The Patient Protection and Affordable Care Act – What it Means to Businesses and Individuals Linda Ialacci, CPA Horvath & Giacin, P.C. July 18, 2012

Overview Tax provisions already in place Small business health care tax credit Insurance for adult children Tax provisions set to take place in coming years W-2 reporting requirements for health insurance premiums Medicare tax increase Individual insurance coverage mandate Employer insurance coverage mandate

Small Business Health Care Tax Credit The employer must: Employ fewer than 25 Full-Time Equivalent (FTE) Employees Have average annual wages less than $50,000 Pay at least 50% of the health insurance premium on behalf of employees The credit is limited if average annual wages are above $25,000 Credit is fully phased out if average annual wages exceed $50,000 Owners not included in calculation

Illustration – Company A 5 employees who worked a total of 9,200 hours during the year FTE = 9200 hours / 2080 = 4.42 which is rounded down to 4 Total wages $100,000 Average wages = $100,000 / 4 FTE = $25,000 Premiums paid $30,000 (3 individual, 2 family) Multiply premiums paid by 35% - $10,500 Taxpayer gets CREDIT of $10,500 on tax return

Illustration – Company B 49 employees worked a total of 56,000 hours 56,000 / 2,080 = 26.92 rounded down to 26 Total wages $1,200,000 $1,200,000 / 26 = $46,154 rounded down to $46,000 Premiums paid $20,000 (12 individuals) Does not qualify because total FTE employees of 26 is greater than 25 Not eligible for credit

Small Business Tax Credit as Percentage of Employer-Paid Premiums

Insurance for Adult Children Continue up to age 26 Need not be dependents Not included in income Applies to married as well as unmarried kids Spouse and children of children not included Covers one of the largest segments of uninsured Americans

W-2 Reporting Cost of Health Care Coverage Started in 2011, but delayed until 2012 for large employers (>250 employees) Box 12, code DD Not included in income Informational purposes only Aggregate cost of all health insurance coverage Not to include FSA, HSA, MSA

Sample W-2

Additional Medicare Tax on Unearned Income Assessed on smaller of: Unearned income, OR Amount exceeding threshold No employer match Thresholds: $200K for individuals $250K for married filing jointly $125K for married filing separately Does NOT apply to distributions from active participation in S Corporation

Additional Medicare Tax Calculation

Additional Medicare Tax on Earned Income Assessed on earned income Employed individuals - Employer must withhold Self-employed individuals Same thresholds: $200K for individuals $250K for married filing jointly $125K for married filing separately Both Medicare taxes begin in 2013

Itemized Deduction Floor – Medical Expenses Currently, medical expenses exceeding 7.5% of AGI are deductible Will increase to 10% of AGI Starts in 2013 For age 65+, will stay the same until 2017

Individual Coverage Mandate Generally, everyone must be able to prove they have “minimum essential coverage” Penalty assessed for noncompliance Affordability exemptions and potential financial assistance Requires another tax return!

Minimum Essential Coverage Coverage under a government-sponsored plan Medicare Part A Medicaid Children’s Health Insurance Program (CHIP) TRICARE Veterans health care programs Peace Corps program Employer-sponsored plans Plans in the individual market Grandfathered plans State health benefits risk pool, as recognized by HHS

Penalty for Noncompliance Greater of a flat amount per person or a percentage of income Increases from 2014 to 2016 Penalty is per person, with family ceilings Included in the tax return IRS cannot levy to collect penalty, but can reduce income tax refunds Based on “applicable income”

“Applicable Income” Defined as the amount by which an individual’s household income exceeds the total of: Personal exemption amount ($3,700 for 2011), AND Standard deduction amount ($5,800 for 2011, if single) For 2011, applicable income would be: Total household income, less $9,500

Penalty Amounts For 2014, the greater of: For 2015, the greater of: Flat dollar amount of $95 per person, OR 1% of “applicable income” For 2015, the greater of: Flat dollar amount of $325 per person, OR 2% of “applicable income” For 2016, the greater of: Flat dollar amount of $695 per person, OR 2.5% of “applicable income”

Penalty Limits For dependents, per-person dollar amount is halved Total family penalty is capped at 300% of annual flat dollar amount: For 2014, $285 For 2015, $975 For 2016, $2,085 Cannot exceed national average premium for bronze-level-qualified health plans offered through exchanges

Employer Mandate Applies to “large employers” – 50 FTE Not offering health insurance, OR Offering insufficient/unaffordable coverage At least one employee requests tax credit under exchange Must provide proof of coverage to employees Effective March 1, 2013 Another tax return!

Employer Penalties – Not Offering Coverage Subject to penalty if ANY employee received premium credit under an exchange plan $2,000 x (Full-time employees – 30) per year 50 employees = (50-30) x $2,000 = 20 x $2,000 = $40,000 per year, or $3,333 per month. Begins in 2014 After 2014, will be indexed by the national average growth rate for the calendar year. Penalty is the same whether one or all employees received credit

Employer Penalties – Offering Coverage Subject to penalty if ANY employee received premium credit under an exchange plan Employee’s contribution > 9.5% of household income, OR Plan offered by employer pays for less than 60% of covered expenses Limited to lesser of: $3,000 per year for each employee who receives a credit, OR Total number of full time employees minus 30, x $2,000. All penalties are calculated per year, but are based on months; full year penalties assume that the number of affected employees is the same throughout the year

FT Employees in an Exchange Plan and receiving a Premium Credit? NO Large Employer? NO Yes No Penalty FT Employees in an Exchange Plan and receiving a Premium Credit? NO Yes NO More than 30 FT Employees? Yes Provide Health Insurance? Penalty 1/12 * 2000 * (FT Employees - 30) NO Yes Penalty 1/12 * 3000 * # of employees who receive credits for exchange coverage Pay Monthly Penalty Lesser of Penalty equations

Linda Ialacci, CPA Horvath & Giacin, P.C. 130 Route 31 North Pennington, NJ 08534 (609) 737-0300 lialacci@horvathgiacin.com www.horvathgiacin.com Circular 230 Disclaimer:  To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter (s) addressed herein.