The Employer Shared Responsibility Provisions of the Affordable Care Act (“ACA”) went into effect for tax year 2015. If you haven’t already started doing so, we wanted to provide you with some guidance on what information an applicable large employer should be tracking monthly and reporting annually to help you meet reporting requirements for 2015.

Overview of the Employer Shared Responsibility Provisions

Before going into too much new detail, it’s important to briefly review the employer mandate. Applicable large employers are required to comply with the Employer Shared Responsibility Provisions beginning in January 2015. For 2015, a company must employ 100 full-time and full-time equivalent employees to be considered an applicable large employer. That amount reduces for 2016 down to 50 full-time and full-time equivalent employees. Companies meeting these thresholds are required to offer minimum essential health coverage to at least 70% of full-time employees and their dependents to be compliant. In 2016 and thereafter, the percentage increases to 95% of full-time employees and their dependents.

For a more in-depth discussion of the Employer Shared Responsibility Provisions and a brief discussion of how to calculate full-time and full-time equivalent employees, please see our article published December 13, 2014, "Employer Shared Responsibility Provisions of the ACA are in Effect for 2015."

Information to Track Monthly

During 2015, applicable large employers need to track whether they offered full-time employees and their dependents minimum essential coverage that meets the minimum value requirements and is affordable. They also need to track whether their employees enroll in the minimum essential coverage that was offered by the employer. It is important to track this information because an employer could be subject to an employer shared responsibility payment if either:

• The employer offered coverage to fewer than 70% (95% for 2016 and later) of full-time employees and their dependents, and at least one full-time employee enrolled in coverage through the Health Insurance Marketplace and receives a premium tax credit; or
• The employer offered coverage to at least 70% (95% for 2016 and later) of full-time employees and their dependents, but at least one full-time employee receives a premium tax credit because the coverage offered was not affordable, did not provide minimum value, or the full-time employee was not offered coverage.

New Reporting Requirements

The ACA requires that applicable large employers file information returns with the IRS as well as provide statements on healthcare coverage to full-time employees. Reporting this information was voluntary for 2014, but in 2015, all applicable large employers are required to file the reporting forms. It is important to note that the reporting requirements apply to ALL applicable large employers starting in 2015. This means that if your business has 50-99 full-time employees in 2015, and therefore qualifies for transition relief from the employer mandate because you have less than 100 full-time employees, you will still be required to file the forms for 2015.

Form 1095-C: “Employer-Provided Health Insurance Offer and Coverage”

Applicable large employers must provide Form1095-C to full-time employees. In addition, a copy of the form is filed with the IRS as an information return. This form is used by the IRS to help determine whether full-time employees are eligible for the premium tax credit, and it also helps determine if a business may potentially owe an employer shared responsibility payment. The following information is required to complete Form 1095-C:

• List of who is a full-time employee for each month.
• Identifying information for each employee such as name, address, and social security number.
• Information about the health coverage offered by month.
• List of the months the employee was enrolled in the company’s health coverage.
• The employee’s share of the monthly premium for lowest-cost self-only minimum value coverage.

Form 1094-C: “Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns”

Form 1094-C is filed as a transmittal document for Forms 1095-C, serving as a summary of the totals from Form 1095-C much as a Form W-3 serves  as a summary of the totals from Form W-2. This form is used by the IRS to help determine whether an employer is subject to a shared responsibility payment and the payment amount.

Conclusion

The Employer Shared Responsibility Provisions of the ACA contain many new requirements for filing. In order to be compliant with the reporting requirements, an employer must first determine whether it will be considered an applicable large employer subject to the ACA mandate. If determined to be an applicable large employer, the next step will be to track information monthly on the health coverage offered and the employees participating in the health plan. This information is critical for applicable large employers to be able to provide the required information to their employees and the IRS.

For more information…

See our website for helpful charts, previously published articles, and the required IRS filing forms.

On February 18, 2015, the Internal Revenue Service issued Notice 2015-17, which reiterates the conclusion in previous guidance addressing employer payment plans – that they are not in compliance with the Affordable Care Act (ACA). This article will discuss the additional guidance provided by Notice 2015-17, and it will also serve as an update to the article that Stockman Kast Ryan & Co. published on December 15, 2014 linked here:

https://www.skrco.com/what-the-affordable-care-act-means-for-reimbursement-type-plans/

Transition Relief for Small Employer Reimbursement Plans

Notice 2015-17 states that employer payment plans, (plans that pay directly for or reimburse employees in part or full for health insurance) are considered group health plans that are not in compliance with the Affordable Care Act. However, the Notice does provide transition relief to small employers – those who are not Applicable Large Employers, meaning that they have less than 50 full-time or full-time equivalent employees. Small employers have until June 30, 2015 to transition their plan to one in compliance with the Affordable Care Act or be subject to excise tax under Internal Revenue Code §4980D. The excise tax is equal to $100 per day, per employee, or $36,500 per participant, per year.  

The transition relief applies to:

1.Employer payment plans, as described in Notice 2013-54 (http://www.irs.gov/pub/irs-drop/n-13-54.pdf);

2.S Corporation healthcare arrangements for 2-percent shareholder-employees;

3.Medicare premium reimbursement arrangements;

4.TRICARE-related health reimbursement arrangements (HRAs).

S Corporation Guidance for 2% Shareholder-employees

Notice 2015-17 provides that the IRS is still contemplating publication of additional guidance on the application of market reforms to a 2-percent shareholder-employee healthcare arrangement. The good news for taxpayers is that until this guidance is issued, and in any event through the end of 2015, these arrangements will not be subject to the excise tax under Internal Revenue Code §4980D. In addition, S corporations with a 2-percent shareholder-employee healthcare arrangement will not be required to file Form 8928. Keep in mind that this relief does not apply to S corporation employees who are not 2-percent shareholders.

As discussed in the December article, the market reforms do not apply to a group health plan with less than two participants. For this reason, a plan covering only a single S corporation employee is not subject to the market reforms or the excise tax.

Medicare Reimbursements

Arrangements that reimburse employees for Medicare Part B or Part D premiums are considered employer payment plans under IRS Notice 2013-54. Notice 2015-17 discusses that when an employer reimburses the cost of Medicare premiums and integrates this with another group health plan offered by the employer, then this is permissible under the market reforms.

 However, this is permissible only if:

1.The employer offers a group health plan (other than the Medicare reimbursement arrangement) to the employee that does not consist solely of excepted benefits and offers coverage providing minimum value;

2.The employee participating in the Medicare reimbursement arrangement is actually enrolled in Medicare Parts A and B;

3.The Medicare reimbursement arrangement is available only to employees who are enrolled in Medicare Part A and Part B or Part D;

4.The Medicare reimbursement arrangement is limited to reimbursement of Medicare Part B or Part D premiums and excepted benefits, including Medicare premiums.

Employee Reimbursement

Notice 2015-17 confirms the argument that an employer may increase an employee’s taxable compensation, not conditioned on the purchase of health insurance, without creating an employer payment plan.  Because this type of arrangement will not be considered a group health plan, it is not subject to the market reform provisions.

Unfortunately, the IRS has clarified that after-tax employer payment plans are, in fact, subject to excise tax under Code §4980D. An arrangement where an employer pays for or reimburses an employee for the cost of health insurance is subject to the market reform provisions of the Affordable Care Act without regard to whether the employer treats the money as pre-tax or post-tax to the employee.

Conclusions

The market reform provisions of the Affordable Care Act are continuously updating and taking shape as more guidance is received on the application of these rules from the IRS. Notice 2015-17 contains some important clarification on the employer reimbursement arrangements as well as transition relief through June 30, 2015 for some small employer plans. We will continue to update you as new information and guidance becomes available.

Manage and Improve Cash Flow in Your Professional Practice

• Changes and uncertainty in reimbursement
• Increased difficulties in accounts receivable collection as financial responsibility shifts to patients through high-deductible health plans
• Consolidation of payers creating stronger rate negotiators
• Increased complexities in coding and reimbursement rules

Recommendations to maintain healthy cash flow:

1. Train your staff. Train your staff to be confident and proficient in the accounts receivable collection process. Explain to them how the billing and collection process affects the bottom line of the practice and the practice’s ability to give pay raises and bonuses. Give them the tools they need, including up to date computer equipment, to do their job well.
2. Verify eligibility early and often. Collect insurance information and verify and update patient information at each patient visit. If the patient’s insurance and other information is not correct in your records, at best, payment will be delayed and at worst, payment will be denied. Because of the grace period included in the Affordable Care Act, it’s important to check eligibility at the time the patient’s appointment is made and again one to three days before the appointment.  
3. Collect co-pays, deductibles and prior balances due at the time of service. Due to rising costs, employers have increased deductibles and co-pays for employee medical and dental insurance plans. As a result, a critical step in maintaining/improving cash flow is to collect co-pays, deductibles and prior balances at the time of service. Let your patients know at the time they make an appointment that deductibles, co-pays and prior balances must be paid at the time of service. Verify insurance coverage prior to the appointment to allow the practice to accurately communicate the practice’s expectations to the patient for payment prior to the appointment.
4. Monitor rejected claims from the clearinghouse. This allows the practice to correct claims before it reaches the third party payer, allowing for quicker payment of the claim.
5. Reduce claim denial rates by managing denials. Monitor denials to determine trends so that methods of reducing denials can be developed by the practice.
6. Strengthen internal controls. Check our earlier post “6 Internal Controls Your Medical Practice Needs Right Now” to prevent cash leakage and fraud.
7. Speed up the deposit of cash to your bank. Utilize remote deposit services which enable a practice to deposit checks into a bank account from its office by scanning a digital image of a check into a computer and the transmitting the image to the bank.
8. Benchmark your practice’s accounts receivable billing and collection process. Compare your aging schedule, net collection percentage and days sales in accounts receivable with those or your peers by using surveys from MGMA, the AMA or other organizations.
9. Review practice expenses. Benchmark your largest expenses for staff and office space with those of your peers. Look for other expenses that would be easy to reduce. Remember that a dollar saved in expense will result in a dollar increase in the bottom line and cash flow. Conversely, a dollar of additional revenue will not result in a dollar increase in the bottom line and cash flow because of variable costs associated with the production of the income.
10. Plan for cash flow disruptions. Every practice experiences a disruption in cash flow from time to time. A doctor goes on maternity leave or takes a leave of absence, for example. Or perhaps you know from experience that next year’s conversion to ICD-10 will entail additional administrative time and payment delays. Cash flow modeling can indicate when and to what degree you can expect a cash flow crunch. This advance warning enables you to take proactive steps to smooth out rough patches in cash flow, such as taking out a short-term line of credit.

For taxpayers there is an important distinction between what the IRS considers a hobby and what is considered a business. Internal Revenue Code Section 162 allows the deduction of ordinary and necessary business expenses if they result from a trade or business. On the other end of the spectrum, Code Section 183 limits the deductions for taxpayers related to activities not engaged in for profit. The expenses may only be deducted to the extent of gross income from the Section 183 activity.

Determination of Business or Hobby

Generally a business is entered into for profit. In order to be characterized as a business, there must be intent to make a profit. A hobby may be entered into for recreation, not to make a profit. The IRS has provided nine factors to help determine if a business is operated for a profit:

• Whether the activity is carried on in a businesslike manner.
• Whether the time and effort put into the activity indicate that the intent is to make a profit.
• Whether the taxpayer depends on the income from the activity to support his/her livelihood.
• Whether losses from the activity are due to circumstances beyond control (or are normal in the startup phase for that type of business).
• Whether methods of operation are changed in an attempt to improve profitability.
• Whether the taxpayer or the taxpayer’s advisors have the knowledge necessary to carry on the activity as a successful business.
• Whether the taxpayer was able to make a profit in similar activities in the past.
• Whether the activity makes a profit in some years and how much profit it makes.
• Whether the activity is expected to make a future profit from the appreciation of the assets used in the activity.

In addition to the nine factors listed above, the IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five years, including the current year. (An exception would be for activities that consist primarily of breeding, showing, training or racing horses, the IRS looks for a profit in at least two of the last seven years.)

The taxpayer has the burden of proof related to proving the required profit motive. A court will weigh all the facts and circumstances, with greater weight given to objective facts than to the taxpayer’s mere statement of intent.

Limits on Deductions for a Hobby

Deductions from hobby activities are limited to the gross income from that activity. If an overall loss occurs for a hobby activity during a tax year, this loss cannot be used to offset other types of income.

The deductions for hobby activities must be claimed as itemized deductions on Schedule A of Form 1040. Therefore, a taxpayer must itemize deductions to deduct any expenses related to the hobby activities. They must be taken in the following order and only to the extent stated:

1.  Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes. These may be taken in full. They should be listed on the correct lines on Schedule A.

2.  Deductions that do not result in an adjustment to basis, such as advertising, insurance and wages. These may be deducted to the extent gross income for the activity is more than the deductions from the first category.

3.  Deductions that reduce the basis of property, such a depreciation and amortization. These are taken last and only to the extent that gross income for the activity is more than the deductions taken in the first two categories.

Deductions in the second and third category must be claimed as miscellaneous deductions on Schedule A. That makes them subject to the 2% of adjusted gross income (“AGI”) limit. What this means is that in addition to the limits already discussed, the deductions must also be greater than 2% of a taxpayer’s AGI before any deduction can be claimed.

The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

Conclusion

Hobbies do not receive favorable tax treatment by the IRS, so it is important to determine if an activity will be deemed a business or a hobby for income tax purposes. To be a business, the activity must be carried on with the intent of making a profit. An activity that is not a business will have limits on the amount of deductions it can take, and any losses from the activity cannot be used to offset other types of income. 

Internal Revenue Code Section 1031 exchanges have been very popular with taxpayers for many years. This Code section allows taxpayers to defer recognition of gain on the disposition of assets by participating in a like-kind exchange (“LKE”) transaction. There are several rules that a transaction must meet in order to qualify as an LKE. This article covers the basic requirements that must be met in order to defer recognition of gain on disposal of assets until a later date. 

The Basics of Section 1031 Exchanges

The first hurdle for an exchange of property to qualify as an LKE is that it must involve qualifying property. Qualifying property includes property used in a trade or business and property held for investment. Property used for personal purposes, stocks, bonds, notes, inventories , and partnership interests do not qualify for a Section 1031 exchange.

In addition to the requirement that the transaction must involve qualifying property, it must also involve like-kind property. Like-kind properties are of the same nature or character, even if they differ in grade or quality. Exchanging real property for real property would qualify as an exchange of like-kind properties; however, exchanging real property for tangible personal property would not qualify as an exchange of like-kind properties. Depreciable tangible personal property needs to be either like-kind or like-class to qualify for LKE treatment. To be considered like-class properties, the assets must be within the same General Asset Class or Product Class.

The basis of the property received in an LKE transaction is generally the same as the adjusted basis of the property given up, however, see the discussion below for partially nontaxable transactions.

Deferred Exchanges

A deferred exchange involves an exchange of like-kind assets that is completed over a period of time. Deferred exchanges are more complex, and additional requirements apply. There are time limits to meet in order for a deferred exchange to qualify as a Section 1031 exchange. The first time limit provides a taxpayer 45 days from the date the relinquished property is sold to identify potential replacement properties. The identification must be in writing, signed by the seller, and delivered to a person involved in the exchange (for example, the seller of the replacement property or a qualified intermediary). The second time limit requires that the replacement property must be received and the exchange completed no later than 180 days after the sale of the relinquished property or the due date (with extensions) of the income tax return for the year in which the relinquished property was sold, whichever is earlier. It is important to note that the replacement property will not be treated as like-kind property unless these identification and the receipt requirements are met.

Additionally, if the transferor actually or constructively receives money or unlike property in full consideration for the property transferred prior to the receipt of replacement property, the transaction is treated as a sale rather than a deferred exchange. Using a qualified intermediary (“QI”) can serve as a safe harbor against actual or constructive receipt.

A qualified intermediary is a party who enters into a written exchange agreement with the taxpayer. The written exchange agreement requires that the QI:

1. Acquires the relinquished property from the taxpayer,

2. Transfers the relinquished property,

3. Acquires the replacement property, and

4. Transfers the replacement property to the taxpayer.

The written exchange agreement must expressly limit the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefits of money or unlike property held by the QI before the end of the exchange period.

Beware: Some Exchanges are Only Partially Nontaxable

If money or unlike property, referred to as boot, is received in addition to the like-kind property and a gain is realized on the transaction, the exchange will be considered only partially nontaxable. Gain must be recognized equal to the lesser of the boot received or realized gain. If a loss is realized on the transaction, no loss can be recognized.

In calculating the realized gain, any liabilities assumed by the other party must be added to the amount realized. Any liabilities of the other party assumed by the taxpayer should be subtracted from the amount realized.

Example: A taxpayer exchanges business property with an adjusted basis of $32,000 for like-kind property. The property was subject to a $4,000 mortgage. The fair market value (“FMV”) of like-kind property received was $36,000. In addition, the taxpayer received $1,500 in cash and paid $500 in exchange expenses. The other party agreed to pay off the mortgage. How much gain should be recognized on the transaction?

The recognized gain on the transaction is $5,000.

The basis of the property that a taxpayer receives (other than money) in a partially nontaxable exchange is the total adjusted basis of the property given up, with some adjustments. Add to the basis any additional costs incurred and any gain recognized on the exchange. Subtract from the basis any money received and any loss recognized on the exchange. The basis is allocated first to the unlike property, other than money, up to its FMV on the date of the exchange. The remainder is the basis of the like-kind property.

LKE Transactions Involving Related Parties

There are special rules for LKE transactions between related persons. Under the rules, if either party disposes of the property within two years after the exchange, the exchange is disqualified from LKE treatment. In that event, the gain or loss on the original exchange must be recognized as of the date of the later disposition.

Related persons include members of the taxpayer’s family, a corporation owned greater than 50% by the taxpayer, and a partnership owned greater than 50% by the taxpayer. The two-year holding period begins on the date of last transfer of property that was part of the LKE transaction.

Conclusion

As discussed in this article, it is difficult to comply with the rules of Section 1031 related to a like-kind exchange transaction. Although there are many restrictions in place to meet the requirements of a like-kind exchange transaction, the benefits of deferring gain on an exchange can be great for taxpayers. For that reason, these transactions have been very popular for a number of years.

Medical Reimbursement Plan and HRA Basics

New ACA Rules

Penalties

More than 2% S Corporation Shareholder/Employees

Exceptions for Some Plans

Conclusion

The Individual Shared Responsibility Provisions

Minimum Essential Coverage

Health Insurance Premium Assistance Refundable Credit

Exemptions from Requirement for Health Coverage

Payments Required for Noncompliance with the Individual Shared Responsibility Provisions

New Tax Forms and Reporting Required for Individual Shared Responsibility Provisions

Conclusion

Many businesses will be affected by the Employer Shared Responsibility provisions of the Affordable Care Act (ACA). Beginning in January 2015, applicable large employers will be subject to these provisions and need to be in compliance to avoid making payments to the IRS. This article will discuss the changes that will come about for businesses due to the Employer Shared Responsibility provisions attached to the ACA including new tax rules for the 2015 tax year and beyond.

The Employer Shared Responsibility Provisions

Are You an Applicable Large Employer?

Requirements for Employer to Comply with ACA Provisions

Play or Pay – What is the Cost of Noncompliance?

New Tax Forms and Reporting Required for Employer Shared Responsibility Provisions

Conclusion