ACA and Tax Filing

While everyone was talking about last year being the year everyone finally felt the impacts of the Affordable Care Act (ACA) with the roll out of the federal and state exchanges, for CPAs and anyone filing a tax return, the 2014 tax returns filed in 2015 will be the year of even greater impacts. That is because this is the first year people’s tax returns include requirements under the ACA. There are two big requirements; one affects everyone and the other impacts anyone buying insurance on the exchanges.

The new requirement that impacts everyone is that you have to report if you had qualifying health insurance, otherwise you have to pay a penalty. If you had insurance, the requirement will be as easy as checking a box (unless you are audited). On the other hand, those who didn’t have insurance have some work ahead of them. Unfortunately, many taxpayers have also been misinformed. They are under the impression that those without insurance will be charged a penalty of $95. First off, the penalty is $95 per member of the household (with a cap of 3). That means for anyone without insurance and at least two dependents, the minimum penalty is $285. But, it gets worse. For 2014, the penalty per person is the greater of $95 or 1% of taxable income. For a middle class family with taxable income of $40,000 that means the penalty per person is $400, not $95 and for a taxpayer with 3 or more members of the household that means the penalty is $1,200 not $285. This means there are going to be people who thought it was cheaper to not buy insurance that will be getting a much smaller refund or even making an additional tax payment come March and April.

By the way, the penalty increases in 2015 to $325 or 2% per person. This means that same family making $40,000 will pay a penalty of $2,400 next year (because it is greater than the $975 of the minimum for 3 people). The percentage of taxable income is really much more important in determining the penalty than the listed dollar minimums. However that doesn’t make for an easy sound bite, so most people don’t realize the penalty is really based on a percentage of net income.

The second new requirement is for those who obtained insurance through the exchanges, they must reconcile the tax credits they got to reduce the cost of insurance to the actual tax credits they were due. When the insurance buyer input their information to determine the credits they could obtain, he/she had to estimate their income, marital status and dependents for 2014. The actual amounts for these items is likely to be different from the estimates provided. If the person ended up with less income, then they will be due additional credits. More likely, the person will have earned more than their estimate and will end up owing back to the government a portion of the credits they received. The big problem is the group of people having to make these computations is the same group that can’t seem to properly compute the earned income tax credit (EITC). Last year 24% of the EITC paid was in error. I don’t have high hopes that the computation of the ACA credits will be any better.

At least the news stories covering the 2015 tax filing season may be a little more interesting this year.

What are the impacts of the ACA?

The next question I received could take me years of blogs to explain, which makes sense since it is about a piece of legislation that is longer than the novel War and Peace. The question is “what are the impacts of the Affordable Care Act?” There are hundreds of impacts, but I am going to focus on two; one that affects individuals and is very misunderstood and one that affects companies and is not really discussed.

The individual mandate to buy insurance is well known, but the tax (that is what the Supreme Court said it was and who am I to argue) for not buying insurance is very misunderstood. The press and talk shows focus on the minimum payment for not buying insurance. In 2014 that will be $95. In 2015 it increases to over $325. The problem is that is where most people stop talking, but that is not what the law says. The law says that the minimum tax for not buying insurance in 2014 is the greater of $95 or 1% of an individual’s AGI. As most CPAs are good at math I assume you can easily figure out that once an individual’s AGI exceeds $9,500, they will no longer be paying $95, but instead 1% of their AGI. Most people who file and pay taxes make significantly more than $9,500. Looking at an income of $35,000 which is around the average reported, the tax would be $350. Those who want to argue that $95 is not enough of a tax to get people to pay several hundred dollars a month in premiums can probably make the same point with a $350 payment, but that is not the point. The point is that there are a lot of people out there that have not bought insurance and are thinking they will just have to pay (or receive a reduced refund of) $95 who will be negatively surprised when the bill is a lot higher next April 15. And the percentage doubles in 2015 to 2% which drives that tax to $700. People will be feeling that tax hit just as the presidential primaries are getting into full swing in 2016. That will make for some interesting political discussions.

The impact to companies is being felt by employees all over the country right now, but they may not have realized it. All self-insured companies have to pay a $63 per “covered life” (if the company covers their employee, spouse and 2 children, they have to pay 4*$63 or $252). The fee is called the “transitional reinsurance fee” and is over $5 per month per covered life. So if you are single and your monthly contributions went up this year, $5 of that increase is going straight to the government as a stealth tax on you. If you cover your family of 4 then it is over $20 a month. If you are thinking, well only big companies are self-insured and they can afford it, you are wrong; not on the “afford it” part which can be debated, but because all insurance companies must pay the fee too. If you think the insurance companies will just eat the cost you don’t understand how they work. Insurance companies raised their premium rates to cover the fee, so that increase in your contributions driven by higher insurance premiums is, at least in part, going straight to the government. The problem is this fee really hasn’t been talked about so everyone just assumes it is the big companies and insurers sticking it to the little guy when it is really your friend and ally, the Federal government.

That is all I have space to talk about for now, but if there is a specific part of the Affordable Care Act you would like me to discuss, just send your question into Ask Bill and I will try to address it.

Employer Coverage Under Obama Care

With all of the furor over a website that doesn’t work and millions of individual coverage policies being cancelled (actually, to be specific, just not re-offered after they expire at the end of the year), people covered by employer sponsored insurance may be thinking they have escaped the worst of Obama Care. Keep in mind that in the U.S., the vast majority of people are covered by their employer, not through individual policies, so anything impacting employer providing insurance will actually impact many times the number of people currently impacted by Obama Care.

The first impact is a tax (isn’t that what the Supreme Court said all of the penalties and fees in Obama Care were) euphemistically called the “Transitional Reinsurance Program Fee.” This tax is $63 per covered individual in 2014. So if you cover your family of 4 through your employer provided insurance, your employer will be paying $252 to the government for the privilege of providing you insurance in 2014. So those contribution increases you are seeing for next year aren’t just about the rising cost of insurance. A chunk, maybe a large chunk, of the increase is going right to the Federal government.

The second impact is the reporting that will be required later in 2014. Your employer is mandated to tell the Federal government the following about you:

  • The months you and your dependent were covered by company provided insurance.
  • The monthly cost of that insurance in total.
  • The amount you paid (your share of the cost) for that insurance (by the way it’s the law that the employer has to pay at least 60% of the cost so you can pay no more than 40% of the cost or the employer has to pay a penalty).

Keep in mind that your employer isn’t able to share that information with anyone without violating the Health Insurance Portability and Accountability Act (HIPAA), but the government conveniently exempted themselves from those requirements in the Obama Care law. This information will allow the Federal government to determine two things about you.

  1. If you followed the law and had health coverage throughout the entire year (if not you have to pay a penalty, I mean a tax).
  2. If you “cheated” and went to the public health exchange to get a subsidy because you make less than 400% of the Federal poverty limit ($80,000 for a family of 4). See, if your employer provides coverage, then you aren’t eligible for a subsidy even if it costs a big chunk (up to 9%) of your salary.

I guess now that the Affordable Care Act is the law, people are starting to figure out exactly what is in it (remember, it had to pass before we could find out).

The Inner Turmoil of Financial Statement Preparers

A number of CPAs in B&I have been fighting mixed feelings since last Thursday.  That was the day the Supreme Court came out with its historic ruling on the Patient Protection and Affordable Care Act – better known as Obamacare.  I say mixed feelings because, like most CPAs, a significant majority of CPA Financial Statement preparers are conservative in nature and in politics and probably had a particular viewpoint on whether the court should have struck down the law or not.  The mixed feelings come in when one considers what those same financial statement preparers – at least any that work for companies that provide retiree health care and therefore have an Other Post Retirement Benefit (OPRB) liability on their books – were looking at having to do if the law was overturned.

First off, the change in the tax effect on any company participating in providing drugs to retirees under the retiree drug subsidy portion of Medicare Part D would have had to be recorded immediately.  Striking down the law could have been considered a tax law change and the many charges taken by companies when Obamacare first passed would have to have been reversed.

Second, there were many changes in the law that could impact the assumptions used to develop the OPRB liability.  Since these changes were not the result of a change in the company benefit plans they would be considered changes in actuarial assumptions. Usually assumption changes only impact a preparer during the annual update of the OPRB liability, but buried in the standard is a requirement to remeasure the whole liability if the assumption change was significant enough to the company.

And that is where the inner turmoil really started for public company Financial Statement preparers.  With the decision coming down on June 28, they would have had a little more than a month to measure the event, determine if it was indeed significant to the company, get the auditors to agree with your judgment (or revisit it if agreement cannot be reached), and then remeasure the liability if the impact was deemed significant.  That is a short time to cram in work that normally takes about three months at year-end. 

So while the radio show pundits were giving their critique of the Supreme Court and Chief Justice Roberts, many financial statements were secretly breathing a sigh a of relief that this would be a relatively normal quarter-end.

What Happens If

It seemed like the whole country was following the arguments before the Supreme Court on the Constitutionality of the Individual Mandate in the PPACA – better know as the Health Care Act (or as some like to call it Obamacare).  I do not recall this much interest in judicial proceedings since the OJ Simpson Trial.  We are now waiting to see the Court’s decision, but we will have to wait until the end of June to find out.   Essentially, there are four possible outcomes.

  1. The mandate is constitutional and everything stays just the way it is
  2. The mandate is not constitutional, but it is the only part struck from the law
  3. The mandate is not constitutional and other integral parts are struck along with it
  4. The mandate is not constitutional and so integrated with the rest of the law that the whole law must be struck down

As an accountant I have been told more than once I have no business trying to play the part of lawyer, so I won’t venture any opinions on which outcome is likely, but as accountants we are responsible for helping our businesses make plans.  In this case, those plans include thinking about the “what ifs” if the law is struck down. With 2,700 pages of law and thousands of pages of passed and proposed regulations, the “what if” list is quite long. 

One of the first decisions businesses and insurers will have to make is how to deal with the benefit changes they already made to comply with the law.  Does the business still want to insure dependents of employees up to the age of 26 as was required by the law?  What about reinstituting lifetime coverage maximums?  What changes should be made to preventive care and checkup benefits now that they aren’t required to be without a co-payment?

Another significant impact close to the heart of many CPAs is the elimination of the requirement to include the dollar amount of medical benefits on an employee’s W-2.  Most businesses are well underway with their plans to determine the amount and develop ways to include it on the W-2 since it is currently required to be included on the 2012 W-2s to be issued in early 2013. Another change would be around Flexible Spending Accounts or FSAs.  Under the law the maximum contribution to an FSA would drop to $2,500 in 2013.  Businesses will need to be prepared to modify their annual enrollment process quickly to keep up with the changes. 

As I said, the list is long and I could spend the next ten blogs going over the possible impacts, but I think you get the idea that the Supreme Court decision is of more than a passing interest to CPAs in Business.  The decision will impact budgets, planning and a number of processes, so like the rest of the country we will be waiting, but unlike the rest of the country, we are already starting to think “what if…”