
• The manufacturing (67%) and health industries (72%)
employers are less prepared in terms of tracking hours
than the retail & consumer industry (92%)
• With a larger variable hour/part-time workforce, the
retail & consumer industry generally has had to track
employee hours to determine medical plan eligibility for
a longer period of time than other industries
154. PwC
Reactions to ACA provisions
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Drop coverage for part-time employees
Consider changing workflow mix of part-time and full-time employees
Evaluate covering employees through state-run health insurance exchange(s)
Significantly change/eliminate company subsidies for employee medical coverage
Evaluate direct contracting with providers or ACOs
Provide coverage to part-time employees
Significantly change/eliminate company subsidies for dependent medical coverage
Drop spousal coverage if the spouse is eligible for coverage elsewhere
Evaluate covering employees through the use of private exchange
Move to a defined contribution approach to healthcare
Make changes to your company's benefits to offset costs associated with ACA
Re-evaluate your overall benefits strategy
Increase your company's efforts related to wellness & health management
Very likely Somewhat likely Unlikely
• The vast majority (87%) of employers are likely to increase their efforts related to wellness & health
management
• 84% of employers are likely to re-evaluate their overall benefits strategy, of which 41% are very likely to
do so
Source: 2015 PwC Touchstone Survey
155. PwC
Financial impact
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
$2,000 penalty per FTE
Limit of 90 days on eligibility waiting period
$3,000 penalty per FTE
Excise tax on high cost plans
("Cadillac Tax")
Reporting of minimum essential coverage (MEC)
Large employer reporting for employer shared responsibility
Additional fees and taxes
(PCORI and reinsurance)
Reporting and compliance requirements
Significant impact Slight impact No impact
• 64% of employers in 2015 indicated that they will be financially impacted by the excise tax on high cost
plans as compared to 60% in 2014
• 88% of employers will be impacted by the new reporting requirements
Source: 2015 PwC Touchstone Survey
156. PwC
Reactions to ACA provisions
When access is granted in the public exchange
for active full-time employees, employers are
considering:
<1,000
employees
1,000 - 5,000
employees
5,000+
employees
2015 total
Moving employees to public exchange as individuals
with a subsidy
3% 4% 2% 3%
Moving employees to public exchange as individuals
without subsidy
0% 1% 0% 0%
Moving group to a public exchange when available 2% 3% 1% 2%
Continuing to offer traditional employer plans 73% 80% 85% 78%
Do not know 25% 16% 13% 19%
More than one option was allowed to be selected
• 78% of employers plan to continue offering traditional benefit plans compared to 72% in 2014
• Nearly a fifth (19%) of employers will take the “wait and see” approach before deciding upon a
strategy
• 85% of large employers plan to offer traditional benefit plans, while 3% are considering moving active
employees to the public exchange
• Interest in public exchanges has decreased within the large employers with only 3% considering
moving active employees to the public exchange compared to 6% in 2014
Source: 2015 PwC Touchstone Survey
157. PwC
What’s ahead?
2018 Cadillac tax
• Excise tax imposed if the aggregate value of employer-sponsored health
insurance coverage for an employee exceeds a threshold amount
- Coverage includes health & supplemental coverage, but not separate
dental or vision coverage
- Includes both employer and employee share
• The tax is equal to 40% of the excess value over the threshold
- The 2018 threshold is:
◦ $10,200 for individual coverage
◦ $27,500 for family coverage
- Indexed at CPI+1% for 2018, CPI thereafter
- Assessed on individual basis (but not based on individual claims)
- The tax is non-deductible
158. PwC
Cadillac tax strategies – not too soon to start planning
SCALING BACK PLANS
• High-deductible plans
• Move to voluntary employee after-tax coverages
• Once “plan” is further defined, consider options to
consolidate or combine
• Collectively bargained plans
SCALING BACK ELIGIBILITY
• Spouses
• Dependents
164. PwC
Health exchanges – ACA premium stabilization (“3Rs”)
Reinsurance Risk CorridorsRisk Adjustment
Cost
>103%
of
Target
Cost
<97% of
Target
Costs
>97% to
<103% of
Target
Plan pays
portion to
HHS
No payments
or charges
HHS pays
plan for
portion of loss
Individual Member’s
Claims ($)
attachment
ptPayer Covers
Reinsurance
covers portion
(coins %)
Premium Rate for
Average Risk
Rates adjusted up for
individuals with
diagnoses requiring
more care
Rates adjusted down
for individuals with
diagnoses requiring
less care
cap
claim amt
Reinsurance Risk adjustment Risk corridors
Program
goals
• Protects against high cost of outliers
and anti-selection
• Provides funding to plans that
enroll high-cost individuals
• Budget neutral
• Protects against adverse selection
• Transfers funds from lowest-risk plans to
highest-risk plans
• Budget neutral
• Protects against inaccurate rate setting
• Limits issuer loss (& gains)
• May not be budget neutral
Market
segment
affected
Individual market plans (inside and
outside of the Exchange)
Individual and small-group market plans (inside
and outside of the Exchange)
Only Qualified Health Plans (QHPs)
Funding Assessment on all insurance issuers and
TPAs (for self-insured plans)
Revenue re-distribution Direct settlement between carriers and HHS
Coverage
period
2014 - 2016 only 2014 and beyond 2014 - 2016 only
165. PwC
Health exchanges – Risks & mitigation
• ACA established a Premium Stabilization Program – known as the “3Rs” – to mitigate the impact of
adverse selection and stabilize premiums in the individual and small group markets:
- Transitional Reinsurance
- Risk Adjustment
- Risk Corridors
• While it does provide some protection, in some instances the 3Rs program actually increases
risk and still leaves carriers with significant risk exposure
Risks (non-3Rs) Mitigation strategies
Many “Unknowns” in Exchange pricing may result in adverse
2014 experience (e.g., demographics, health status, pre-ex conditions)
• Outside of 3Rs, consider private reinsurance to cover claims in
excess
of $250,000
• Encourage initial PCP visit for new members, to capture diagnoses
early for risk score
Very little experience data is available for 2015 pricing esp.
due to extended 2014 open enrollment
• Develop and test process to collect experience and demographic
data (e.g., systems interface to data warehouse)
Regulators may not approve necessary rate increases could
be particularly damaging for plans which captured significant
Exchange
market share
• Set up processes for data reconciliation and validation prior to rate
filling submission
• Review high-increase rates with senior management to confirm
long-term strategy
Potential for compliance issues across separate Exchange/
government entities
• Establish PMO to address ongoing reporting
• Conduct periodic audits of compliance processes
166. PwC
ACA Premium stabilization – Considerations
Reinsurance Risk adjustment Risk corridors
Difficult to estimate potential
reinsurance recovery on
unpaid claims (no specific
information available)
Educate providers regarding importance of
proper claims coding (diagnosis, co-
morbidities)
Calculations may require
additional allocation to the
state/market level that issuers are
not currently performing
Potential for reinsurance
benefits to be impacted due
to:
• Review process may lead to
denial of some filed claims
• Limited availability of
funds
• Currently the coinsurance
is projected to be over 80%
due to overfunding
Effective internal quality assurance and
audit
program, including:
• Monitoring
• Data analytics
• Personal review of claims and diagnoses
reported
• An audit plan, to ensure data reported is
accurate and in compliance with
program requirements
Accrual calculation is relatively
complex, needs to integrate with
other items such as reinsurance
and risk adjustment settlements
Issuers will be recording an
accrual at December 31 for
year’s reinsurance recovery,
may impact year-over-year
comparability of financial
statements
Ensure that those (potentially third parties)
providing coding review services are
qualified and have been properly engaged
Calculation is not symmetrical –
positive experience in one cell
does not necessarily offset
negative experience in another cell
168. PwC
Current approaches to transitional reinsurance accrual estimation
Transitional reinsurance mechanism is designed to protect issuers in the individual
market by reimbursing 80% of claims between $45,000 and $250,000 for a given
individual in 2014. Settlement to occur by June 30 of the following year, so an accrual
would need to be estimated at year-end
• All observed industry carriers are booking accrual for paid to date 2014 reinsurance
recoveries. Some use higher reinsurance percentage than prescribed formula
above. A few carriers indicated less than expected reinsurance receivables were
calculated from Edge Server.
• Majority of plans also booked additional amounts for the expected reduction in
IBNR due to reinsurance recoverable amount to date based on the projected
recoverable annual amount. Year to date amounts adjusted for the seasonality and
claim payments patterns.
• Projected 2014 ultimate reinsurance recoveries are based on the group and/or
individual experience with attention to the historical large claims payment patterns
and range from 16 to 20% of
incurred claims.
169. PwC
Reinsurance program parameters considerations
Parameters 2014 Current
regulation
2015 Current
regulation
Considerations
Attachment
Point/CAP
• a$45,000/$250
,000
• $45,000/$250,00
0
• No changes are expected after
already implementation of the
reduction to the attachment
point in 2014. Reduced the
attachment point from
$75,000 to $45,000 in 2015.
Coinsurance
Rate
• 80% • 50% • Potential Increase. There are
carriers which use higher than
prescribed amount in the
accrual calculation.
Funding
Contribution
• $63 PMPY • $44 PMPY • No changes are expected.
Funding • $10 Billion • $6 Billion • Projected collected amounts
and lower market place
enrollment increase portion of
reinsurance claims.
170. PwC
Current approaches to risk adjustment accrual estimation
Permanent risk adjustment program is designed to reimburse or charge carriers
based on the relative risk in the state’s non-grandfathered individual and small group
markets. Settlement to occur by June 30 of the following year, so an accrual would be
estimated at year-end.
• Current approaches in the accrual setting in the market place differ by size, region,
market share, filling requirements, and available resources.
• Carriers that we observed estimate ultimate receivable positon by year-end but
books conservative accrual estimate of $0.
• Methodologies observed include use of: pricing assumptions, market modeling
based on publicly available data(on and off exchange enrollment demographics,
consultant studies) and own experience, consultant studies based on historical
experience, consultant market assessment and internal modeling.
171. PwC
Current approaches to risk adjustment accrual estimation –
Other considerations
• Readiness of carriers for Edge Server submission.
• Data quality issues in the Edge Server submissions and potential record
rejections.
• Availability of preliminary results from CMS that can be used for year-end
estimation.
• Modeling Concerns:
- New uninsured population
- Timing of the open enrollment period and renewals
- Competitive posito
- Own and competitors approach to the transitional markets
- Coding efficiency
172. PwC
Current approaches to risk corridor accrual estimation
Transitional risk corridors applied at the plan level, but with the “target” claims cost set as a pro-rata
allocation from the applicable state/market cell.
• Intended to be a budget neutral but CMS might fund short fall from next year fund collections*.
There are carriers that are not recording full amounts of estimated accrual due uncertainty with
fund available and tax allocation methodology.
• Risk corridor payable/receivable formula includes reinsurance and risk adjustment amounts adding
complexity to the accrual estimation.
• Carriers use already developed process such as MLR calculation for the formula inputs and
identification of the administrative expenses and administrative expenses considered as
claim expense.
• Use of aggregate approach is common, not all of carriers currently estimating accruals at the
plan level.
• Observed carriers are booking receivables with risk corridor formula loss ratios in range of 120%
to 140% range.
• Tax allocation at the plan level is a very important issue in all of the plans due to very
limited guidance.
* CMS Risk Corridors and Budget Neutrality Memo, April 11, 2014
173. PwC
Risk corridor – Funding issues
Based on an S&P analysis, the ACA risk-corridor pool is significantly underfunded for
2014 if its funding is limited only to insurers' risk corridor payments
• The analysis found that the aggregate risk-corridor payables recorded by U.S.
insurers for 2014 are less than 10% of the aggregate risk-corridor receivables
booked by insurers for the same year.
• Additionally, several insurers that may be eligible for corridor payments were
conservative and did not record any receivable or only partially booked them on
their balance sheets in 2014. It indicates that the actual aggregate payments due to
insurers from the corridor are likely even higher.
• Uncertainty of payment due to underfunding can cause volatility in the market for
all participants.
* CMS Risk Corridors and Budget Neutrality Memo, April 11, 2014
175. PwC
Medical loss ratio – Interaction with 3Rs
June 1st (Pre 3Rs Implementation)
July 31st (Post 3Rs Implementation)
August 1st (Pre 3Rs Implementation)
September 30th (Post 3Rs Implementation)
• To reflect the need to incorporate the premium stabilization program amounts into
the MLR calculations and rebate distributions, the 2014, 2015 and 2016 deadlines
have been delayed.
Revised MLR timing due to 3Rs
• MLR filing deadline
• Rebate disbursement deadline
176. PwC
Medical loss ratio – Interaction with 3Rs
• Statutory assessments to defray operating expenses of any State or Federal department,
transitional reinsurance contributions assessed, and examination fees in lieu of premium
taxes as specified by State law.
• The State and Federal Exchange user fees.
• The risk adjustment user fees of $0.08 per month.
• Data validation systems expenditures are not allowed to be deducted.
Certain fees resulting from 3Rs can be counted as Taxes, Licensing and Regulatory Fees
• Section 1342(c) of the Affordable Care Act requires that risk corridor calculations treat
reinsurance and risk adjustment payments as adjustments to allowable cost.
- The final regulation stated that that risk adjustment amounts, risk corridors amounts, and
reinsurance payments would have a net impact on the MLR numerator.
- One exception is the reinsurance contribution amount which is to be included in fees and
assessments, having a net impact on the MLR denominator.
3Rs inclusion in the MLR formula
178. PwC
Medical loss ratio – Interaction with 3Rs
Implications of 3Rs with MLR:
• Each one of the 3Rs impacts the MLR formula and the possibility of having to pay a MLR refund. The
process to estimate potential rebates are complicated by the need to estimate additional assets and/or
liabilities attributable to the 3Rs after January 2014.
• The MLR liability estimate has to be modified to take into consideration the reinsurance, risk
corridors and risk adjustment asset or liability estimates. The order of calculations becomes
very important.
• Risk Adjustment and Transitional Reinsurance should be the first calculations performed. Next would
be the risk corridors (reflecting both reinsurance and risk adjustment results).
• The MLR rebate calculations will not be able to be performed until all the other three risk mitigation
programs have been completed. Estimating the impact of these other three programs for financial
statement purposes will be complex, since they are interrelated and depend upon not only the specific
carrier’s experience, but its experience relative to all other carriers within the market.
MLR
Transitional
Reinsurance
Risk Adjustment
Transitional Risk
Corridor
180. PwC
Income tax allocation for MLR reporting
Statute indicates that MLR denominator is premium revenue, “excluding Federal and State taxes and
licensing and regulatory fees”. “Federal and State taxes” includes income taxes, except income taxes on
investment income and capital gains
There is a need to allocate income taxes across lines of business for MLR reporting purpose into the
following categories:
• Rebate-eligible blocks (individual, small group, large group, Medicare, mini-med, and expat)
• Rebate-ineligible blocks (ASO, Medicaid, Specialty Block…etc.)
• Investment income
Income Tax Allocations
• For the MLR reporting, carriers generally use a consistent approach based on generally accepted
accounting method
• Allocate income taxes to the LOB based on pre-rebate underwriting gain; avoid potential circular
interaction between rebates and taxes
• With the rebate liability being within the scope of actuarial opinion, the valuation actuary who
provides actuarial opinion and memorandum needs to have a good understanding and be
comfortable with the company’s approach to allocating income taxes
181. PwC
Federal income tax allocation for MLR reporting
• Taxes incurred should be consistent with the reported statutory annual statement
amounts based on SSAP 101 and allocated to all Lines of Business (LOB) including
large group, small group, individual, and other business segments
- Excludes taxes on investment income and capital gains
- Excludes taxes on rebate per NAIC regulations Section 3C and avoid circular tax
calc
• In general, for LOBs in an underwriting loss position, a tax benefit would be
calculated. On the other hand, LOBs in a profitable position would result in tax
expenses
• Amounts by segment should reconcile on an entity basis to the reported annual
statement
incurred taxes
• SHCE and HHS reported tax items are expected to be the same unless
reconciliation/documentation provided to discuss rationale for the differences
182. PwC
State and other taxes allocation for MLR reporting
State taxes incurred
• Employment taxes (payroll and Social Security)
• State premium taxes (allocate to LOBs based on written vs. earned premiums)
• State disability funds
• State unemployment taxes
• Regulatory fees and assessments
• Community benefit expenditures
Federal, State and local non-income taxes
• Allocations depend on specific facts for each entity and tax/assessment item
• Allocate to states that impose income tax based on respective portion of individual state
applicable state rate to total entity state rate
• Allocate to LOB within state based on respective portion of pre-tax income within that
State
183. PwC
Tax allocation for MLR vs Risk corridor
Tax allocation for Risk Corridor is an important issue in all of the carriers due to very
limited guidance.
ACA requires that MLR and Risk Corridor be closely related in definition
and consistent in calculation
MLR
Federal and State income taxes should
be allocated to each LOB based on
pre-tax income
Risk Corridor
Based on recent FAQ by REGTAP and
CMS, allocation for each QHP should be
based on the earned premium
• Larger Tax Dollars/Higher Effective Tax Rates
- Lead to unreasonable results for MLR/Risk Corridor
• Underwriting Gain Approach to Rebate and Percentage of Premiums for Risk
Corridor may not meet “Consistent” standard
• Percentage of Premium Revenue method to reflect Non-Revenue lines or small
revenue lines could be problematic
187. PwC
Thank you!
Jinn-Feng Lin
PwC | Principal
Office: 1-312-298-3792 | Mobile: 1-847-476-9220
Email: jinn-feng.lin@us.pwc.com
Michael F Callan
PwC | Partner
Office: 1- 213 -356 -6039 | Mobile: 1-661 -645 -7319
Email: michael.f.callan@us.pwc.com
188. Breakout Session
4b. Regulatory Update; PCAOB,
SEC and IRS Practice & Procedure
www.pwc.com
Mike Kurowski, Community Health Systems
Rob McCallum, HealthSouth
Beth Tucker, PwC
Dave Wiseman, PwC
191. PwC
Insights from 2014 AICPA national conference on current SEC
and PCAOB developments
Annual conference hosted by representatives of regulatory and standard setting bodies along with
auditors, users, preparers, and industry experts.
Key messages conveyed by SEC:
• Streamlining disclosures, eliminating boiler plate language
• Income Tax Disclosures in MD&A
- MD&A disclosure of material trends and uncertainties is critical
- Focus on quality and transparency of key disclosures
- Specific to company’s facts and circumstances
- Expect continued inquiries about valuation allowances/realizability of deferred tax assets, and
indefinite reinvestment
192. PwC
Insights from 2014 AICPA national conference on current SEC
and PCAOB developments (continued)
• Expected increase in number of questions and requests for enhanced disclosures around:
- Effective tax rates
◦ Explaining fluctuations in the effective tax rate from the statutory rate
◦ Volatility in the effective tax rate
◦ Effective tax rates that do not change because of material changes in components are offsetting
◦ More insight from qualitative disclosures above and beyond what is in the
quantitative disclosures
- Foreign earnings and the associated taxes
◦ Source and extent
◦ Pushback on boilerplate language regarding rate being impacted by mix of foreign earnings
193. PwC
SEC’s areas of focus in 2015
• Valuation allowances
• Realizability of deferred tax assets
• Indefinite reinvestment assertions
• Income tax expense, in particular when tax rates appear unusual relative to the expected statutory
rate, effective tax rates are volatile, or effective tax rates do not change because material changes in
components are offsetting
• Income tax disclosures in MD&A
194. PwC
SEC comment letters
• Valuation allowances
- Sources of taxable income
- Positive and negative evidence considered
- Timing
• Uncertain tax positions
- Transparent disclosure of unrecognized tax benefits
- Timing of changes in assessment
195. PwC
SEC comment letters (continued)
Valuation allowances
We note that you reversed $187.5 million of the deferred tax asset valuation allowance
during the second quarter of fiscal year 2013 based on five consecutive quarters of
earnings, the expectation of your continued profitability, and signs of recovery in the
housing market. In your fiscal year 2012 Form 10-K, you noted “…the inability to carry
back its current net operating losses and [your] recent earnings history are significant
evidence of the need for a valuation allowance against [your] net deferred tax assets.”
Considering the reversal of the valuation allowance materially impacted net income, it
is unclear how your current disclosures sufficiently explain to investors the
material positive and negative evidence you considered when arriving at the
conclusion that the majority of the valuation allowance for your net deferred tax assets
should be reversed.
Please substantially revise your disclosure in future filings to provide
investors with quantitative and qualitative information of the material
positive and negative factors that you considered when arriving at your conclusion
that it is more likely than not that the deferred tax assets will be realized. Please refer to
ASC 740-10-30-16 — 30-25 for guidance. Please provide us with the disclosures you
would have included in this Form 10-Q in response to this comment.
196. PwC
SEC comment letters (continued)
Uncertain tax positions
Given the material impact that the unfavorable tax court decision had upon your
income from continuing operations for the three and six months ended June 30, 2014
as well as the impact it will have upon your liquidity when payment becomes due,
please tell us the following:
1. Describe in greater detail how the specific tax position(s) taken by the Company
regarding the federal taxation of foreign income of certain foreign subsidiaries
differed from the factors considered by the tax court in reaching their decision;
2. Tell us how you historically contemplated the possibility that the IRS
could reach a different conclusion based upon the same facts and
circumstances and how that possibility was reflected in your accounting
for income tax liabilities as of December 31, 2013 and March 31, 2014; and
3. Explain the factors you historically relied upon to support your
assessment that it was more likely than not that the position you had
taken would be sustained upon examination.
197. PwC
SEC comment letters (continued)
• Effective tax rate
- Netting of items in presentation lines (e.g., foreign/state rate differentials)
- Other reconciling items
• Indefinite reinvestment of foreign earnings
- Focus on the accounting and disclosure requirements
- Cumulative amount of temporary differences related to indefinitely reinvested foreign earnings
- Impracticability of deferred tax liability quantification
198. PwC
SEC comment letters (continued)
Effective tax rate reconciliation
We note that your reconciliation between the actual and expected income tax includes a
significant line item for foreign tax rate differentials. In order to provide investors with greater
insight into this item that affects your income taxes, please expand your disclosure in future filings.
For example, discuss how the tax rate differential is determined and identify the significant components
of these items. Also, discuss what countries contribute to this tax rate differential and whether there are
any known uncertainties or trends in the lower tax jurisdictions that could affect your income taxes in
future periods. Refer to item 303(a) of Regulation S-K. Provide us with a sample of your proposed revised
disclosure.
199. PwC
SEC comment letters (continued)
Effective tax rate reconciliation
1. We note the significant impact of “foreign tax effect” on your effective tax rate. Please provide us with
a breakdown of the components included in this line item of your effective tax rate reconciliation for
each period presented, and tell us what consideration was given to providing further quantitative
breakdown of this line item in your disclosures. Refer to Rule 4-08(h)(2) of Regulation S-X.
2. We note your response to our prior comment where you indicate that it is most appropriate to present
foreign items together on a single line of the rate reconciliation. Please quantify for us each of the
separate items for the periods presented and to the extent any item exceeds five percent of the
amount computed by multiplying the income before tax by the applicable statutory federal income tax
rate, revise to disclose the item separately. In this regard, we note that tax rate differential,
tax credits and the effect of exchange rates, although all related to your foreign operations,
appear to be dissimilar in nature.
200. PwC
SEC comment letters (continued)
Indefinite reinvestment assertion – The initial comment
We note your disclosure on page F-23 that it is not practical to determine the amount of income or
withholding tax that would be payable upon the remittance of these foreign earnings. Please tell us why it
is not practical to determine the amount of tax that would be payable. Describe the complexities
involved that make determination of the amount difficult. Alternatively, revise future filings to quantify
the effect that repatriation of foreign earnings would have.