The Whitlock Company WHAT HEALTH CARE REFORM MEANS FOR YOUR BUSINESS

The Whitlock Company Definitive Healthcare Update Overview Small employer tax credit W-2 changes Changes to HSA’s 1099 changes Medicare payroll tax Medicare tax on net investment income Employer required health insurance coverage

The Whitlock Company Definitive Healthcare Update SMALL BUSINESS TAX CREDIT Effective 1/1/2010 Incentive for small businesses to provide their employees with group health insurance coverage Businesses with 10 or less full-time-equivalent (FTE) employees – Average annual earnings less than $25,000 a year – Maximum credit of 35% of health insurance costs

The Whitlock Company Definitive Healthcare Update SMALL BUSINESS TAX CREDIT Effective 1/1/2010 Credit phase-out Companies with FTEs between 11 and 25 workers – average annual wages of up to $50,000 – eligible for partial credits

The Whitlock Company Definitive Healthcare Update SMALL BUSINESS TAX CREDIT (cont.) Effective 1/1/2010 TAX EXEMPT EMPLOYERS -Same criteria for FTEs and annual wages -Reduced credit rate of 25% -More guidance to be issued on how to claim the credit

The Whitlock Company Definitive Healthcare Update SMALL BUSINESS TAX CREDIT Effective 1/1/2010 Employer must pay at least 50% of health insurance premiums Credit – Offsets Income tax liability only – Can NOT offset employment taxes (941, etc.) – Will flow through for partnerships and S Corporations to shareholders – Non-refundable – Reduces insurance tax expense deduction

The Whitlock Company Definitive Healthcare Update SMALL BUSINESS TAX CREDIT Effective 1/1/2010 Employer meets the FTE test as long as FTEs are less than 25 (total employees may be more than 25 considering part time individuals) Owner-types are excluded from FTE count: – Owners – Partners/members – > 2% shareholders – Owner’s family or household members

The Whitlock Company Definitive Healthcare Update SMALL BUSINESS TAX CREDIT (cont.) Effective 1/1/2010 Calculation of credit Determine Full Time Equivalents (FTEs) 1.Calculate total hours worked per employee 2.Divide by 2080 to determine FTEs Determine Average Wages 1.Calculate total FICA wages paid to all employees 2.Divide by FTEs

The Whitlock Company Definitive Healthcare Update EXAMPLE #1 (Full credit) Facts: # of Employees Annual Hours/Employee Total Hours Limited to 2,080/employee 52,08010,400 31,0403,120 12,300 2, ,82015,600

The Whitlock Company Definitive Healthcare Update EXAMPLE #1 Answer Calculation: Total Hours15,600 Full-Time Hours (divided by) 2,080 FTE 7.50 FTE Rounded Down 7

The Whitlock Company Definitive Healthcare Update EXAMPLE #1 Answer Facts: Total Wages 150,000 FTE 7 Calculation: Total Wages 150,000 FTE (divided by) 7 Avg Wages 21,429 Avg Wages (Rounded Down to nearest 1000) $21,000

The Whitlock Company Definitive Healthcare Update EXAMPLE #1 Answer FTE 7 Average Annual Wages 21,000 Health Care Premiums – Employer Paid 40,000 Calculation: Health Care Premiums40,000 Allowable Credit Percentage 35% Credit $14,000

The Whitlock Company Definitive Healthcare Update EXAMPLE #2 (Partial Credit) Facts: FTE 12 Average Annual Wages 30,000 Health Care Premiums – Employer Paid 40,000

The Whitlock Company Definitive Healthcare Update EXAMPLE #2 (Partial Credit) Credit Calculation: 40,000 * 35% = 14,000 Credit Reduction for FTE greater than 10: 14,000*((12-10)/15) = 1,866 Credit Reduction for Average Wages greater than $25,000 14,000*((30,000 – 25,000)/25,000) = 2,800 Total Credit Reduction: 1, ,800 4,666 Total 2010 Tax Credit: 14,000 – 4,666 = $9,334

The Whitlock Company Definitive Healthcare Update REPORTING HEALTH CARE BENEFITS ON W2s Effective in 2011, reporting in January 2012 Employers responsible for reporting the value of the health care benefits they provide to employees on their 2011 W2

The Whitlock Company Definitive Healthcare Update REPORTING HEALTH CARE BENEFITS ON W2s Effective in 2011, reporting in January 2012 Reporting requirement does not make the amount taxable to the employee

The Whitlock Company Definitive Healthcare Update REPORTING HEALTH CARE BENEFITS ON W2s Effective in 2011, reporting in January 2012 Update payroll systems effective 1/1/2011 for reporting purposes (discuss with software vendor if applicable) Where do you get the values for the W2? – Health insurance company for fully insured plans – Third party administrators for self-funded plans

The Whitlock Company Definitive Healthcare Update REPORTING HEALTH CARE BENEFITS ON W2s Health plans that are NOT included on W2: – Flexible spending amounts – Specified illness or disease, (i.e. cancer) – Disability insurance – Workers’ compensation

The Whitlock Company Definitive Healthcare Update REPORTING HEALTH CARE BENEFITS ON W2s Possible W2’s for Non-Employees? This issue will be spelled out in later regulations Retirees COBRA participants

The Whitlock Company Definitive Healthcare Update INCREASED VENDOR 1099 REPORTING Effective at 1/1/2012 for January reporting New requirement considered as a “pay for” to provide other tax cuts Joint Committee on Taxation estimates it will raise $17 to $19 billion in additional revenue Will effect every business at this point unless legislation is changed

The Whitlock Company Definitive Healthcare Update INCREASED VENDOR 1099 REPORTING Effective at 1/1/2012 for January reporting PRIOR LAW Payments in excess of $600 Payments to corporations were exempt from reporting requirement Generally issued for services (i.e. contract labor), rent, interest

The Whitlock Company Definitive Healthcare Update INCREASED VENDOR 1099 REPORTING Effective at 1/1/2012 for January reporting NEW LAW Payments in excess of $600 No corporate exemption (All vendors to receive 1099s) Payments for ALL goods, services, and property to be reported

The Whitlock Company Definitive Healthcare Update INCREASED VENDOR 1099 REPORTING Effective at 1/1/2012 for January 2013 reporting Could dramatically increase accounting and reporting costs to all businesses. START PLANNING NOW Example: Small business owner selling collision parts speaking to Senate leaders “I am going to go from preparing four 1099 forms to somewhere over 200.”

The Whitlock Company Definitive Healthcare Update INCREASED VENDOR 1099 REPORTING Effective at 1/1/2012 for January reporting Need to start obtaining taxpayer id numbers for each vendor via Form W-9.

The Whitlock Company Definitive Healthcare Update INCREASED VENDOR 1099 REPORTING Effective at 1/1/2012 for January reporting This process would need to be completed by 1/1/2012 in order for accounting software to capture data. Back-up withholding may be required for any vendor not supplying their federal ID number before payment is made to that vendor.

The Whitlock Company Definitive Healthcare Update INCREASED VENDOR 1099 REPORTING PROPOSED LEGISATION Fully Repeal OR Exempt Companies with fewer than 25 employees and Companies with more than 25 employees raise reporting amount from $600 to $5,000 Credit card purchases to be exempt

The Whitlock Company Definitive Healthcare Update OVER THE COUNTER MEDICATIONS Effective beginning 1/1/2011 Ban on OTC medication reimbursed from: – Flexible spending accounts (FSAs) through a cafeteria plan – Health reimbursement arrangements (HRA) – Health savings accounts (HSA) U nless the physician formally prescribes the OTC medications

The Whitlock Company Definitive Healthcare Update HEALTH SAVINGS ACCOUNTS Effective beginning 1/1/2011 Penalties increase to 20% – for non- medical distributions from Archer MSAs (medical savings accounts) HSAs (health savings accounts)

The Whitlock Company Definitive Healthcare Update MEDICARE PAYROLL TAX Effective in 2013 New tax 0.9% wages – Not matched by employer – 401K (deferred comp) are EXEMPT* – In addition to 1.45% Medicare tax w/hldg Employer must: – Withhold on wages over $200,000 for an employee

The Whitlock Company Definitive Healthcare Update MEDICARE PAYROLL TAX Effective in 2013 Wage threshold amounts : – $200K for single – $250K for married filing jointly – $125K for married filing separately Individuals must: – Compute 0.9% tax on aggregate wages on Form 1040 – Any balance due, pay with 1040 – Consider higher estimated tax payments

The Whitlock Company Definitive Healthcare Update MEDICARE PAYROLL TAX EXAMPLE: Jack has $200k W-2 from XYZ Corporation Sally, his wife, has $210k W-2 from ABC Corporation XYZ withholds no 0.9% tax: $200,000 – 200,000 = no excess, no tax ABC withholds 0.9% tax: ($210,000 – 200,000) = $10,000 excess x.9% = $90 medicare tax withheld cont…

The Whitlock Company Definitive Healthcare Update EXAMPLE: cont… 1040 – Married filing jointly Compute their additional tax: Jack’s W-2$200,000 Sally’s W-2 210,000 Total wages 410,000 Threshold for MFJ 250,000 Taxable portion 160,000 x _ 0.9% Total tax 1,440 Less (Sally’s withholding) - 90 Balance due 04/15$ 1,350

The Whitlock Company Definitive Healthcare Update MEDICARE TAX ON “NET INVESTMENT INCOME” Effective in % Medicare tax in ADDITION to all other Medicare taxes Tax is based on “net investment income” for - individuals - estates - trusts

The Whitlock Company Definitive Healthcare Update MEDICARE TAX ON “NET INVESTMENT INCOME” Effective in 2013 What is “Net Investment Income”? Interest income Dividend income Annuity income Royalty income Rent income Net gains (ordinary and capital) sale of property Passive investment income Commodity trading

The Whitlock Company Definitive Healthcare Update MEDICARE TAX ON “NET INVESTMENT INCOME” Effective in 2013 Exemptions: Sale of a personal residence Gains on sale of business if “active participation” Interest income on municipal bonds IRA, qualified retirement plan distributions Income subject to self-employment tax Nonresident aliens

The Whitlock Company Definitive Healthcare Update MEDICARE TAX ON “NET INVESTMENT INCOME” Effective in 2013 Tax computed on the lesser of: An individual’s “net investment income” OR the excess of the individual’s modified adjusted gross income (AGI) over threshold amounts

The Whitlock Company Definitive Healthcare Update MEDICARE TAX ON “NET INVESTMENT INCOME” Effective in 2013 Threshold amounts are the same as the 0.9% Medicare payroll tax: $200K for single $250K for married filing jointly $125K for married filing separately

The Whitlock Company Definitive Healthcare Update MEDICARE TAX ON NET INVESTMENT INCOME Effective 2013 EXAMPLE: Sally is single: ABC Corp W-2 $180,000 XYZ Corp W-2 __ 50,000 Total wages 230,000 Interest and dividend income 250,000 Modified AGI$ 480,000

The Whitlock Company Definitive Healthcare Update MEDICARE NET INVESTMENT INCOME TAX EXAMPLE (cont.) She will owe the lesser of: Net investment income of $250,000 x 3.8% $ 9,500 OR Modified AGI $480,000 x__ 3.8% $ 18,240

The Whitlock Company Definitive Healthcare Update MEDICARE NET INVESTMENT INCOME TAX COMBINED WITH PAYROLL TAX: Sally owes $9,500 for NII Medicare Tax, plus the 0.9% Medicare payroll tax calculated below: Total wages (180k + 50k) $ 230,000 Less threshold for single - 200,000 30,000 x 0.9% Medicare payroll tax due $ 270 Sally owes $9,770 for both.

The Whitlock Company Definitive Healthcare Update NEW LIMITS ON CAFETERIA PLANS Effective 1/1/2013 New limits for health portion of FSA (cafeteria plans) deferrals OLD LAW: – No limit on election amount NEW LAW: – $2,500 limit per year – Amount indexed for inflation after 2013

The Whitlock Company Definitive Healthcare Update LARGE EMPLOYER MANDATE Effective 1/1/2014 To avoid health insurance excise taxes, large employers must provide: – At least 50% of health insurance premium AND – At least 60% of the plan’s share of total allowed cost of benefits of plan – OR if the minimum essential coverage is unaffordable for the employee

The Whitlock Company Definitive Healthcare Update LARGE EMPLOYER MANDATE Effective 1/1/2014 Who is a Large Employer? Defined as a business employing: average of at least 50 full-time employees during the preceding calendar year What is considered “full-time”? Full-time means work at least 30 hours per week All other employees counted on prorated basis

The Whitlock Company Definitive Healthcare Update LARGE EMPLOYER MANDATE Effective 1/1/2014 The Excise Taxes (penalty/fine): Excise tax of a maximum of $2,000 per employee, per year The first 30 employees don’t count in the penalty $2,000 Excise tax amount x 1/12 Monthly portion x # of months not providing insur benefit x (Total employees – 30*) *reduction provided by Act = Total excise tax for that year

The Whitlock Company LARGE EMPLOYER MANDATE Effective 1/1/2014 Additional $3,000 penalty for lower income employees if: Receive subsidies OR Purchase insurance direct from insurance exchanges Definitive Healthcare Update

The Whitlock Company Definitive Healthcare Update LARGE EMPLOYER MANDATE Effective 1/1/2014 Effect on “Small” Businesses: Most small businesses = fewer than 50 employees Don’t HAVE to provide health insurance BUT - there are the incentives: – tax credits – shopping the health insurance exchanges

The Whitlock Company Definitive Healthcare Update What to Do Now Financially: Consider whether to apply for tax credits Analyze cost to offer insurance or not Decide how to handle 1099’s Owners need to consider personal tax effects for tax planning in their future