1. Difficulty of Care Payments Medicaid Waiver / Exclusion Requirements
Under
Medicaid Waiver / Exclusion Requirements
For IRS Tax Reporting
Gerald J. Archibald, CPA
Partner, Co-Group Practice Leader
October 12, 2017

2. The Opportunity and Objective!
To further inform providers in the I/DD service sector that there may be a significant opportunity / incentive for individual employees to care for and reside with I/DD individuals who would live in the employee’s personal residence
The IRS has recently (2014-7) expanded the “previous Foster Care regulations” to allow for income earned by an employee who meets the qualifying criteria of providing a home for an I/DD individual to EXCLUDE certain compensation from Federal and possibly New York State taxable income
My objective today is to provide the current status and qualifications for excluding wages paid by I/DD providers in the HCBS service sector, which are referred to in IRS regulations as “Difficulty of Care Payments”

3. What is the Opportunity?
If qualified, an employee or independent contractor receiving compensatory payments for providing care services to an I/DD individual in their personal residence can qualify for significant reductions in their Federal and possibly New York State tax liabilities
We have proven through filing amended tax returns over the past six months that this opportunity is significant, beneficial to the individuals involved, and NOT a complicated compliance matter
In addition to a reduction in income tax for the provider employee/independent contractor, this modified tax treatment can only help as a recruitment and retention incentive for providers to employ qualified staff in a difficult employment environment throughout New York State

4. Considerations When Dealing with IRS and/or NYS Income Tax
To realize the benefit of the regulatory change related to “Difficulty of Care Payments”, please be aware that while these regulations are relatively recent, we have confirmed by filing amended tax returns for prior years that both IRS and New York State Income Tax recognize the validity of Difficulty of Care payments being excluded from taxable income
The Difficulty of Care exclusion opportunity has been pursued aggressively in California and several other states
However, please be advised that the process of filing amended returns should only be done by a tax preparer who is knowledgeable of these “cutting edge” income tax reporting regulations
We have successfully filed amended tax returns for “qualified employee” situations and in once instance, when processed by IRS / NYS, resulted in a 12% increase in total compensation via an $8,000 tax refund

5. Topics to be Discussed
IRS Notice – Medicaid Waiver – HCBS eligibles
Excludable Wages
Difficulty of Care Payments
Personal Care Services
Under A Plan of Care By State
Same Family Home
Effective Date of Notice
How To Report On Tax Return
W-2 Excluded Wages
Required Attachments
Other Payroll Taxes
Other Possible Issues

6. TAX CHANGE RESULTING FROM
IRS Notice
Foster Care Payment/Medicaid Waivers
Statute Section 131 was originally written for Foster Care individuals and under this statute certain payments for care can be excluded from the care provider’s adjusted gross income for personal income tax purposes.
Notice was issued by IRS on January 3, and extended the tax treatment under Section 131 to compensation received for certain Difficulty of Care payments, as defined.
Certain Payments (NOT ALL) under a State Medicaid Home and Community-Based Services program can be deemed difficulty of care payments excludable from gross income under Section 131 of the IRS Code.

7. Difficulty of Care Payments
Definition of Difficulty of Care Payments
Difficulty of Care payments are compensation to a “foster care provider” for additional Personal Care Services required because the individual has a physical, mental or emotional handicap. The provider/employee must provide the care in the Provider’s/employee’s family home/residence. The Care Recipient and the Provider/employee must both live in the same residence as their family home.
In the case of difficulty of care payments, wages/compensation are not excluded to the extent the payments are for:
More than 10 qualified individuals who have not obtained age 19, or
5 qualified individuals who have attained age 19.

8. Personal Care Services (PCS)
January 6, 2010
Personal Care Services (PCS)
Defined by CMMS (Center for Medicare and Medicaid Services) to include assistance with: eating, bathing, dressing, toileting, transferring, maintaining continence, personal hygiene, light housework, laundry, meal preparation, transportation, grocery shopping, using telephone, medication management and money management.
Skilled services that only a health care professional may perform are not PCS.
Habilitation services assist individuals in acquiring, retaining and improving self-help, socialization and adaptive skills necessary to reside in home and community setting.
The payments received cannot be for Room and Board.
Payments for vacation or leave pay cannot be excluded from gross income. Accordingly, only payments for “care”, as defined, may be excluded.

9. Plan of Care by State or Authorized Agency
The State or its Funding Agency must determine the need for this compensation and the Payer must designate the compensation for this purpose.
Must be under a Plan of Care (Individual Service Plan / Habilitation Plan) that is overseen by the State or a designated provider agency. The State or provider agency must be licensed or certified for the HCBS Care Program.
Not all payments by the State Medicaid Waiver Home and Community-Based Service Programs are excludable from the provider’s/employee’s income.

10. Same Family Home / Personal Residence
Under Section 131, payments are excludable as difficulty of care payments only if the care is provided to a “qualified foster individual”, meaning any individual who is living in a “foster family home” in which the individual was “placed” by an agency of the state or political subdivision thereof, or a “qualified foster care” placement agency.
Both the Care Provider and the Care Recipient must live in the same family home and not have any other residence.
Tax Court has concluded that, for purposes of Section 131 “a person’s home is where he resides.” The “foster” individual receives care in a family setting and not an institution.

11. EFFECTIVE DATE – NOTICE 2014-7
Beginning January 3, 2014, the IRS will treat qualified Medicaid Waiver payments as difficulty of care payments under Section 131 ( c ) that are excludable from taxable income.
If an employee received qualified compensation payments in prior years that met the definition, the time for claiming the credit or refund through an amended return is limited.
An individual taxpayer generally may file a claim for refund within three years from the date the tax return was originally filed or two years from the date that income tax was paid, whichever is later.
The IRS pronouncement allows qualified taxpayers to amend previous years, prior to 2014.

12. HOW TO REPORT ON TAX RETURN
Subsequent to January 3, 2014, the prescribed reporting of excluded income is to not report excluded income as taxable wages on your W-2. If the W-2 has been issued, you should attempt to obtain a Corrected Wage Statement, Form W-2c from your employer.
However, if you are claiming for a year prior to 2014 or you are unable to obtain a Corrected Form W-2c from your employer, you may amend your personal tax return for that year.

13. HOW TO REPORT ON TAX RETURN (Continued)
If you receive payments on or after January 3, that are “qualified” as excludable from income, the individual must continue to report the “qualified” compensation as excludable from taxable income into 2014 or later years.
As a result of the requirement above, a particular individual may have some impact on other aspects of the tax return as originally filed (e.g., Earned Income Credit).
If applicable, impact on other areas of the original tax return must be addressed and properly reported.

14. Required Attachments to the Amended Tax Return
If you are filing an amended return or you were unable to obtain a W-2 that excluded these wages from taxable income, you will need to attach the following documents:
Social Security Number(s) of the Care Recipient(s) being served.
Copies of documents from Care Provider AND Care Recipient with current address proving all parties live at the same residence. Examples are copies of driver licenses, bank statements, utility bills, etc.
Documentation that Care Services payments are derived from Medicaid Waiver Home and Community Based Services (HCBS).

15. Are payments subject to FICA and FUTA taxes?
Notice does not address whether income under this notice is subject to FICA and FUTA taxes.
The answer is maybe. If the agency is your employer, the payments are subject to FICA. If you are an independent contractor, the payments may not be subject to FICA taxes.
Tax Topic 762 available from the IRS website, provides additional guidance on how to determine if you are an employee or independent contractor.
Be very careful with requirements for demonstrating Independent Contractor Compliance. The latest IRS requirements are extremely rigid, with more than 10 criteria necessary for compliance.

16. Possible Issues to Consider
Payments made for vacation, paid time off or other time that does not meet the definition of Notice excludable wages are taxable.
By excluding wages from taxable income:
This may cause problems if you had withholdings in excess of taxable wages for pre-tax items, such as retirement plans (403 (b)), pre-tax benefits or child care payments.
Since earned income would decrease by excluding nontaxable wages, this may affect other items on your tax return that are based on income limitations. Such as earned income credit and other credits and itemized deductions.
Again, for 2014 and future years, the taxpayer must continue to report qualified compensation payments as excludable.

17. Provider Action Steps
If an I/DD provider has a qualified employee / independent contractor, make sure that the calendar year W-2 or 1099 properly reflects Difficulty of Care payments as excludable from taxable income. For years prior to 2017, evaluate the necessity and appropriateness of filing amended tax returns to claim previously taxed income as excludable, thereby generating a refund for the individual caregiver.

18. IRS Resources IRS Notice 2014-7
Notice includes Q&A (issued January 2014)
Additional Q&A (issued February 23, 2015)

19. Q & A
For further information or follow-up questions, please contact Gerald Archibald
Partner / Co-Group Practice Leader, The Bonadio Group

20. Thank You!