Obamacare repeal-replace proposal and insurance company compensation

https://housegop.leadpages.co/healthcare/

The tax law is difficult to understand due to its numerous special rules. This is apparent on just about every news show about the House Republican/President Trump's bill to replace/repair the Affordable Care Act (aka Obamacare).  Last night, I saw a bit of a CNN town hall with HHS Secretary Tom Price. Questions were raised about the bill providing significant benefits to high income/wealthy individuals.  In addition to repeal of the Net Investment Income Tax (Section 1411), a comment was made by the CNN reporter about repealing the ACA rule regarding a compensation limit on high compensation of health insurance companies.

At first, Secretary Price said he wasn't familiar with the rule. Then he said he did know and queried the audience as to why anyone would want a rule that limits what an individual can be paid.  This was after the CNN reporter noted the rule involved $500,000 of compensation. Query: Does he know that this is more than 10 times the median income in the US (see IRS stats that median AGI was $38,171 for 2014)?  I only note that as it is interesting (sad) to see government officials be cavalier on such points that seem to just highlight they are out of touch with the lives of 90% of the public.

Back to the rule ... The ACA added IRC Section 162(m)(6) to basically provide that a health insurance company cannot deduct compensation of any employee that exceeds $500,000 for the year. Employees can still be paid a greater amount, it is just that the employer can't deduct the excess. The House Republican/President Trump proposal released March 6 would repeal this provision (section 241 of the bill).  And, yes, there are health insurance employees paid more than $500,000 (see for example, Anthem's 2017 proxy statement's summary compensation table for its execs at page 54).

Given that the ACA aimed to make health insurance more affordable, the rationale for the compensation deduction limitation was to perhaps discourage such amounts by increasing taxes for the employer.

Is that a good rule?  Well, the rule increases costs for insurance companies because losing a deduction (for the compensation paid to an employee in excess of $500,000), causes them to pay more taxes. That increases their costs. While SEC rules already require disclosure of executive compensation, perhaps the ACA rule should have been that the health insurance companies had to disclose the positions in the company where the holder of that position was paid more than $500,000.  Perhaps that would put some pressure on health insurance companies to restrict compensation or at least highlight that insurance companies have a lot of money if they can pay employees such a large amount of compensation.

What do you think?

ACA taxes generate more revenue than AMT

In reviewing some IRS stats for 2014 returns, I was surprised to see that two taxes added by the Affordable Care Act (Obamacare), generated more revenue in 2014 than was generated from the individual AMT. Here are the stats:

Net Investment Income Tax (NIIT)    (3.8% §1411 tax)	$22.5 billion
Additional .09% Medicare tax	$7.3 billion
Total	$29.8 billion
Alternative Minimum Tax (AMT)	$28.6 billion

For 2013 returns, the AMT generated $4.6 billion more than the two ACA taxes.

[IRS 2014 stats, Figure E on page 27]

These ACA taxes only apply to individuals with income over $200,000 if single or over $250,000 of income if married. The AMT applies to individuals with over $52,800 of income if single and over $82,100 if married (and if they have sufficient preferences and adjustments such as state tax deductions and mortgage interest on a home equity debt or incentive stock option income).

The AMT threshold amounts are adjusted annually for inflation while the NIIT and Medicare tax thresholds are not adjusted.

Data from the Tax Policy Center estimates that for 2016, only individuals in the top 10% paid the NIIT. They estimate that if the NIIT were repealed for 2016, the average benefit to individuals in the top 1% of income level would save on average almost $24,000. I'm glad to see they break that down further to show what the top 0.1% benefit because not only do we have an income gap between the top 10% of income earners and the bottom 90%, but there is a big gap within the top 1% for the top 0.1% and the other 0.9% in that top 1%.  The benefit of repeal for the top 0.1% is about $154,000 per year. [Tax Policy Center, T16-0169, 8/16/16]

So, if Republicans repeal Obamacare, how will they address not only the increase in uninsured but the loss of about $30 billion of revenue per year?  Don't be surprised if they keep the tax (at least until tax reform occurs) or they phase it out over a few years to reduce the revenue loss impact.

We'll see.

What do you think?      

Filing Season and Affordable Care Act

I think it is correct to say that all taxpayers are affected by the Affordable Care Act in some way. Certainly individuals living in the US.  All must answer a question on the 1040 as to whether everyone in the "shared responsibility family" (basically those listed on the return), had health coverage for all months of the year. If there are any uncovered months, the next step is to see if an exemption applies for that month. If no exemption for any month, a penalty is computed and reported on the 1040.

Some individuals obtained coverage on the Exchange or Marketplace and if their household income is at least 100% of the Federal poverty line but not more than 400% FPL, they get a Premium Tax Credit. Most likely they got it each month via reduced monthly premium amounts, but they must reconcile it by filing a 1040 or 1040A and attaching form 8962.

I've got an article in the AICPA Tax Insider (2/18/16) - "What Individuals Need to Know About the Affordable Care Act for 2016." It covers items relevant to filing 2015 returns as well as for dealing with our current year 2016.

What do you think about the tax provisions of the ACA?  I find most to be some of the most complex tax provisions we have - particularly the employer mandate of IRC Section 4980H.

Obamacare - can pieces be removed?

Presidential candidate Clinton has called for repeal one of the numerous parts of the Affordable Care Act (aka Obamacare).  Reuters reports that on September 29, 2015, she called for repeal of the "Cadillac tax" provision that goes into effect starting in 2018 ("Clinton calls for repeal of 'Cadillac tax' on healthcare plans," by John Whitesides, Reuters, 9/29/15).

A few observations on this:

• What happens when one piece of the complete healthcare reform plan is removed? The Cadillac tax raises revenue by imposing an excise tax on certain expensive plans offered to employees (see IRC Section 4980I).  Likely it also is an incentive not to offer these generous plans that can result in increased health care costs (the insured in these plans might be getting services not needed when the cost to them looks free, but employers are paying a lot). Does repeal of one provision make the system not work?  Perhaps.
• Politicians and many others keep skirting around the many inequities in the system.  One of the longstanding, costly inequities is that employees can exclude from income and payroll taxes, the value of the health insurance premiums paid for by their employer.  About 60% of  employees get this benefit.  It is worth more to individuals in higher tax brackets. That is part of the inequity (a credit would be more equitable). Another part is that it is so costly in terms of reduced revenue.  For example, if Jane's employer covers $10,000 of her annual health insurance costs, Jane excludes this from her income. If she is in a 30% tax bracket, she saves $3,000 of taxes compared to if her employer just increased her wages by 30%. And Jane and her employer don't have to pay Social Security and Medicare taxes on this health subsidy income (another savings of 15.3%). This exemption also makes it easy to increase the costs of health care because the insured don't necessarily see it.  Why not reform this costly provision (it is the most costly tax break in the system and isn't even available to everyone).
• Why not address inequities such as the Premium Tax Credit ending once the insured's household income crosses 400% of the federal poverty line?  The employer-provided health subsidy exclusion (prior bullet) has not such end point? That means that someone with about $43,000 of income getting insurance in the Marketplace, won't get any government subsidy, where as someone making $200,000 with employer-provided health insurance gets to keep their tax break (the exclusion). Why isn't anyone talking about this
• If the employer-provided health care exclusion were reduced, such as my having employees include 10% (or perhaps 15% or 20%) of the value of what the employer pays in their income, perhaps that would help pay for a better Premium Tax Credit and removal of the complicated Cadillac tax?  And the cost of this is minimal to the employee.  For example, Jane, in the earlier example would have to include $1,000 in her income (if 10% of the employer-provided insurance were taxable).  At her 30% bracket, her taxes go up $300.  That is a small price to pay for $10,000 of coverage!

A bigger discussion is needed.  Obamacare has too many complicated tax provisions in addition to many complicated non-tax provisions.  Has health care improved?  Is it all costing less?  What about removing health insurance from the employer-employee situation?  An many more questions that should be in this tax policy and social policy discussion.

What do you think?

Supreme Court Premium Tax Credit Decision - 4 thoughts

IRS Flowchart on whether you qualify for the PTC - from Pub 974. Also see IRC Section 36B.

As we all know by now, the US Supreme Court upheld the government regulations that provide that an otherwise qualified individual who obtains health insurance through the federal exchange (rather than a state exchange) is entitled to a Premium Tax Credit (PTC). This is the 6/25/15 decision in King v Burwell. I think this is the logical ruling because the Act does provide that if a state doesn't create an exchange, the Department of Health and Human Services (HHS) is to establish one. Also, since this is the "Affordable Care" Act we are talking about, the PTC is a key part that helps make insurance affordable for many who have household income at or below 400% of the federal poverty line (more so for younger people in regions where the cost of living is not high - not for all individuals).

Four quick thoughts about the PTC and ACA:

1. It seems that states with exchanges should consider ending them to save costs and let people go to the federal exchange.  This seems to be an unintended consequence of the decision and the feds might not have sufficient resources to handle this possible action.
2. This survival of the PTC should lead Congress and President Obama to fix it.  It is too complex (see the flowchart above and the Section 36B and regulations). Also, the IRS likely does not have the resources to determine if people properly claimed it.
3. Address policy issues with the PTC and other tax benefits tied to health insurance: The PTC unrealistically behaves as if individuals of all ages and all geographic regions can spend about 8% of their income to obtain health insurance.  Because insurance costs more as you age and housing costs a lot more in some regions, that assumption is unrealistic.  Health insurance tax rules should be examined as a whole to try to better equalize the treatment among different ways to obtain health insurance.  The best deal is to get employer-provided coverage because it is tax-exempt to the worker - no income or payroll tax. And you get this benefit regardless of your income level - whether your household income is at the federal poverty line of 100 times or more of the federal poverty line. In contrast, you can only get a PTC if your household income is at or below 400% of the federal poverty line.  This is a completely unfair way to subsidize health insurance costs.
4. Why not take the bold step of divorcing health insurance from employment?  It drives up costs, it creates unfair tax advantages for those who have it, and the cost to employers helps make them uncompetitive in the global market.  The tax cost of the employer-provided health insurance exclusion is over $200 billion per year.  Why not use this money to lower rates and improve and expand the PTC?  Also - note that the King ruling also affects the employer mandate.  With more individuals eligible to avail themselves of the PTC, it is more likely that an applicable large employer can have at least one full-time employee claiming it thereby possibly exposing the employer to the employer mandate penalty.

What do you think?

Tax Outlook for 2015

I've got a short (1 page) article in the CPELink Spring/Summer 2015 magazine on my take on the tax outlook for 2015. I note three items to watch - ACA, preparer regulation and tax reform. I have a brief summary below. For the full page article - click here and go to page 9.

1. Affordable Care Act (ACA) – By late June, we should have the U.S. Supreme Court’s decision in King v. Burwell, 759 F.3d 358 (4^th Cir. 2014), on whether individuals obtaining coverage through the federal Exchange (because their state did not create its own Exchange), are entitled to the PTC they likely have been receiving since January 2014. If the government loses this case, millions of individuals will likely terminate their coverage as it is unaffordable without the PTC subsidy. Or, perhaps Congress will step in with a remedy. 
2. Preparer Regulation – At the start of the 114^th Congress in January 2015, Senator Wyden introduced The Taxpayer Protection andPreparer Proficiency Act of 2015 (S. 137) to give the IRS authority to regulate preparers by having them “demonstrate competency to advise and assist persons in preparing tax return, claims for refund, and associated documents.
3. Tax Reform – In the last few days of the 113rd Congress, key outgoing and incoming tax committee leaders indicated that tax reform discussions would continue.  House Ways and Means Committee Chair Dave Camp formally introduced his tax reform proposal as H.R. 1. He had introduced it for discussion in February 2014, but formally introducing it as a bill means it easily lives on forever, even though Congressman Camp retired at the end of 2014.  The fate of the 51 provisions that expired at the end of 2014 will likely be tied up as part of tax reform.  If nothing happens by early December 2015, we are likely to see a repeat of December 2014 with most items extended retroactively for one year (back to 1/1/15).

Again - for a few more details - go to page 9 of the magazine.

What do you think? What does your tax outlook list for 2015 look like?

Guest Post - Resolving a Premium Tax Credit Problem

In a 3/26/15 post, I described an Affordable Care Act oddity of someone starting the year getting the Premium Tax Credit (PTC) in advance because their income qualified them for it. But later in the year, their income increases and they lose all or part of their PTC.  That caught the attention of financial executive Randall Bolten, author of Painting with Numbers: Presenting Financials and Other Numbers So People Will Understand You (John Wiley & Sons, 2012).

He suggests that a compensation practice can be used to help address this payback problem. He notes that this problem is caused by the legislation’s failure to address the impact of significant income fluctuations throughout the year. An approach that could deal with this takes a page from “accelerated” sales commission plans, where commission rates increase as sales volume increases. To see how this might work, he offers an explanation along with charts and graphs.

Please click here to see Randall Bolten's full post with all of the graphs and details. Thank you.

What do you think?

IRA Contribution by April 15 May Prevent Paying Back Premium Tax Credit

The Premium Tax Credit (PTC) for individuals who purchased health insurance on the Exchange (Marketplace) is an important tax break.  As income goes up, this subsidy in the form of a refundable credit decreases. Then, it hits a cliff and completely disappears if one's household income exceeds 400% of the Federal poverty line (FPL). This can result in a tax bill of thousands of dollars!

Here is an example. A married couple, both age 64, thought their 2014 income would be about $62,000. Being eligible for insurance on the Exchange, they purchased a policy and obtained a PTC of $14,112. When they file their return, they realize they actually have $63,000 of income for 2014. this is above 400% of the FPL so they must repay all of the $14,112 PTC!  If they can drop their income to $62,040 (400% of the FPL for 2014), they don't have to repay the $14,112 (which they already used to be able to buy the insurance so no longer have). If they are eligible for an IRA deduction, and make a contribution of at least $960 (let's say $1,000 for safety) by April 15, they have engaged in some terrific tax planning (click here for IRS info on an IRA contribution by April 15). If they paid someone to prepare their return and that preparer was astute enough to give this advice - and the couple gets their return completed and filed in time to get the IRA contribution made on April 15, great for everyone. [Note: I used a 64 year old couple to generate a high PTC - health insurance costs more when you are older. See this 12/31/14 post.]

Given how the Administration wants to promote retirement savings, I'm puzzled why the IRA contribution idea wasn't built into the Form 8962 for the PTC.

This cliff is bad tax policy for the reason noted above AND because it makes the law inequitable. If this couple instead had employer-provided health insurance and the employer paid all or part of the cost of coverage, that benefit would not be taxable to the couple regardless of their income level.

What do you think?

Another Affordable Care Act Oddity

To help more people obtain health insurance, the Affordable Care Act (ACA) provides a subsidy in the form of a refundable, advanceable tax credit - the Premium Tax Credit (PTC). Generally, if your household income is at least 100% of the Federal poverty line, but not over 400% of that line, and you are not offered affordable coverage from your employer, you are eligible.

For many people, their household income is roughly the same each month. But not for everyone. Perhaps you started the year with monthly income within the eligibility range and obtained subsidized insurance for those months. But, then you get a better paying job or a bonus (but still no offer of affordable health insurance from your employer), and your annual household income goes above 400% of the FPL?  Well, then you have to repay the subsidy you got in the earlier months even though for those months, you could not afford the coverage.

Sounds rough, but not easy to resolve.  If the PTC were changed to be based month by month on your income, it would favor those who can defer lots of income to the last month of the year. Perhaps the problem is more tied to the "cliff" in the PTC that causes someone to completely lose the subsidy once their income crosses the 400% of the FPL (more on that here).  And, all of this puts the PTC person in a situation that an employee with employer-subsidized coverage is not in. That is, there is no cliff that causes an employee to lose his or her income exclusion for what the employer pays towards the employee's health coverage.

What do you think would work to make the PTC more fair?

Busy Season Updates - TPR and ACA

Well into the start of busy season, the IRS issued important guidance on some parts of the Affordable Care Act (ACA) and how small businesses can adopt the tangible property regulations (TPR).  I've got a summary of the ACA updates (and beyond) in a short article in the 3/12/15 AICPA Tax Insider - An update on Affordable Care Act busy season developments.

Here is my summary of the TPR items as well as a recent news release by the California Franchise Tax Board on conformity with TPR.

Policy Item: Both the ACA items (particularly the relief from the $100/employee/day penalty for health reimbursement arrangements (HRAs) that violate ACA provisions), and the TPR relief for small businesses came after many diligent tax practitioners had already invested time with their clients and clients had invested money and may have changed business practices that may have been adverse to employees (to fix HRA problems).  It would be nice to see some practice implemented such that IRS can get this filing season related guidance out well before the start of filing season. Perhaps there should be a meeting in October with IRS and key tax practitioner groups (AICPA, NAEA, etc.) to identify the filing season challenges and suggest solutions that the IRS could issue guidance on before December).

What do you think?

Here is my TPR summary:  Hope it is helpful.

Adopting the Tangible Property Regulations
in Light of IRS Simplified Procedure of Rev. Proc. 2015-20
+ FTB Announcement on Conformity

On February 13, 2015, the IRS finally responded to requests of many practitioners to provide relief from filing Forms 3115 for all clients with depreciable assets, whether used for business or rental properties. Basically, this guidance – Rev. Proc. 2015-20, allows “a small business taxpayer, defined as a business with total assets of less than $10 million or average annual gross receipts of $10 million or less for the prior three taxable years” to adopt the tangible property regulations (TPR) on a cut-off basis. That means, no need for a Form 3115 or calculation of any §481(a) adjustment. With this approach, the small business just adopts the TPR for its tax year beginning on or after 1/1/14. The taxpayer continues to use its old method for repairs versus capitalization and supplies for prior tax years.

It is highly recommended that you read Rev. Proc. 2015-20. This will help in deciding whether to take this simplified method versus reviewing the clients tax records to determine where it has method changes and §481(a) adjustments. For example, you need to review the records to determine if in the past, something was expensed as a repair which the TPR would treat as an improvement. If that item would still be on the depreciation records if capitalized back in the year incurred, it generates a positive §481(a) adjustment. There may also be pre-2014 transactions where something was capitalized as an improvement when under the TPR, it is not an improvement so should have been expensed. If this asset is still being depreciated, a negative §481(a) adjustment is generated equal to the adjustment basis of the asset at 12/31/13 (assuming the taxpayer is using a calendar year as its tax year). 

The nature of the possible adjustments to adopt the TPR for prior years are summarized in Rev. Proc. 2015-14, Section 10.11 on Tangible Property. This was formerly in Rev. Proc. 2014-16.

Also relevant are the regulations on dispositions of property that related to the TPR. These regulations and Rev. Proc. 2014-54 (now part of Rev. Proc. 2015-14) allowed a one-time retroactive adjustment via a negative Section 481(a) adjustment for 2014 (assuming a calendar year) (see Section 6 of Rev. Proc. 2015-14).

Some observations to consider when you read Rev. Proc. 2015-20 and decide whether to go the Form 3115/§481(a) route or the simplified approach for your small clients.

	Rev. Proc. 2015-20 Simplified Approach (No 3115 or 481(a) adj.)	Rev. Proc. 2015-14 Method Changes and Forms 3115
Audit protection for prior years	No	Yes
Possibility of reducing 2014 taxable income for any negative §481(a) adjustment (after using the netting process of Rev. Proc. 2015-14).	No	Yes (note that if the 481(a) adjustment relates to a passive activity, it is a passive activity deduction only usable against passive activity income).
Ability to make the optional late partial disposition election that is only available for 2014 (producing a negative §81(a) adjustment).	No	Yes
Time commitment	To consider whether to go the simplified route (no 3115 or §481(a) adjustment) or do the full method adoption.	Time is needed to review depreciation schedule and inquire about past repairs. Need to review supplies treatment in light of TPR. Creation of documents to support required §481(a) adjustments. Spend time with Rev. Proc. 2015-14 on how to make the method changes.
Taxpayer’s tax records	·   2014 and later follow TPR ·   Tax years prior to 2014 follow the taxpayer’s method used prior to the TPR.	All of taxpayer’s tax records follow the TPR (due to the §481(a) adjustments made).

Additional Information

·         Rev. Proc. 2015-20 includes a special rule in identifying taxpayers eligible for the $10 million measure of being “small.” Basically, if the taxpayer has separate and distinct trades or businesses, it does not aggregate their gross receipts to see if the $10 million threshold is crossed.  See Section 4 of Rev. Proc. 2015-20.

·         In Rev. Proc. 2015-20, the IRS requests comments on whether the $500 de minimis safe harbor election amount of Reg. 1.263(a)-1(f) should be increased.

·         In February 2015, the IRS announced a new address for Form 3115 required to be mailed to Ogden.

·         In March 2015, the IRS released FAQs on the TPR. The FAQ on Rev. Proc. 2015-20 suggests that taxpayers using the simplified procedure include a statement on the 2014 return that the taxpayer is a qualifying trade or business using the simplified procedure of Rev. Proc. 2015-20.

California and TPR and Method Changes

In its March 2015 newsletter, the Franchise Tax Board (FTB) explains how the federal TPR apply in California and the effect of a federal Form 3115. Quoting one key part of this news:

“Does California Follow the Repair Regulations?

Yes, for taxable years starting on or after January 1, 2010, California conforms to the Internal Revenue Code as enacted on January 1, 2009. Any regulations for the Internal Revenue Code as in effect on January 1, 2009, are applicable as regulations of the FTB unless they conflict with a provision of the Revenue and Taxation Code or a regulation of the FTB. The FTB is currently not aware of any specific repair regulations which the FTB would not follow”

The FTB also states that any method change made for federal income tax purposes also changes the method for California purposes. FTB notes though, that if the §481(a) adjustment involves depreciation, the §481(a) amount for California corporations will be different..

Finally, the FTB states that it will follow Rev. Proc. 2015-20.

 

Obamacare confusion - real and made up

Our health care system is too complex. I'm not only referring to the numerous tax provisions in the Affordable Care Act (ACA or Obamacare), but the system itself.  For example, if you have health insurance, do you know what it covers, how costs are computed, how insurance companies and the medical profession make money?

On March 4, the US Supreme Court heard oral argument in King v Burwell on whether individuals who obtained health insurance through the federal exchange (because their state did not establish its own exchange), are entitled to a Premium Tax Credit (PTC).  The PTC provision in the Code (Section 36B) makes reference to state exchange. The Administration interprets that as also meaning a federal exchange. Millions of individuals have obtained (in 2014) and are currently obtaining for 2015, a PTC to help pay for health insurance.

When requested in advance, the PTC funds go directly to the insurance company to lower monthly premium costs. When the insured files his or her tax return, he or she must reconcile the advance PTC to the actual PTC based on true household income that is not known until after the end of the year.

A Wall Street Journal op ed on March 2, 2015 by Congressmen Ryan, Kline and Upton ("An offramp from ObamaCare"), bemoans the problems of Obamacare.  I think a good part of it plays off the complexity of the system and the low understanding the public has of the ACA and our health care system in general.  For example, these lawmakers present an alternative subsidy proposal (alternative to the PTC):

"The credit would be “advanceable”—that is, you would get it when you needed it; you wouldn’t have to wait for tax season. It also would be “refundable”—that is, you would get the full amount no matter the size of your tax bill. And would adjust the size of the credit for age; the elderly, who face higher coverage costs, would get more support."

Their statement makes it seem that the current PTC is not advanceable when it is and most individuals likely get it in advance in order to be able to afford the monthly premiums.  The current PTC is also refundable. That is, if it exceeds your tax liability, you get the balance.  Their statement about adjustments for age is partially correct.  The PTC is based on age because the PTC ties to the cost of the second lowest cost silver plan. That cost is higher the older you are.  But, there are other ACA flaws for age, such as assuming health insurance is affordable for everyone if it is less than 9.5% of their household income (the percentage is the same for all ages - see my "tax oddity" post of 12/31/14).

The lawmakers do acknowledge the significant subsidy employees with employer-provided coverage get. What is missing is that starting in 2014, millions more get subsidies through the PTC or expanded Medicaid. BUT, millions continue to get no subsidy at all and likely can't afford coverage. These individuals have income above 400% of the Federal poverty line and no employer-provided health insurance. If they don't qualify for Medicaid or Medicare, they are out of luck if they can't afford coverage.  Meanwhile, they are helping to support subsidies for the majority. 

Improvements are seriously needed. The current system is too complex, confusing, inequitable, expensive, - and, not providing health care commensurate with the costs.

What do you think?

King v Burwell references:

• Oral argument transcript and audio files
• 4th Circuit opinion (7/22/14)
• Nellen, Can individuals on federal exchange claim the premium tax credit? AICPA Tax Insider, 10/16/14