AFFORDABLE CARE ACT: Tax Implications for Employers August 21, 2013 Juliana Reno juliana.reno@kutakrock.com

1. AFFORDABLE CARE ACT:Tax Implications for EmployersAugust 21, 2013 Juliana Renojuliana.reno@kutakrock.com

2. SMALL BUSINESS TAX CREDITEffective Now

3. SMALL BUSINESS TAX CREDIT • Which employers qualify? • All of the following must be true: • Full-time equivalent employees (“FTEs”) ≤ 25 • Average annual wages ≤ $50,000 • Offer insured health coverage • 2014 and later: must be exchange coverage • Contribute ≥ 50% of the cost of employee-only coverage

4. SMALL BUSINESS TAX CREDIT • How to Calculate the Credit: Big Picture • First calculate the maximum credit. • Then reduce appropriately if • FTEs > 10 or • Average wages > $25,000.

5. SMALL BUSINESS TAX CREDIT • Maximum Credit: • Amount of premiums paid by employer multiplied by • Applicable Percentage • 2013 tax-exempt employers—25% • 2013 other employers—35% • 2014+ tax-exempt employers—35% • 2014+ other employers—50% • There is a cap! In effect, the cap means that the employer cannot get a tax credit for buying coverage that is more expensive than the average in the state.

6. SMALL BUSINESS TAX CREDIT • Reductions • If FTEs > 10, multiply the credit by: (FTEs-10)/15 • If average wages > $25,000, multiply the credit by: (average wages-25,000)/25,000

7. SMALL BUSINESS TAX CREDIT • Miscellaneous • Credit can only be claimed in 2 years • Tax-exempt employers apply the credit against payroll tax liabilities • Other employers must reduce the premium deduction by the amount of the credit • Who is the employer? All entities within the controlled group count as a single employer. • Who is an employee? Do not “count” self-employed, sole proprietors, 2% shareholders, 5% owners, and their family members

8. RETIREE DRUG SUBSIDYEffective Now

9. RETIREE DRUG SUBSIDY • Applicable if employer offers a prescription drug plan to Medicare-eligible retirees • The employer may deduct its costs • The employer may be entitled to a subsidy • Interplay of deduction and subsidy: • Before 2013, employer could disregard the subsidy when calculating its deduction • In 2013 and later, employer must reduce its deduction by the subsidy

10. ADDITIONAL MEDICARE TAXEffective Now

11. ADDITIONAL MEDICARE TAX • Employer must withhold an additional 0.9% on wages over $200,000 • Employer is not required to match this payment (this is different than “regular” Medicare taxes) • What the employer must withhold is not exactly the same as what the employee will owe • Employee who anticipates the need to pay the additional tax may request early/additional withholding

12. FORM W-2 REPORTINGEffective Now

13. FORM W-2 • Which employers are affected? • Employers who issued 250 or more W-2s in the prior year • What must be reported? • Total cost of coverage (employer and employee premiums) for most employer-sponsored health plans, BUT NOT FOR ** stand-alone limited-scope dental or vision coverage ** coverage only for a specified disease or illness ** hospital indemnity or other fixed indemnity insurance ** coverage for long-term care ** accident-only coverage, disability coverage, or any combination of these ** coverage issued as a supplement to liability insurance ** liability insurance, including general liability insurance and automobile liability insurance ** workers’ compensation or similar insurance **

14. FLEXIBLE SPENDING ACCOUNTSEffective Now

15. FLEXIBLE SPENDING ACCOUNTS • Employee contribution limit: $2,500 • No longer permitted to reimburse OTC drugs unless • An appropriate medical professional has issued a prescription; or • The drug is insulin.

16. PCORI FEESEffective Now

17. PCORI FEES • What are those? • A way to fund the Patient-Centered Outcomes Research Institute (PCORI) • PCORI  better outcomes  lower medical costs • Scheduled to last 6 years • Who is responsible for compliance? • For fully-insured plans—insurance company • For self-funded plans—employer

18. PCORI FEES • How to comply? • Calculate the fee • Applicable Dollar Amount: $1 for PYE between October 1, 2012, and September 30, 2013 multiplied by • Average # of Covered Lives: different methods • Complete IRS Form 720 • Pay & Report • Due by July 31 of the calendar year after the PYE • First due date was July 31, 2013

19. COVERAGE MANDATESEffective Now & Later

20. COVERAGE MANDATES • What are those? • Examples include but are not limited to: • No lifetime limits on essential health benefits • No pre-existing condition exclusions • If the plan covers children, must cover to age 26 • No rescissions except in the case of fraud • Cover preventive care at 100% • Cover ER equally at in-network and non-network hospitals

21. COVERAGE MANDATES • Who is responsible for compliance? • For fully-insured plans—insurance company • For self-funded plans—employer • What is the penalty for non-compliance? • Excise Tax • $100 per affected individual per day • Not deductible • Employer must self-report

22. TRANSITIONAL REINSURANCE FEESFirst Reports November 15, 2014

23. TRANSITIONAL REINSURANCE FEES • What are those? • A way to help insurance companies cover the claims of very sick people. • Scheduled to last 3 years • Who is responsible for compliance? • For fully-insured plans—insurance company • For self-funded plans—employer

24. TRANSITIONAL REINSURANCE FEES • How to comply? • Report average # of covered lives to HHS by November 15, 2014 • HHS to issue invoice within 30 days • Applicable Dollar Amount: $63 for 2014 multiplied by • Average # of Covered Lives • Payment due within 30 days thereafter

25. EMPLOYER MANDATEDelayed Until January 1, 2015

26. EMPLOYER MANDATE (PAY OR PLAY) • Premiums paid by an employer for an employer-sponsored plan • Deductible as ordinary and necessary business expenses • Not subject to payroll taxes (because not taxable income to the employee) • Penalties under Code § 4980H • Not deductible

27. EXAMPLE • Company has 100 FT employees • Company offers coverage • Employee-only coverage costs $6,000 • Company pays 50%, or $3,000 • Status Quo • $210,000 premiums (70% uptake) • Deductible • Tax savings (35%) = $73,500 • Net = $210,000 - $73,500 = $136,500 • BOTTOM LINE W/O TAX IMPACT = $210,000 • BOTTOM LINE W/TAX IMPACT = $136,500

28. EXAMPLE • Option #1: Continue Status Quo • $150,000 premium (50% uptake) • Deductible • Tax savings (35%) = $52,5000 • Net = $150,000 - $52,500 = $97,500 • $60,000 penalty (20 employees) • Not deductible • BOTTOM LINE W/O TAX IMPACT = $210,000 ($150,000 + $60,000) • BOTTOM LINE W/TAX IMPACT = $157,500 ($97,500 + $60,000)

29. EXAMPLE • Option #2: Stop Offering Coverage • $0 premium • $140,000 penalty ($2000 x (100-30)) • Not deductible • BOTTOM LINE W/O TAX IMPACT = $140,000 • BOTTOM LINE W/TAX IMPACT = $140,000

30. THE “CADILLAC” TAXEffective 2018

31. CADILLAC TAX • Employee will owe a 40% tax on the amount of the premium that is above the threshold • Threshold (subject to indexing): • $10,200/individual and $27,500/family • Threshold is higher for high-risk professions

32. NONDISCRIMINATIONEffective Date TBA

33. NONDISCRIMINATION • Long-Standing Rule: Self-funded plans must not discriminate in favor of highly compensated individuals with respect to eligibility or benefits. • Health Care Reform: “Similar rules” shall apply to fully-insured plans • Grandfathered plans are exempt • IRS has non-enforcement policy in place

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