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Agenda

Tax Update for Healthcare Financial Executives Carolinas HealthCare System November 1, 2013 Michele Melchior , Director – Health Care Tax Cindy Brown , Director – Compensation and Benefits. Agenda. IRS Priority Guidance Plan: 2013 / 2014 IRS College and University Report

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Agenda

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  1. Tax Update for Healthcare Financial ExecutivesCarolinas HealthCare SystemNovember 1, 2013Michele Melchior, Director – Health Care TaxCindy Brown, Director – Compensation and Benefits

  2. Agenda • IRS Priority Guidance Plan: 2013 / 2014 • IRS College and University Report • ACA: Premium tax credit – what providers need to know • 501(r) – Additional requirements for hospitals: Update • Health Care Reform: Update on Changes • Health Care Reform: New Taxes and Fees • Individual Mandate • Employer Mandate • New Reporting Requirements • Same-Sex Marriage and Federal Tax Law • Questions

  3. IRS Priority Guidance Plan: 2013 / 2014 • Executive Compensation, Employment Taxes • Health Care and Benefits • Regulations (ACA requirements): • shared responsibility employer health coverage • annual fee on health insurance providers • minimum value of eligible employer-sponsored coverage and other provisions relating to health insurance premium tax credit • reporting by Health Insurance Exchanges • 501(r) – additional requirements for hospitals

  4. IRS Priority Guidance Plan: 2013 / 2014 • Other Guidance: • 501(c)(4) organizations: measurement of 'primary' activity of social welfare, including political campaign intervention • additional guidance for supporting organizations • additional guidance for donor advised funds • DOMA (Defense of Marriage Act) • charitable contributions / donee substantiation

  5. College and university compliance project Highlights and insights Background: • IRS launched project in October 2008 • 400 randomly selected institutions received questionnaires • Focused on unrelated business income & executive comp • 34 selected for IRS examinations • Final report issued April 2013

  6. College and university compliance project Highlights and insights Significant highlights: Why is this important? • Findings: • underreporting of unrelated business income, • flaws in comparability data used to establish reasonable compensation • employment tax and retirement plan reporting concerns

  7. College and university compliance project Highlights and insights “Because these issues may well be present elsewhere across the tax-exempt sector, all exempt organizations need to be aware of the importance of accurately reporting unrelated business income and providing appropriate executive compensation.” - Lois Lerner, Director, Exempt Organizations division.

  8. College and university compliance project Highlights and insights Highlights - results • Increases to UBTI for 90% of institutions examined • totaling $90 million • Over 180 changes to amounts of UBTI reported on 990-T • Disallowance of $170 million in losses and NOLs (net operating loss) carryovers • could amount to more than $60 million assessed taxes

  9. College and university compliance project Highlights and insights Highlights – reasons for increases to UBTI • IRS disallowed expenses • Lack of profit motive ($150 million NOLs disallowed) • Improper expense allocation • Errors in computation or substantiation of NOLs ($19 mm) • Reclassification of exempt activities as unrelated ($4 mm)

  10. College and university compliance project Highlights and insights Highlights – fail to meet rebuttable presumption standard • Comparable institutions were not similarly situated for • location • endowment size • revenues • total net assets • number of students • selectivity

  11. College and university compliance project Highlights and insights Highlights – fail to meet rebuttable presumption standard • Compensation study did not document sufficiently selection criteria or explain why they were comparable • Compensation study did not specify whether amounts reported were salary only or if they included other types of compensation (e.g. fringe benefits and deferred compensation) Remember: Just because it's not taxable, doesn't mean it isn't considered compensation!

  12. College and university compliance project Highlights and insights Highlights – compensation-related wage adjustments • fringe benefits • personal use of autos • housing • social clubs and • travel • misclassification of employees as independent contractors • withholdings on nonresident aliens • graduate tuition waivers and reimbursements

  13. College and universities compliance project Highlights and insights Highlights – deferred compensation adjustments • nonqualified deferred compensation – with no substantial risk of forfeiture • excess loans from 403(b) plans – deemed distributions • excess 403(b) plan deferrals • excess 403(b) plan additions

  14. College and universities compliance project Highlights and insights Insights • Institutions selected for exam not a representative sample • Most of the adjustments were to NOLs • 20% of those examined had outside tax advice on UBI • Personal use of autos, housing, social clubs and travel - were documented in employment agreements, but not taxed correctly • did not result in intermediate sanctions • resulted in increases in employment tax • resulted in increases in taxable wages

  15. Rebuttable Presumption of Reasonableness:On the Form 990 • Governance- Policies (Part VI) • Did the process for determining compensation of the following persons include a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision? • CEO, Executive Director, President (top management official) and Other Officers, Key Employees • The process must also be described in writing

  16. Rebuttable Presumption of Reasonableness:On the Form 990 • Schedule J: Indicate which of the following the organization used to establish compensation for the CEO, Exec. Dir., President(top management official): • Compensation Committee • Independent Compensation Consultant • Form 990 of other Organizations • Written employment contract • Compensation survey or study • Approval by the board of directors or compensation committee

  17. Form 990: Schedule J Questions about compensation practices • Check the boxes if you provide: • first class or charter travel, companion travel, tax gross-ups, discretionary spending account, or • personal residence, club dues or fees, or personal services • Did you follow a written policyfor the above items? • Did you require substantiationprior to reimbursing for or allowing the above items for Officers, Directors, Trustees and CEO/ED?  “Discretionary spending account” – ‘an account or sum of money under the control of a listed person for which he/she is not accountable to the organization under an accountable plan, whether or not actually used for any personal expenses.’

  18. Individual MandatePenalty for No Coverage Beginning in 2014, individuals must acquire “minimum essential” health care coverage or pay a penalty. Individuals can choose to obtain coverage offered by their employer, or may purchase coverage from an insurance carrier or state’s insurance marketplace. The individual's penalty for failing to acquire minimum essential health care coverage is the greater of:

  19. ACA: Premium tax credit – what providers need to know • Premium tax credit – who is eligible: • Household income = 100% - 400% of FPL (federal poverty line) • Each member of the family is tested separately for eligibility • Adult children up to age 26 are included in 'household' income

  20. ACA: Premium tax credit – what providers need to know • Premium tax credit – who is not eligible: • Enrolled in or eligible for a qualifying employer-sponsored plan (if meets affordability / minimum value) • Eligible for other government-sponsored coverage (Medicare, Medicaid) • Medicaid eligibility will vary from state to state based on each state's participation in Medicaid expansion (Note: Certain individuals not required to obtain coverage under Individual mandate: religious conscience, incarceration, hardship, no US income tax filing required, coverage not affordable, member of Indian tribe, not lawfully present in US, health care sharing ministry, short coverage gap < 3 mos.)

  21. ACA: Premium tax credit – what providers need to know • Premium tax credit – how does it work: • Individuals self-report projected annual income when applying for credit • Option: Request advance monthly payments be paid directly to insurance company each month, or receive refundable credit with Form 1040 filed following year • Individual pays remaining portion of monthly premium directly to insurance company (monthly) • Several forms sent to individuals will assist in reconciling eligibility and advance payments • Result: Could receive additional refundable credit or may owe back part of all of credit as additional tax

  22. ACA: Premium tax credit – what providers need to know What providers need to know: • Many hospitals desire to help financially needy patients by providing assistance with the non-covered portion of the premium • Concerns: Anti-Kickback Statute problems? Private benefit problems? (See AHA October 10, 2013 advisory) • Grace period rule (90 days): Subsidized insurance coverage may be terminated retroactively for non-payment – Providers will bear the cost!

  23. ACA: Premium tax credit – what providers need to know What providers need to know: • Certified Application Assistors • certification required to assist those applying for insurance due to confidential nature of data • is it permitted under state law? • Enrollment only permitted during Open Enrollment season or other qualifying changes (similar to normal employee enrollment) • cannot enroll simply because patient arrives at the ER uninsured

  24. Internal Revenue Code §501(r) – Additional Requirements for Certain Hospitals To maintain tax-exempt status, hospitals must: • Conduct a community health needs assessment (CHNA) every 3 years • Establish financial assistance and emergency medical care policies • Limit amount changed for certain care provided to those who qualify for financial assistance • Avoid engaging in extraordinary collection actions before making reasonable efforts to determine eligibility for financial assistance

  25. Internal Revenue Code §501(r) – Additional Requirements for Certain HospitalsEffective Dates for hospitals CHNA and Implementation Strategy: • Effective for years beginning after 3/23/2012 • Every three years thereafter • Proposed Regulations issued April 2013 Financial Assistance Policies and Other requirements: • Effective 10/1/2010 • Proposed Regulations issued June 2012 Final Regulations: Expected late 2012 / early 2013

  26. IRC §501(r) – Guidance Issued Community Health Needs Assessment (CHNA) • Notice 2011-52 Issued July 2011 • May be relied upon only until October 5, 2013 • Watch out on completion timing! • Proposed Regulations Issued April 2013 • Current guidance – can be relied upon now Financial Assistance & and Other Policies • Proposed Regulations Issued June 2012 • Current guidance – can be relied upon now

  27. Internal Revenue Code §501(r) and ACA: Financial Assistance Policies • 501(r): Written policy must include 'eligibility criteria for financial assistance, and whether such assistance includes free or discounted care.' • criteria set at discretion of tax-exempt hospital • Existing policies: • Currently many overlap with eligibility for premium tax credit (100% - 400% FPG) • Medicaid Gap

  28. Internal Revenue Code §501(r) and ACA: Financial Assistance Policies Updating your policies? • Considerations: • some individuals will remain uninsured (undocumented persons, failed to enroll, terminated coverage, not affordable at family level, etc.) • coverage under exchange is prospective (not retroactive) • impact on Form 990, Schedule H – project it first! • Are you exchanging Charity Care for Bad Debt? • impact to your mission • Many hospitals are in a 'wait and see mode'

  29. Internal Revenue Code §501(r) and ACA: Financial Assistance Policies • Review policies NOW to ensure they satisfy the express requirements of Section 501(r) (which are currently in effect) • Be prepared to make additional final changes to your policies once final regulations are issued • Expectation is that final regulations will generally track the proposed regulations • Not expecting lengthy transition relief • Be mindful of Schedule H questions (expect it to change) • Educate boards and leadership – awareness • Involve professional advisors to ensure all regulatory issues are addressed

  30. Internal Revenue Code §501(r): Community Health Needs Assessment (CHNA) • Proposed Regulations issued April 2013: • Generally consistent with Notice 2011-52 • Somewhat more flexible (opportunities for joint reports) • Identify 'significant' health needs (instead of 'all') • Penalties for non-compliance • $50,000 excise tax • Facility-level tax (Form 990T) • Opportunity for correction / disclosure • Loss of tax-exemption (willful or egregious failure to comply)

  31. Internal Revenue Code §501(r): Community Health Needs Assessment (CHNA) Common issues: • Wide disparity in types of CHNA reports (25 pages to 250 pages) – bigger is not necessarily better, requirements must be covered • Checklist of requirements: be prepared for IRS review – assess your compliance • Public Document: Posted on each facility website • Does it align with hospital's strategy and direction? • Board authorization required – ensure the board understands the conclusions System-wide approach – use same template / organization • Drives consistency • Easier to analyze • Leadership to ensure IRS compliance

  32. Internal Revenue Code §501(r): Implementation Strategy • Proposed Regulations permit a one time transition delay – due 4 1/2 months after year end (i.e. first due date of Form 990) • hereafter, will be due with CHNA at year end • Board approval required • Attached to Form 990, or • post to website with URL link on Form 990 • Progress updates will be required annually on Form 990

  33. Internal Revenue Code §501(r): Implementation Strategy Tips for System-wide approach • Think strategically as a 'system' to choose broad focus areas that work with strategic plan • facility can customize based on specific needs • Think about goals that have measurable results • Facility level teams, system level leadership • Timelines to finalize, provide education, get board approval • Ongoing process: Quarterly or bi-annual updates with teams, leadership, board

  34. Internal Revenue Code §501(r)What's next? New Regulations are 'Proposed' • Not yet 'effective', but can be relied upon • The law is in effect now! Form 990: Schedule H • Not updated and not consistent with proposed regulations • expect changes • Make best reasonable effort to comply with 501(r)

  35. Health Care ReformDelayed Enforcement of Penalties What does this delay mean? • Employers will not pay any penalties in 2014 for non-compliance with the "employer mandate" • The delay also applies to certain reporting requirements What does the delay not impact? • It does not remove the “employer mandate” • It does not change the criteria for determining full-time employee status, affordable coverage and “minimum value” • It does not impact the “individual mandate” for all individuals to have health insurance by 2014 • It does not delay the implementation of the Exchanges

  36. 2014 HEALTH CARE PLAN REQUIRMENTS Second group of coverage mandates for group health plans effective for plan years beginning on or after January 1, 2014:

  37. Health Care Reform New Taxes and Fees

  38. Coverage Offered to Less than 95% of Full-Time Employees During the Month $166.66 Per Month ($2,000 Per Year) Per Full-Time Employee (Minus 30 Employees**) Employer Mandate Beginning in 2015, employers with 50 or more full-time and full-time equivalent employees (taking into account related employers) may be subject to a monthly excise tax OR Affordability Employee Premium for Self-Only Coverage Is 9.5% or Less of Employee’s Income Coverage Offered to 95% or More of Full-Time Employees During the Month But Does Not Satisfy Affordability and Minimum Value Requirements $250 Per Month ($3,000 Per Year) Per Full-Time Employee Who Purchases Insurance Through an Exchange and Receives a Premium Tax Credit or Subsidy Minimum Value Plan Covers At Least 60% of Plan Costs * These 2014 amounts are annualized and will be indexed for inflation. ** For control groups, the 30 is allocated among the members of the controlled group.

  39. Employer Mandate Exposure to Significant Excise Tax Who? Applies to employers with 50 or more full-time and full-time equivalent employees What? An excise tax is assessed for not offering coverage to 95% or more of full-time employees even if most employees are covered Impact to Employers?Employers that slip below the 95% threshold are assessed the full tax ($2,000 [indexed] x number of full-time employees [minus 30 employees])

  40. Employer MandateNew Steps to Determine Eligibility • Each month, an employer must • Identify its full-time employees (30 or more average hours of service per week) • Determine who was offered coverage • The employer must count hours for each employee • Hourly employees: Count actual hours • Salaried employees: • Count actual hours, or • Use hours-equivalency rules The IRS rules define who is and who is not a full-time employee.

  41. Employer MandateNew Steps to Determine Eligibility (continued) • Coverage may be expanded to new categories of employees (A full-time employee is defined at 30 or more hours) • Must count all common law employees (Authority to direct and control the manner in which services are performed (actual control not required)) • Are these individuals common law employees? • Independent contractors • Staffing agency individuals • Leasing company individuals • Professional employer organization individuals

  42. Employer MandateNew Steps to Determine Eligibility (continued) • Employee may be classified as part-time, but employee actually works an average of 30 or more hours per week • An employer may not offer coverage to certain categories of employees. (These employees must be counted in the 95% threshold test after the first 3 months of employment, if weekly hours of service average 30 or more.) • Temporary employees • Seasonal employees • Per diem employees • Commission only salesperson • Independent contractors

  43. Employer MandateCommon Law Employees Employers may be tempted to substitute independent contractors to: • Avoid the cost of healthcare; or • Avoid the penalties that would apply for failing to offer coverage to full-time employees. Under health care reform, an “employee” means a common-law employee. Employers, who misclassify workers, may be exposed to payment of past employment taxes, as well as, health care reform penalties. The IRS is increasing its focus on worker reclassification.

  44. Employer MandateCommon Law Employees (continued) For worker classification, the IRS has adopted "Three Categories of Evidence". Behavioral Control – Addresses the “right of direction and control” and how the worker performs the tasks assigned. This includes instructions, training, oral or written reports, as well as, furnishing of tools and materials. Financial Control – Addresses the “business aspects” of the worker’s activities. This includes the right to direct or control the way the worker conducts his/her business activities from a financial standpoint. Relationship of the Parties – Addresses the facts which illustrate how the parties perceive their relationship. This includes the existence of a written contract, whether benefits are provided and the right to discharge/terminate.

  45. Employer MandateTake Action Now • The IRS is establishing an information-gathering process. It will assess the tax proactively without self-reporting by employers • Assess the risk of penalties forfalling below the 95% threshold as well as not meeting minimum value and affordability limits • Discuss the details of the rules and how they apply to the organization, and identify changes that may be necessary to avoid the excise taxes • Follow-through with proper implementation and establish procedures

  46. Employer MandateTake Action Now (continued)Examples of Complex Rules in the Regulations

  47. New Proposed Reporting Requirements On September 5, the IRS released new proposed regulations on the annual reporting requirements of IRC sections 6056 and 6055. Provides two sets of rules: • IRC sections 6056 - Reporting for "large employer" who must comply with the employer mandate. • IRC sections 6055 - Reporting for providers of minimum essential coverage (insurance carriers, employers, etc.) including the type and period of coverage and furnish statements to employees.

  48. New Proposed Reporting Requirements (continued) What information is reported for IRC section 6056 • Employer's name, address, EIN and contact phone number • A certification as to whether the employer offers coverage to its full-time employees (and dependents) under an employer plan, by calendar month • The number of full-time employees for each month during the year • The months during the calendar year that coverage was available • The monthly premium for the lowest cost coverage option • The name, address and social security number of each full-time employee during the calendar year and months during which the employee was covered under the plan

  49. New Proposed Reporting Requirements (continued) What information is reported on the employee statements? • A large employer must furnish an statement to each of its full-time employees that includes name, address, and EIN of the employer sponsoring plan and the information shown on the 6055 return. When is the due date? • No later than February 28 following the reporting year or March 31, if filed electronically. (First filing will be March 1, 2016 since February 28, 2016 is a Sunday) What is the practical "proposed" impact? • Replacing IRC section 6056 employee statements with Form W-2 reporting. (Other streamline rules were provided.)

  50. DATES TO KNOW #5 Concern of Increased Costs October 1, 2013 – Government Exchanges Open December 15, 2013 – Enroll on Exchange for 1/1/14 health care coverage March 15, 2014 – Must sign up for coverage to avoid individual mandate penalty March 31, 2014 – End Open Enrollment -qualifying event needed to change coverage July 31, 2014 - 2nd installment of PCORI Tax Due December 15, 2014- Reinsurance Fee/Tax Due January 1, 2015 – Employer mandate is effective March 1, 2016 – Employer reporting is required January 1, 2018 - Cadillac Tax is effective

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