Under the provisions of the Affordable Care Act (the “ACA,” commonly referred to as “Obamacare”), certain large employers are liable for an annual assessable payment if any full-time employee is certified to the employer as having bought health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee, and either the employer: (1) fails to offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage (“MEC”) under an eligible employer-sponsored plan; or (2) offers its full-time employees and their dependents the opportunity to enroll in MEC under an eligible employer-sponsored plan that, for a full-time employee who has been certified as having enrolled in a qualified health plan for which an applicable premium tax credit or cost-sharing reduction, either is not affordable or does not provide minimum value. This is referred to as the “employer mandate,” and is described in greater detail in the Internal Revenue Code.
The implementation of the employer mandate was initially delayed for all employers until 2015. Subsequently, the Internal Revenue Service (the “IRS”) delayed the applicability of the employer mandate until 2016 for mid-sized employers (those with between 50 and 99 full-time employees), provided that certain requirements were met. A “phase-in” was instituted for large employers (those with 100 or more full-time employees)
Employer Payment Plans
In late 2013, the IRS in Notice 2013-54 addressed (in part) group health plans under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy, or arrangements under which the employer uses its funds to directly pay the premium for an individual health insurance policy covering the employee. This Notice looked to prior IRS treatment of employer payment plans, which provides that if an employer reimburses an employee’s substantiated premiums for non-employer sponsored hospital and medical insurance, the payments are excluded from the employee’s gross income. This exclusion also applies if the employer pays the premiums directly to the insurance company.
However, Notice 2013-54 states that an “employer payment plan” does not include an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage. Employers may establish payroll practices of forwarding after-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan.
On its website, the IRS explains the consequences to an employer if it does not establish a health insurance plan for its own employees, but instead reimburses its employees for the premiums they pay for health insurance through a qualified health plan in the exchange (also known as the “marketplace”), or outside the exchange.
Importantly, an employer payment plan generally does not include an arrangement under which an employee may have an after-tax amount applied toward health coverage or take that amount in cash compensation. Otherwise, employer payment plans are considered to be group health plans subject to the ACA marketplace reform requirements, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Such employer payment plans cannot be integrated with individual policies to satisfy the market reform requirements, and thus they fail these requirements, potentially subjecting the employer to a $100 per day excise tax, or $36,500 per year per employee.
If you would like assistance in complying with these complex rules, please contact our office.
For general information about the ACA, please see IRS Publication 5152, available at http://www.irs.gov/pub/irs-pdf/p5152.pdf. Publication 5152 reports the latest changes to the marketplace and discusses the importance of reporting changes in circumstances, such as family size and income changes, that can affect the premium tax credit. Also, for facts about the individual shared responsibility provision, and specifically what individuals need to know regarding health insurance coverage and taxes, please see IRS Publication 5156, available at http://www.irs.gov/pub/irs-pdf/p5156.pdf.
Employee or independent contractor? This superficially simple classification question often bedevils employers large and small (when it is even considered), yet its answer has significant tax ramifications at the federal and state level. Those employers based in Pennsylvania must be particularly cognizant of the state’s unemployment compensation law (the “UC Law”), which presumes that every individual who performs services for which he or she is paid is an “employee.” Unless specifically excluded from coverage, all work for which payment is made under any contract of hire in Pennsylvania (whether express, implied, written, or oral), including work performed in interstate commerce, is covered by the UC Law.
The critical test under Section 4(l)(2)(B) of the the UC Law, which exempts individuals from characterization as employees and instead labels them as independent contractors, requires: (1) that the individual has been and will continue to be free from control or direction over the performance of the services involved, both under his or her contract of service and in fact; and (2) as to these services, the individual is customarily engaged in an independently established trade, occupation, profession, or business. Only if both of these conditions are met to the satisfaction of the Office of Unemployment Compensation Tax Services at the Pennsylvania Department of Labor and Industry (“UC Services”) will the individual indeed be regarded as an independent contractor. Until the above criteria are met, the individual’s services will be considered employment subject to the coverage of the UC Law, with the concomitant withholding tax requirements for the employer.
Nuances of the Construction Industry
Employers in the construction industry must also recognize that under the UC Law, certain parallel criteria apply. Specifically, an individual in the construction industry will be designated as an independent contractor only if he or she: (1) has a written contract to perform such services; (2) is free from direction or control over performance of the services both under the contract of service and in fact; and (3) is customarily engaged in an independently established trade, occupation, profession, or business.
To be customarily engaged in an independently established trade, occupation, profession, or business, the individual must: (1) possess the essential tools, equipment, and other assets necessary to perform the services independent of the person for whom the services are performed; (2) realize a profit or suffer a loss as a result of performing the services; (3) perform the services through a business in which the individual has a proprietary interest; (4) maintain a business location that is separate from the location of the person for whom the services are being performed; (5) have previously performed the same or similar services for another person while free from direction or control over performance of the services both under the contract of service and in fact, or the individual holds himself out to another person as available and able, and in fact is available and able, to perform the same or similar services while free from direction or control over performance of the services; and (6) maintain liability insurance during the contract term of least $50,000.
Critically, UC Services is not bound by any agreement between a worker and its employer (contractor) in determining independent contractor status, regardless of whether this designation is in writing. Nor does that individual asserting that he or she is an independent contractor, or the issuance of IRS Form 1099 to that person, render a conclusive determination. The UC Law requires UC Services to investigate all the facts in reaching its determination.
Such investigations into an individual’s employment status may occur in connection with an unemployment compensation claim filed by an individual who asserts that he or she was an employee and not an independent contractor. Also, UC Services randomly selects employers for audit to confirm compliance with the UC Law.
To mitigate the consequences of an unexpected audit, and for simple clarity and peace of mind, employers should maintain documentation to support their reasons for classifying any individual performing services for them as an independent contractor. Such documents include copies of that individual’s pre-printed invoices, federal and state tax identification numbers, public advertisements, and business forms and stationery.
Should you have any questions about this important determination, please contact our office for assistance.
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Employers nationwide should be keeping a close eye on the proposed Payroll Fraud Prevention Act of 2014 (the “PFPA”). If enacted by Congress, this bill would make misclassification of employees as independent contractors a federal offense. Although Congress has not yet passed any substantive independent contractor legislation, many states, including Pennsylvania, have recently passed laws curtailing the use of independent contractors. Moreover, the Internal Revenue Service (the “IRS”) and the U.S. Department of Labor (the “DOL”) have been cracking down on businesses that misclassify independent contractors, and have also been sharing information with state agencies. Finally, employers must be ever-vigilant of misclassification lest they face unwanted scrutiny from state workplace agencies and class action lawyers.
So what does the PFPA require? Critically, every employer and enterprise will be required to provide a classification notice for both “non-employees” and “employees.” This notice would inform all workers performing labor or services that: (1) they have been classified by the business as either an employee or non-employee; (2) the DOL website contains additional information about the rights of employees under the law; and (3) they should contact the DOL if they suspect that they have been misclassified.
Regardless if a business uses independent contractors or non-employees, each employer or enterprise would be required to issue such notices to all its employees within six months following passage of the law for incumbent workers and, with respect to new employees and independent contractors, at the start of the new worker’s employment or independent contractor relationship.
Any business that fails to provide this notice is subject to penalty, even one that uses no independent contractors (or properly classifies them). The civil penalties for any failure to provide a notice is a specific amount for each employee or other individual who was the subject of such a violation in an amount of $1,100 for a first offense and up to $5,000 for a second offense or a willful violation. These penalties are magnified if the required notice was not provided to a large number of workers. Furthermore, the failure to furnish this notice will create the presumption that a non-employee is an employee, which can be rebutted only by clear and convincing evidence that the individual is not an employee.
The PFPA has additional provisions that will pierce the corporate liability shield for those individuals required to create or maintain business entities (such as corporations and limited liability companies) as a condition for providing their services. The PFPA will authorize the DOL to report misclassification to the IRS, and will also direct the DOL to conduct audits of certain industries with frequent incidence of misclassifying employees as non-employees. Finally, the PFPA will impose triple damages for willful violations of the minimum wage or overtime laws where the employer has misclassified the worker.
The PFPA is likely on its way towards passage, so if you would like assistance in preparing for its effect, please contact our office.
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The United States Supreme Court recently upheld in its entirety the controversial 2010 Patient Protection and Affordable Care Act, often referred to as “ObamaCare.” Critically, the Supreme Court decision declared that the individual mandate in Section 5000A of the legislation, requiring U.S. citizens and legal residents to maintain minimum essential health coverage, was permissible under the Constitution of the United States.
Moreover, in addition to making sweeping changes to the U.S healthcare system, the legislation added a number of new taxes and made various other revenue-increasing changes to the Tax Code in order to finance healthcare reform. The legislation also made several healthcare-related changes to the Tax Code to benefit certain taxpayers, including a credit to offset part of the costs of health insurance for low-to-middle income individuals and families and a credit to offset part of the costs to small business of providing for their employees.
The following is a non-exhaustive list of some of the tax-related items from the healthcare legislation that were upheld as a result of the Supreme Court decision, along with the taxable year effective date of that provision.
Premium-assistance credit: Refundable tax credits that eligible taxpayers can use to help cover the cost of health insurance premiums for individuals and families who purchase health insurance through a state health benefit exchange. (Effective 2014).
Small business tax credit: Small business – defined as businesses with 25 or fewer employees and average annual wages of $50,000 or less – would be eligible for a credit of up to 50% of non-elective contributions the business makes on behalf of their employees for insurance premiums. (Effective 2010).
Medical care itemized deduction threshold: Threshold for the itemized deduction for unreimbursed medical expenses is increased from 7.5% of adjusted gross income to 10% of adjusted gross income for regular income tax purposes. (Effective 2013 generally, 2017 for certain taxpayers).
Additional hospital insurance tax on high-income taxpayers: Employee portion of the Medicare hospital insurance tax part of FICA is increased by 0.9% on wages that exceed a threshold amount. (Effective 2013).
Employer responsibility: An “applicable large employer” that does not offer coverage for all its full-time employees, offers minimum essential coverage that is unaffordable, or offers minimum essential coverage that consists of a plan under which the plan’s share of the total allowed cost of benefits is less than 60%, is required to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. (Effective 2014).
Information reporting: Requires employers to disclose on each employee’s annual Form W-2 the value of the employee’s health insurance coverage sponsored by the employer. (Effective 2012)
Medicare tax on investment income: Imposes a tax on individuals equal to 3.8% of the less of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income exceeds a threshold amount (Effective 2013).
The last of the provisions above, the Medicare tax on investment income, requires particularly careful planning, as it subjects investment income, for the first time in the history of Social Security, to the Medicare tax.
Although the fate of many of these tax provisions yet to go into effect is subject to potential further Congressional action, as well as the outcome of the 2012 presidential election, individual and business taxpayers should meet now with their tax and investment advisers so as to review their compliance requirements and set in place a tax strategy to minimize their tax liabilities.
If you have any questions about what the healthcare reform law means for you, please contact our office and we will be glad to assist you.
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