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Affordable Care Act and the Impact on Practice

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Affordable Care Act and the Impact on Practice

  1. 1. The Affordable Care Act and the Impact on Practice ACVIM – 2014 Forum
  2. 2. IRS Circular 230 Disclosure In accordance with requirements imposed by the IRS, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this presentation (including attachments) is not intended or written to be used, and cannot be used, for the purpose of a) avoiding penalties under the Internal Revenue Code or b) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please consult your tax advisor before relying on any of the advice provided in this presentation.
  3. 3. Quick Intro – Jason Deshayes, CPA • Partner with Butler and Company • My calling is to serve clients and help navigate them through their finances, whether they are an individual or a business • I also believe it is hugely important to serve the community
  4. 4. 2013 and 2014 are going to be interesting years • Provisions of the Affordable Care Act have kicked in, with a lot on the horizon still • The new American Taxpayer Relief Act was passed, providing a level of certainty with what the future of tax law has in store • Are we finally going to accept this is the new normal?
  5. 5. The Affordable Care Act • Affectionately referred to as Obamacare • Wide reaching legislation that has completely morphed the idea of medical care and health insurance for the entire country • Focus on all of the additional health conditions that will be covered now – Nothing is free, it’s going to come out of someone’s pocket • We still don’t know what is going to happen!
  6. 6. So, what does the ACA mean to me?
  7. 7. Benefits/Changes • Extension of benefits to unmarried dependents under the age of 26 • Cannot deny coverage based on pre-existing conditions • Individual mandate for coverage • Creation of state health insurance exchanges • Shared responsibility for employers of at least 50 FTE • Additional Medicaid eligibility
  8. 8. Certain Requirements • Health insurance has to be sold to anyone regardless of health status • People in the same age group will pay the same premiums regardless of health status • All companies with 50+ FTEs have to offer affordable health care with essential health benefits
  9. 9. Rating Restrictions • Age – Older people won’t pay more than 3x the amount younger people pay • Premium Rating Area – Higher cost of living = more expensive insurance • Number of family members covered – Each person counts • Tobacco Use – Premium can only be rated on a 1.5:1 ratio • Used to be 10x!
  10. 10. Minimal Essential Coverage • Defined as: – Coverage under an “eligible employer-sponsored plan,” which the proposed Treasury rule defines generally to mean coverage under a group health plan, whether insured or self-insured, including coverage under a federal or non- federal governmental plan; – Coverage under an employer-sponsored retiree health plan; – Coverage under certain government programs, such as Medicare, Medicaid, the Children’s Health Insurance Program (CHIP) and TRICARE; – Coverage in the individual insurance market, including a plan offered by an Exchange; and – Other coverage recognized by HHS, including self-funded student health coverage and coverage under Medicare Advantage plans. • You need to have minimal essential coverage to avoid a penalty as an individual (more later)
  11. 11. Essential Health Benefits • No annual/lifetime limits on: – Ambulatory services – Emergency services – Hospitalization – Maternity and Newborn care – Mental Health and Substance Abuse – Prescription drugs – Rehabilitative services – Laboratory services – Pediatric services (oral and vision too) – Preventative and wellness
  12. 12. New Mental Health Coverage Individuals who will gain mental health, substance use disorder or both benefits under ACA Individuals with existing mental health and substance use disorder benefits who will benefit under federal parity protections Total individuals who will benefit from parity protections Currently in individual plans 3.9 million 7.1 million 11 million Currently in small group plans 1.2 million 23.3 million 24.5 million Uninsured 27 million N/A 27 million Total 32.1 million 30.4 million 62.5 million Source ASPE Issue Brief Feb 20,2013
  13. 13. Women’s Health Coverage Additional benefits provided for women’s health Number of women impacted and when Maternity coverage under individual plans 8.7 million starting in 2014 Preventive care services 20.4 million starting late 2010 Expanded insurance coverage 1.1 million starting late 2010 Expanded benefit coverage 13.5 million starting 2014 Source ASPE Research Brief March 20,2012
  14. 14. What is Affordable? • If the employee portion of the employer-coverage exceeds 9.5% of the employee’s household income, then the coverage is deemed not to be affordable – Different ways to determine this: • W-2 method for employee only • Federal Poverty Line • Rate of Pay Method (9.5% of 130 hours x rate of pay) • Employees disclose all personal financial information to determine true household income • If there are multiple cost options (ex: multiple levels of deductibles or coverage benefits), then the affordability test is based on the lowest-cost option
  15. 15. Insurance Issues • The new coverage standards apply only to policies that renew on or after January 1, 2014. – This means if you have a renewal cycle of September 1, then your policy doesn’t kick in until September 1, 2014 – May make a whole lot of sense to get into a group plan while the getting is good – The majority of individual policies are adopting a January 1 start • No idea of what the cost of coverage is looking like in the long term – Some places, very little increase – Personally speaking, I saw an increase of 60%
  16. 16. So, what does the ACA mean to me? • Depending on your circumstances, you will see a tax hike starting in 2013 – 3.8% Medicare tax on net investment income if you have more than $200,000 (single) or $250,000 (married) of income • Interest, dividends, annuities, royalties and rents (unless derived from a trade or business) • Gains from the disposition of property – buildings, stocks, mutual funds, capital gain distributions
  17. 17. So, what does the ACA mean to me? – 0.9% additional Medicare tax withholding on wages over $200,000 (single) or $250,000 (married) • This is only on the employee side – employers do not match this additional tax – Not subject to additional Medicare • Activities that aren’t trade or business (Executor) • S-corporation income for active owner • Covenant-not-to-compete • Retirement income • These items may trigger higher AGI
  18. 18. So, what does the ACA mean to me? • Lots of reporting requirements – tax reporting is the key mechanism for enforcement – Income tax returns • Corporate • Individual – Payroll tax reports • If you aren’t using a payroll service, I would recommend you look into it – they know what reporting is necessary
  19. 19. So, what does the ACA mean to me? – Once the individual mandate goes into effect in 2014, you will be required to have health insurance or pay a penalty…errr….I mean, tax. The $$$ is low compared to cost of coverage – Individual Shared Responsibility penalty • The greater of a flat fee or % of income – Fee in 2014 = $95, $325 in 2015, $695 in 2016 – Maximum fee is $2,085 (3x the fee; indexed for inflation) – % of taxable income = 1% in 2014, 2% in 2015, 2.5% in 2016 • Doesn’t apply if: – You can’t afford coverage (premiums > 8% of income) – Undocumented immigrants – People who only don’t have insurance for less than 3 months – People whose income is below tax filing requirements • Cannot exceed the cost of a bronze (cheapest) plan • Applies for each month without coverage • No liens or levies from the IRS – IRS can only extract the penalty from a refund
  20. 20. Penalty Calculation Single, healthy, young taxpayer has applicable income (for penalty) of $60,000 a year –Penalty in 2014 = greater of $95 or 1% of $60,000 ($600) –Cost of coverage = est $150/month = $1,800 If this individual doesn’t see the doctor ever, why not pay the penalty and get the insurance whenever you need it
  21. 21. Penalty Calculation Family of 4 with applicable income of $150,000 –Penalty in 2016 = greater of $2,085 or 2.5% of $150,000 ($3,750) –Cost of coverage = est $450/month = $5,400 Still cheaper to just pay the penalty – may not be smarter, but the penalty isn’t large enough to force compliance
  22. 22. Employer Responsibility – Employer Mandated Coverage – if you own a business and meet certain qualifications, you may be subject to penalties if you don’t offer “minimal essential coverage” - $2,000 per employee • Kicks in now in 2015 (pushed back a year) • 30 person threshold – penalty kicks in after that • Let’s say you have 100 employees and you do provide health insurance, but 2 of your employees use the exchange - $140,000 penalty (70 employees x $2,000)
  23. 23. Employer Responsibility – Inadequate/Unaffordable Insurance Penalty • You offer insurance to 95% of your FTEs, but the insurance is either unaffordable or lacks minimum value • At least one employee utilizes a health exchange • $3,000 penalty assessed monthly (1/12 of $3,000 per month) per employee who uses exchange • Penalty capped at the “no coverage” penalty
  24. 24. So, what does the ACA mean to me? – Flexible Spending Accounts – capped at $2,500 starting in 2013 – Itemized deduction of medical expenses requires 10% of AGI (up from 7.5%) • If your AGI is $100,000, you need $10,000 of unreimbursed medical before you get a $1 of deduction – Over-the-Counter Drugs are not longer allowable for FSA, HAS, HRA and MSAs • Nonqualified distributions have increased tax for 20%
  25. 25. So, what does the ACA mean to me? – 2.3% medical device manufacturer tax • Intended to cover only devices used on humans – Problem is that some of this technology can be used on animals too…so if your vet bills get higher, you know why • Tax paid by the manufacturers, who then pass on that cost to the device users – Required disclosure of nutritional content at fast food restaurants and vending machines – Grants for small employers who set up wellness programs – Free preventative care
  26. 26. So, what does the ACA mean to me? – 2.3% medical device manufacturer tax • Intended to cover only devices used on humans – Problem is that some of this technology can be used on animals too…so if your vet bills get higher, you know why • Tax paid by the manufacturers, who then pass on that cost to the device users • For example, you use a human pediatric endoscope to use on a small animal or some other exotic pet – since it can be used on humans, it would be subject to this tax • AVMA has been working hard on this
  27. 27. Eegads – that’s enough of that!
  28. 28. American Taxpayer Relief Act • Our government’s way of avoiding the country going over the “fiscal cliff” – the result of automatic tax increases and spending cuts
  29. 29. American Taxpayer Relief Act • We went over the cliff…for a little bit and came out with a degree of certainty about tax law – I am certain a number of our clients will be taxed a lot more – I am certain that at least I won’t be stressing about the Alternative Minimum Tax nearly as much – I am certain estate planning will require far less use of a crystal ball
  30. 30. American Taxpayer Relief Act • Tax rate changes – The rates general stay the same, until which you hit $400,000 (single) or $450,000 (married) of taxable income - new rate of 39.6% – Qualified Dividends and Long-Term Capital Gains stay at 15%, unless you are in the 39.6% tax bracket – then you pay 20% • Still have the 0% rate if you are in 10% or 15% bracket
  31. 31. American Taxpayer Relief Act • Itemized Deductions and Personal Exemptions – The more you make, the less benefit you receive for your personal exemptions and itemized deductions (kicks in with incomes over $250k/ $300k) • Alternative Minimum Tax – Finally…no more patching, the AMT Exemption is indexed for inflation • Social Security 2% cut is gone for employee portion
  32. 32. American Taxpayer Relief Act • Extension of the Qualified Charitable Distribution – Allows you to make a donation direct from the IRA to a charity – Meets requirement for RMD; good through 2013 • American Opportunity Tax Credit extended
  33. 33. Business Structure and Compensation Being a business owner requires a lot of financial know-how –Business organization/entity selection –Accounting for revenue/expenses –Human resources –Marketing Worth it to consult with an attorney and accountant to make sure you’ve got your bases covered It’s far easier to do things right from the get-go Organizational structure can change down the road if the structure you have isn’t appropriate
  34. 34. Sole Proprietorship • Really easy to set up - you put your sign on a door. • No protection of personal assets • Self-employment tax issues • Included on personal return as a Schedule C • Can only have one owner
  35. 35. Sole Proprietorship You & Your Practice One Tax Bill
  36. 36. Partnership • Requires more work for set up, must have a partnership agreement. • Very little protection of personal assets • Self-employment tax issues • Files a separate return with the income being taxed at the individual partner's level based on their ownership • Have to have at least two partners • Lots of flexibility, presuming you allow it in your partnership agreement
  37. 37. Partnership Practice Guaranteed payments & draws Provider #1 Provider #2 Tax on profits paid by Individual owners
  38. 38. S-Corporation • Much more formal organization • Protection of personal assets • Get paid a W-2 as part of compensation; distributions represent the rest • Files a separate return with the income being taxed at the individual partner's level based on their ownership • May have 1 - 100 unrelated owners • Not as good for fringe benefits • Flexibility with tax planning
  39. 39. S-Corporation Practice W-2 Compensation & distributions Owner/ Employee Tax on profits paid by Individual owner
  40. 40. Corporation • Much more formal organization • Protection of personal assets • Get paid via W-2 as compensation • Corporation files own tax return and pays own tax, but at maximum tax rate as a Personal Service Corp • May have unlimited owners • Better fringe benefits for owners • Flexibility with tax planning
  41. 41. Corporation Practice W-2 Compensation Provider #1 Provider #2 Tax on profits paid by the corporation Tax on wages paid by shareholders
  42. 42. Limited Liability Company • Has a lot of flexibility as it can be any and all of the entities mentioned here – can be a LLC for legal purposes, but can be a corporation, sole proprietorship, partnership or S-corporation for tax purposes • Advised to help shield legal liability - but still have insurance!
  43. 43. Keeping the books •Keeping track of the books means recording revenue & expenses, reconciling bank accounts, balancing bank loans, etc… •If you are not the type to do this work yourself, it’s best to bring in an outside party – bookkeeper, accountant, CPA, etc… •It is far less expensive to do things the right way the first go around •Your bookkeeping and accounting needs will (and should) evolve as the practice evolves
  44. 44. Accounting Systems • QuickBooks is one of the most common accounting systems available - both a desktop and online version • CBS – Client Bookkeeping Solution • Xero • FreshBooks • Good ol’ spreadsheets • Other cloud based programs
  45. 45. Accounting Systems • A few things to think about: –Is this a program you can understand? –What is a good interface with your CPA? –Can you get the data you want from the system easily? –Cost vs. benefit –Do you want/need the remote access?
  46. 46. Retirement Plans • When was the last time you looked at the plan? • What type of match is the business on the hook for? • Is the plan appropriate for the employee base? • Does it fit the owners’ needs? • Are your employees even using it? • Save on some payroll taxes by increasing the retirement benefits – higher match/lower salary
  47. 47. Retirement Plans • Various types of retirement plans – SIMPLE, 401k, SEP are examples • Limits range from $11,500 to $50,000 • SIMPLE plans have the smallest limit, but least cost to the employer and easiest to manage • SEPs can put the most money into retirement, but at the cost of the employer having to front the entire cost • 401k plans have a mix of employer and employee contributions, as well as Roth/traditional components, but higher administrative cost • Catch up contributions allowed if over 50 • IRAs outside of employer plans
  48. 48. Employees and Payroll • Whatever you are paying an individual, add approximately 10% for taxes and at least 15% - 20% for benefits (if you offer them) • Quarterly reporting and other deposit requirements for payroll taxes • Documentation requirements for each employee • Payroll outsourcing is a very easy way to take care of this at a pretty low cost • The employer pays for 1/2 of each employee's social security and Medicare (7.65% of gross pay up to $109,000, 1.45% after that) plus unemployment taxes • Safe assumption is each employee will cost you about twice as much as their hourly rate
  49. 49. Cost of Employees • You hire an assistant at $35,000 – the compensation package also includes health insurance and a retirement match Your cost: Salary $35,000 Payroll Taxes 3,500 Health insurance 3,600 ($300/month) Retirement match 1,050 (3% match) Other costs 2,500 Total cost $45,620 (130% of salary)
  50. 50. Questions?
  51. 51. Contact Info Jason Deshayes, CPA Butler and Company 505-821-0893 Skype – taxguyjase Twitter - @taxguyjase