For 2022, the Social Security wage cap will be $147,000, and Social Security and Supplemental Security Income (SSI) benefits will increase by 5.9 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2022, the Social Security wage cap will be $147,000, and Social Security and Supplemental Security Income (SSI) benefits will increase by 5.9 percent. These changes reflect cost-of-living adjustments to account for inflation.

Wage Cap for Social Security Tax
The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:

• a 6.2 percent social security tax, also known as old age, survivors, and disability insurance (OASDI); and
• a 1.45 percent Medicare tax, also known as hospital insurance (HI).

For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:

• a 12.4 percent OASDI tax; and
• a 2.9 percent HI tax.

OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.

For 2022, the wage base is $147,000. Thus, OASDI tax applies only to the taxpayer’s first $147,000 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $147,000.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2022
For workers who earn $147,000 or more in 2022:

• an employee will pay a total of $9,114 in social security tax ($147,000 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $18,228 in social security tax ($147,000 x 12.4 percent).

Additional Medicare Tax
Higher-income workers may have to pay an additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:

• $250,000 for married taxpayers who file a joint return;
• $125,000 for married taxpayers who file separate returns; and
• $200,000 for other taxpayers.

The annual wage cap does not affect the additional Medicare tax.

Benefit Increase for 2022
Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2022 by 5.9 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

The Court of Appeals for the Second Circuit affirmed the district court's judgment that the cap on the federal income tax deduction for money paid in state and local taxes (SALT) is constitutional.

The Court of Appeals for the Second Circuit affirmed the district court's judgment that the cap on the federal income tax deduction for money paid in state and local taxes (SALT) is constitutional. Four states brought a claim against the government alleging that the $10,000 cap on the federal income tax deduction for money paid in state and local taxes, enacted as part of the Tax Cuts and Jobs Act ( P.L. 115-97) (TCJA), violated the Constitution. The states argued that the state and local tax deduction was constitutionally mandated, or alternatively that the cap violated the Tenth Amendment because it coerced them to abandon their preferred fiscal policies. The district court held that the states had standing and that their claims were not barred by the Anti-Injunction Act (AIA). However, the district court concluded that the claims lacked merit. The states' allegations that the cap decreases the frequency and price at which taxable real estate transactions occur by measurably increasing the cost of those transactions reflect specific lost tax revenues and suffice to support standing. Moreover, the exception in South Carolina v. Regan, 84-1 USTC ¶9241, 465 U.S. 367, 373 (1984), applied to the facts of this case, therefore, the court held that the AIA did not foreclose its review of the states' claim.

Background
The federal tax code’s state and local tax (SALT) deduction permitted taxpayers to deduct from their taxable income all the money they paid in state and local income and property taxes. However, in 2017, Congress passed the TCJA which imposed a cap on the SALT deduction. The immediate impact of this cap was felt most acutely in states where the state and local tax liability of residents often exceeded the $10,000 maximum. Four of the most affected states, namely, New York, Connecticut, New Jersey, and Maryland, sued the government asserting that the cap on the SALT deduction was unconstitutional on its face and unconstitutionally coerced them to abandon their preferred fiscal policies. The government responded by stating that the district court lacked subject matter jurisdiction to consider the states' claims and also defended the cap on the merits. The district court rejected the government's jurisdictional defense but dismissed the complaint for failure to state a claim. On appeal, the states argued that the district court erred on the merits.

Affirming an unpublished District Court opinion.

The IRS has reminded employers to check the Work Opportunity Tax Credit available for hiring long-term unemployment recipients and other groups of workers facing significant barriers to employment.

The IRS has reminded employers to check the Work Opportunity Tax Credit available for hiring long-term unemployment recipients and other groups of workers facing significant barriers to employment.

Cash contributions made either to supporting organizations or to establish or maintain a donor advised fund do not qualify. Also, cash contributions carried forward from prior years do not qualify, nor do cash contributions to most private foundations and most cash contributions to charitable remainder trusts.

Subject to certain limits, taxpayers who itemize could generally claim a deduction for charitable contributions made to qualifying charitable organizations. These range from 20 percent to 60 percent of adjusted gross income (AGI) and vary by the type of contribution and type of charitable organization. The law now permits electing individuals to apply an increased limit of up to 100 percent of their AGI, for qualified contributions made during 2021. More information can be found at https://www.irs.gov/forms-pubs/about-publication-526.

The Work Opportunity Tax Credit encourages employers to hire workers certified as members of any of the following targeted groups facing barriers to employment:

• temporary Assistance for Needy Families (TANF) recipients;
• unemployed veterans, including disabled veterans;
• formerly incarcerated individuals;
• designated community residents living in Empowerment Zones or Rural Renewal Counties;
• vocational rehabilitation referrals;
• supplemental Nutrition Assistance Program (SNAP) recipients;
• supplemental Security Income (SSI) recipients;
• long-term family assistance recipients; and
• long-term unemployment recipients.

An employer must first request certification by submitting IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit to their state workforce agency (SWA) to qualify for the credit within 28 days after the eligible worker commences work. However, under a special relief provision, a submission deadline on November 8, 2021, applies to qualified summer youth employees residing in Empowerment Zones and designated community residents residing in Empowerment Zones.

Eligible employees must commence work on or after January 1, 2021, and before October 9, 2021, to qualify for the submission deadline. The Work Opportunity Tax Credit is claimed on eligible businesses' federal income tax returns and is usually based on wages paid to qualified workers during the first year of employment. The credit is first figured on Form 5884, Work Opportunity Credit, and then is claimed on Form 3800, General Business Credit.

Under a special rule, employers are permitted to claim the Work Opportunity Tax Credit for hiring qualified veterans, although the credit is not available to tax-exempt organizations for most groups of new hires. Such organizations claim the credit against payroll taxes on Form 5884-C, Work Opportunity Credit for Qualified Tax Exempt Organizations.

The IRS highlighted how expanded tax benefits help both individuals and businesses give to charity before the end of this year.

The IRS highlighted how expanded tax benefits help both individuals and businesses give to charity before the end of this year. The law now permits these taxpayers to claim a limited deduction on their 2021 federal income tax returns for cash contributions made to certain qualifying charitable organizations. These taxpayers, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2021. The maximum deduction is increased to $600 for married taxpayers filing joint returns. Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify to claim a limited deduction for cash contributions.

Cash contributions made either to supporting organizations or to establish or maintain a donor advised fund do not qualify. Also, cash contributions carried forward from prior years do not qualify, nor do cash contributions to most private foundations and most cash contributions to charitable remainder trusts.

Subject to certain limits, taxpayers who itemize could generally claim a deduction for charitable contributions made to qualifying charitable organizations. These range from 20 percent to 60 percent of adjusted gross income (AGI) and vary by the type of contribution and type of charitable organization. The law now permits electing individuals to apply an increased limit (Increased Individual Limit), up to 100 percent of their AGI, for qualified contributions made during 2021. More information can be found at https://www.irs.gov/forms-pubs/about-publication-526.

The IRS issued a notice clarifying the application of certain extensions granted under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) for the election of COBRA coverage and payment of COBRA premiums due to the COVID-19 emergency.

The IRS issued a notice clarifying the application of certain extensions granted under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) for the election of COBRA coverage and payment of COBRA premiums due to the COVID-19 emergency. The IRS also addressed the interaction of COBRA continuation coverage under the Emergency Relief Notices with the COBRA premium assistance available for certain individuals under the American Rescue Plan Act of 2021 (the ARP).

Guidance and Application of Extensions
COBRA permits qualified beneficiaries who lose coverage under a group health plan to elect continuation health coverage for a 60-day period after receipt of a COBRA election notice. The initial premium can not be due earlier than 45 days after that election.

Certain extensions were granted due to the COVID-19 (Coronavirus) emergency, and issued in the Joint Notification of Extensions of Certain Timeframes for Employee Benefit Plans, Participants, and Beneficiaries Affected by the COVID-19 Outbreak. Additional guidance was provided by Employee Benefits Security Administration (EBSA) Disaster Relief Notice 2021-01. Under the Emergency Relief Notices, up to one year must be disregarded in determining the due dates for individuals to elect COBRA continuation coverage and pay COBRA premiums during the Outbreak Period. This notice clarifies that the disregarded period for an individual to elect COBRA continuation coverage and the disregarded period for the individual to make initial and subsequent COBRA premium payments generally run concurrently.

For example, if an individual elected COBRA continuation coverage outside of the initial 60-day COBRA election timeframe, that individual generally will have one year and 105 days (60 days plus 45 days) after the date the COBRA notice was provided to make the initial COBRA premium payment. If an individual elected COBRA continuation coverage within the initial 60-day COBRA election timeframe, that individual will only have one year and 45 days after the date of the COBRA election to make the initial COBRA premium payment.

Applying the disregarded periods in this way means that individuals who delay electing COBRA may not have more than one year of total disregarded time for the COBRA election and initial COBRA payment. For example, a taxpayer cannot delay electing COBRA continuation coverage for 6 months and then add another full year to the disregarded period for purposes of determining the deadline for making the initial COBRA premium payment (resulting in a total of 18 months of disregarded time for both the COBRA election and initial COBRA payment).

Transition Relief
To avoid inequitable outcomes, in no event will an individual be required to make the initial premium payment before November 1, 2021, even if November 1, 2021 is more than one year and 105 days after the date the election notice was received, provided that the individual makes the initial premium payment within one year and 45 days after the date of the election.

ARP COBRA Premium Assistance
On March 11, 2021, the American Rescue Plan Act of 2021 (ARP) was enacted, providing for temporary COBRA premium assistance for certain “Assistance Eligible Individuals” for periods of coverage beginning on or after April 1, 2021, through periods of coverage beginning on or before September 30, 2021. The extensions of the timeframes under the Emergency Relief Notices do not apply to the periods for providing the required notice of the ARP extended election period or for electing COBRA continuation coverage with COBRA premium assistance under the ARP.

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought.

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.

When Sales of Livestock are Involuntary Conversions
Sales of livestock due to drought are involuntary conversions of property. Taxpayers can postpone gain on involuntary conversions if they buy qualified replacement property during the replacement period. Qualified replacement property must be similar or related in service or use to the converted property.

Usually, the replacement period ends two years after the tax year in which the involuntary conversion occurs. However, a longer replacement period applies in several situations, such as when sales occur in a drought-stricken area.

Livestock Sold Because of Weather
Taxpayers have four years to replace livestock they sold or exchanged solely because of drought, flood, or other weather condition. Three conditions apply.

First, the livestock cannot be poultry.

Second, the taxpayer must have held the converted livestock for:

• draft;
• breeding; or
• dairy purposes.

Third, the weather condition must make the area eligible for federal assistance.

Persistent Drought
The IRS extends the four-year replacement period when a taxpayer sells or exchanges livestock due to persistent drought. The extension continues until the taxpayer’s region experiences a drought-free year.

The first drought-free year is the first 12-month period that:

• ends on August 31 in or after the last year of the four-year replacement period; and
• does not include any weekly period of drought.

What Areas are Suffering from Drought
The National Drought Mitigation Center produces weekly Drought Monitor maps that report drought-stricken areas. Taxpayers can view these maps at

https://droughtmonitor.unl.edu/

However, the IRS also provided a list of areas where the year ending on August 31, 2021, was not a drought-free year. The replacement period in these areas will continue until the area has a drought-free year.

An individual was allowed to deduct the amount of premiums paid to provide health insurance coverage for his ex-spouse as alimony.

An individual was allowed to deduct the amount of premiums paid to provide health insurance coverage for his ex-spouse as alimony. The taxpayer had agreed to pay his then spouse’s health insurance premiums, incident to a separation agreement pending divorce, through a cafeteria plan provided by the taxpayer’s employer. Subsequently, the taxpayer had excluded the amount equal to the health insurance premiums pursuant to Code Secs. 106 and 125 from his gross income and also claimed an alimony deduction pursuant to Code Secs. 62 and 215 for the portion of the premiums covering his then spouse.

Double Deduction
There was no dispute that the taxpayer was entitled to exclude the health insurance compensation from his gross income. However, the IRS had challenged the taxpayer’s attempt to also deduct the alimony payments and argued that permitting the alimony deduction would create a windfall to the taxpayer by granting him the practical equivalent of multiple deductions for the same economic outlay. The tax court held that disallowing the alimony deduction would leave the taxpayer with a greater tax burden that would counter the intended purpose and operation of the general alimony regime. Therefore, the taxpayer undisputably qualified for both the exclusion and the alimony deduction, and no double tax benefit outcome could arise when considering the alimony regime as a whole. By asking to disallow the alimony deduction where the law plainly permits the taxpayer this right, the IRS attempted to disrupt the uniformity of the general alimony regime under the guise of the double deduction rules when no such threat was present.

Deduction for Wholly Tax-Exempt Income
In addition, the IRS contended that Code Sec. 265(a) disallowed the taxpayer’s alimony deduction because it provides that an amount may not be deducted if it is allocable to wholly tax-exempt income (other than interest). The tax court, however, had never applied Code Sec. 265(a)(1) to disallow an alimony deduction, or, in any instance where the supposed exempt item of income at issue was actually included in gross income by a different taxpayer. Moreover, the alimony payments were not considered allocable to wholly tax-exempt income for Code Sec. 265 purposes as the taxpayer was required to include it in her income.

The IRS has reminded taxpayers that the last quarter of 2021 is a good time to check withholding.

The IRS has reminded taxpayers that the last quarter of 2021 is a good time to check withholding. The IRS’s convenient Tax Withholding Estimator (https://www.irs.gov/individuals/tax-withholding-estimator), will help taxpayers determine if they have too much withheld and how to make an adjustment to put more cash into their own pocket now. About 70 percent of taxpayers over withhold their taxes every year, which typically results in a refund. Alternatively, it will help taxpayers see that they should withhold more or make an estimated tax payment to avoid a tax bill when they file their tax return next year.

The following things need to be considered when adjusting withholding for 2021:

• Coronavirus tax relief - Tax help for taxpayers, businesses, tax-exempt organizations, and others, including health plans, affected by coronavirus (COVID-19).
• Disasters such as wildfires and hurricanes – Special tax law provisions may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area.
• Job loss – 4128, Tax Impact of Job Loss, explained how this unfortunate circumstance can create new tax issues.
• Workers moving into the gig economy due to the pandemic – The IRS advised people earning income in the gig economy to consider estimated tax payments to avoid a balance or penalties when they file.
• Life changes such as marriage or childbirth – Getting married or having a child are just a couple of life events that can affect your refund or how much you owe.

Taxes are generally paid throughout the year whether from salary withholding, quarterly estimated tax payments, or a combination of both. Taxpayers can pay online, by phone, or from the IRS2Go app. Finally, taxpayers can schedule payments for future dates, which can be useful during filing season, for payment plan payments or for estimated tax payments.

The IRS released standards that a limited liability company (LLC) must satisfy to receive a determination letter recognizing it as tax-exempt under Code Secs. 501(a)(1) and 501(c)(3). This does not affect the status of organizations currently recognized under Code Sec. 501(c)(3).

The IRS released standards that a limited liability company (LLC) must satisfy to receive a determination letter recognizing it as tax-exempt under Code Secs. 501(a)(1) and 501(c)(3). This does not affect the status of organizations currently recognized under Code Sec. 501(c)(3).

Required Provisions
The IRS would issue said letter only if an LLC’s articles of organization and its operating agreement each include:

• provisions requiring that each member of the LLC be either (1) recognized as aforementioned; (2) a governmental unit under Code Sec. 170(c)(1); or (3) wholly-owned instrumentality of such, a governmental unit;
• express charitable purposes and charitable dissolution provisions;
• express chapter 42 compliance provisions under Code Sec. 508(e)(1), if the LLC is a private foundation; and
• an acceptable contingency plan (such as suspension of membership rights) in the event that one or more members cease to be except organizations or governmental units or wholly-owned instrumentalities.

Finally, comments could be made electronically via the Federal eRulemaking Portal at www.regulations.gov (type IRS-2020-0042 in the search field on regulations.gov to find this Notice and submit comments). Alternatively, send comments by mail: Internal Revenue Service, CC:PA:LPD:PR (Notice 2021-56), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

Final regulations under Code Sec. 301 update the existing regulations under this provision to reflect statutory changes made by the Technical and Miscellaneous Revenue Act of 1988 ( P.L. 100-647) (the 1988 Act).

Final regulations under Code Sec. 301 update the existing regulations under this provision to reflect statutory changes made by the Technical and Miscellaneous Revenue Act of 1988 ( P.L. 100-647) (the 1988 Act). These changes generally provide that the amount of a Section 301 distribution of property made by a corporation to its shareholder is the fair market value of the distributed property. The final Section 301 regulations adopt prior proposed regulations ( NPRM REG-121694-16), without substantive changes, and apply generally to distributions made after September 22, 2021.

Code Sec. 301 and Amendments by the Technical and Miscellaneous Revenue Act of 1988
Code Sec. 301 provides rules for the treatment of a distribution of property, including money, made by a corporation to its shareholder with respect to that shareholder’s stock ownership in that corporation (a Section 301 distribution).

The 1988 Act amended Code Sec. 301(b)(1) to provide that the amount of any Section 301 distribution is the amount of money received plus the fair market value of the other property received. The 1988 Act also amended Code Sec. 301(d) to provide that the basis of property received in a Section 301 distribution is the fair market value of such property (both amendments, collectively, are referred to as the 1988 amendments).

The current Section 301 regulations reflect the rules of these two provisions as they existed prior to the 1988 amendments. Accordingly, to the extent preempted by statute, the current regulations have no application.

2019 Proposed Regulations
In 2019, the IRS issued proposed regulations under Code Sec. 301 ( NPRM REG-121694-16) to reflect the 1988 amendments (2019 proposed regulations). The scope of the 2019 proposed regulations was limited to:

• deleting provisions made obsolete by statutory changes;
• making minor additions and revisions to reflect current statutory text;
• making certain non-substantive changes for purposes of clarity and readability, including reordering and redesignating paragraphs; and
• amending cross-references in regulations under other provisions to reflect the proposed reordering and redesignating of paragraphs in the Section 301 regulations.

Final Regulations
The final Section 301 regulations adopt the 2019 proposed regulations with no substantive changes and with certain non-substantive changes for purposes of clarity and readability. The final regulations apply to Section 301 distributions made after September 22, 2021. However, these regulations update the previous regulations under Code Sec. 301 to reflect the statutory changes made by the 1988 Act, which apply to distributions made in tax years beginning after December 31, 1986.

The Treasury and IRS have issued final regulations addressing the calculation of qualified business asset investment for qualified improvement property, under the alternative depreciation system (ADS), for purposes of the Code Sec. 250 deduction (for foreign-derived intangible income and Code Sec. 951A global intangible low-taxed income (GILTI)) and for purposes of determining GILTI.

The Treasury and IRS have issued final regulations addressing the calculation of qualified business asset investment for qualified improvement property, under the alternative depreciation system (ADS), for purposes of the Code Sec. 250 deduction (for foreign-derived intangible income and Code Sec. 951A global intangible low-taxed income (GILTI)) and for purposes of determining GILTI.

The regulations also contain transition rules relating to the impact of loss accounts on net operating loss carrybacks allowed under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (the "CARES Act”").

Treatment of Qualified Improvement Property Under Code Secs. 250 and 951A
The regulations clarify that the technical amendments to Code Sec. 168 made by section 2307(a) of the CARES Act apply to determine the adjusted basis of property under Code Sec. 250 and Code Sec. 951A. The CARES Act classified qualified improvement property as 15-year property with a 20-year recovery period, for purposes of ADS. The rule is treated as effective December 22, 2017. The ADS rules used for determining qualified business asset investments are the rules in effect on December 22, 2017.

NOL Carrybacks
The CARES Act allowed taxpayers to carryback for five years, NOLs incurred in 2018 through 2020. The regulations provide rules analogous to the existing transition rules in Reg. §1.904(f)-12(j) to situations involving an NOL arising in a post-2017 tax year that is carried back to a pre-2018 tax year. The rules of Reg. §1.904(g)-3(b) apply to the NOL carryback, and income in a pre-2018 separate category in the tax year to which the NOL is carried back is generally treated as if it included only income that would be assigned to the same separate category in post-2017 tax years.

Therefore, any separate limitation loss created by reason of a passive category component of a post-2017 NOL that is carried back to offset pre-2018 general category income will be recaptured in post-2017 tax years as general category income, and not as a combination of post-2017 general, foreign branch, or Code Sec. 951A category income. Losses will first ratably offset a taxpayer’s general category income in the carryback year, to the extent thereof, and that no separate limitation loss account will be created as a result of that offset. The amount of income in the general category available to be offset under this rule is determined after first offsetting the general category income in the carryback year by a post-2017 NOL component in the general category that is carried back to the same year.

PFIC Rules
Proposed regulations under Code Sec. 1297 and Code Sec. 1298, for determining whether a foreign corporation is treated as a passive foreign investment company (PFIC) and the treatment of income and assets of a qualifying insurance corporation that is engaged in the active conduct of an insurance business, were not finalized.

The Treasury and IRS intends to finalize the regulations separately.

Health flexible spending arrangements (health FSAs) are popular savings vehicles for medical expenses, but their use has been held back by a strict use-or-lose rule. The IRS recently announced a significant change to encourage more employers to offer health FSAs and boost enrollment. At the plan sponsor's option, employees participating in health FSAs will be able to carry over, instead of forfeiting, up to $500 of unused funds remaining at year-end.

Health flexible spending arrangements (health FSAs) are popular savings vehicles for medical expenses, but their use has been held back by a strict use-or-lose rule. The IRS recently announced a significant change to encourage more employers to offer health FSAs and boost enrollment. At the plan sponsor's option, employees participating in health FSAs will be able to carry over, instead of forfeiting, up to $500 of unused funds remaining at year-end.

Health expenses

Health FSAs are designed to reimburse participants for certain health care expenditures, typically expenses that qualify for the medical and dental expense deduction. Medical supplies, such as eye glasses and bandages, are usually treated as qualified expenses. However, nonprescription medicines (other than insulin) are not considered qualified medical expenses.

Health FSAs are often funded through voluntary salary reduction agreements with the participant's employer under a cafeteria plan. In that case, they are very taxpayer-friendly because no federal employment or federal income taxes are deducted from the employee's contribution. The employer may also contribute to a health FSA. However, there are special rules which govern employer contributions.

Typically, participants designate at the beginning of the year the amount they want to contribute to their health FSA and these amounts are deducted from their pay. For 2014, an employee's salary reduction contributions cannot exceed $2,500. The $2,500 cap is very important because cafeteria plans that do not limit health FSA contributions to $2,500 are not treated as cafeteria plans, and all benefits offered under the plan are included in the participants' gross income.

Use-or-lose rule

As mentioned, the use-or-lose rule is a drawback to health FSAs. Unused amounts remaining in the health FSA at year-end are forfeited. Employers are not allowed to refund any unused funds in a health FSA. Critics of the use-or-lose rule argue that it has discouraged participation in health FSAs because many employees do not want to risk forfeiting unused funds. Often, participants have to scramble at year-end to use their health FSA dollars

Grace period option

A few years ago, the IRS modified the use-or-lose rule. The IRS allowed cafeteria plans to adopt a grace period. Participants can use amounts remaining in a health FSA at year-end for up to an additional two months and 15 days. This grace period is optional. Employers are not required to offer the grace period, although many do.

Carryover option

At its option, an employer may now amend its cafeteria plan to provide for the carryover to the immediately following year of up to $500 of any amount remaining unused as of the end of the year in a health FSA. The carryover of up to $500 may be used to pay or reimburse qualified expenses under the health FSA incurred during the entire plan year to which it is carried over. Additionally, the carryover does not count against or otherwise affect the salary reduction limit ($2,500 for 2014) for health FSAs. However, the new rules do not allow participants to cash out unused health FSA amounts or convert them to other types of benefits.

The maximum carryover amount is $500. An employer can choose to offer a $0 carryover, a $500 carryover or any amount in between. As we discussed, the carryover is optional. Employers can choose not to offer any carryover.

Employers cannot offer both the grace period and the carryover. It is a choice of either the grace period or the carryover....or neither. The employer and not the participant decides. In regulations, the IRS described how employers can amend their cafeteria plans to provide for the carryover and how they can, if they choose, replace the grace period with the carryover.

Let's take a look at an example: Jacob participates in a health FSA under his employer's cafeteria plan. At year-end, Jacob has $255 remaining in his health FSA. Jacob's employer never offered a grace period but opted to allow participants to carry over up to $300 of unused health FSA dollars. Jacob can carry over all of his $255 in unused health FSA dollars.

If you have any questions about the new carryover option or health FSAs, please contact our office.

Notice 2013-71

Shortly after resuming operations post-government shutdown, the IRS told taxpayers that the start of the 2014 filing season will be delayed by one to two weeks. The delay will largely impact taxpayers who want to file their 2013 returns early in the filing season. At the same time, the White House clarified on social media that no penalty under the Affordable Care Act's (ACA) individual mandate would be imposed during the enrollment period for obtaining coverage through an ACA Marketplace.

Shortly after resuming operations post-government shutdown, the IRS told taxpayers that the start of the 2014 filing season will be delayed by one to two weeks. The delay will largely impact taxpayers who want to file their 2013 returns early in the filing season. At the same time, the White House clarified on social media that no penalty under the Affordable Care Act's (ACA) individual mandate would be imposed during the enrollment period for obtaining coverage through an ACA Marketplace.

IRS shutdown

On October 1, many IRS employees in Washington, D.C. and nationwide were furloughed after Congress failed to approve funding for the government's fiscal year (FY 2014). During the shutdown, only 10 percent of the IRS' approximately 90,000 employees remained on the job, most engaged in criminal investigations and infrastructure support. Employees on furlough, including revenue agents assigned to exams and hearing officers assigned to collection due process cases, were expressly prohibited from doing any work, including checking email and voice messages.

Employees return to work

The IRS reopened on October 17. The previous day, Congress had passed legislation to fund the government through mid-January 2014. The IRS immediately cautioned taxpayers to expect longer wait times and limited service as it would take time for employees to resume work and process backlogged inventory. Upon their return to work, IRS employees began reviewing email, voice messages and their files as well as completing administrative tasks to reopen operations. The IRS reported that it received 400,000 pieces of correspondence during the furlough period in addition to nearly one million items already being processed before the shutdown.

Returns and refunds

The 16-day furlough overlapped with the October 15 deadline for taxpayers on extension to file 2012 returns. The IRS reported that during the shutdown it continued as many automated processes as possible, including accepting returns and processing payments. The Free File system also was open during the furlough period. However, refunds were not issued while the IRS was closed. Refunds are now being processed. If you have any questions about a refund or payment, please contact our office.

Filing season

The start of the 2014 filing season will be delayed approximately one to two weeks so the IRS can program and test tax processing systems following the 16-day federal government closure. The IRS had anticipated opening the 2014 filing season on January 21. With a one- to two-week delay, the IRS would start accepting and processing 2013 individual tax returns no earlier than January 28, 2014 and no later than February 4, 2014. The IRS reported it will make a final determination on the start of the 2014 filing season in mid-December.

The IRS explained that the government shutdown took place during the peak period for preparing its return processing systems for the 2014 filing season. The IRS must program, test and deploy more than 50 systems to handle processing of nearly 150 million tax returns.

"Readying our systems to handle the tax season is an intricate, detailed process, and we must take the time to get it right," Acting Commissioner Daniel Werfel said in a statement. "The adjustment to the start of the filing season provides us the necessary time to program, test and validate our systems so that we can provide a smooth filing and refund process for the nation's taxpayers. We want the public and tax professionals to know about the delay well in advance so they can prepare for a later start of the filing season."

Affordable Care Act

Beginning January 1, 2014, the Affordable Care Act generally requires individuals - unless exempt - to carry health insurance or make a shared responsibility payment (also known as a penalty). Individuals exempt from the payment include individuals covered by most employer-sponsored health plans, Medicare, Medicaid, and other government programs. The penalty is $95 in 2014 or the flat fee of one percent of taxable income, $325 in 2015 or the flat fee of two percent of taxable income, $695 in 2016 or 2.5 percent of taxable income (the $695 amount is indexed for inflation after 2016).

The Obama administration launched individual Marketplaces (formerly known as Exchanges) on October 1 in all 50 states and the District of Columbia. The enrollment period for coverage for 2014 began on October 1 and is scheduled to end March 31, 2014, which is after the January 1 effective date of the individual mandate. In late October, the Obama administration clarified on social media that individuals who enroll in coverage through a Marketplace at anytime during the enrollment period will not be responsible for a penalty.

Because of technical problems, some applications on HealthCare.gov have not been running at 100 percent, the U.S. Department of Health and Human Services (HHS) reported. Individuals can, however, enroll and obtain insurance at in-person assistance centers. Marketplace customer call centers are also open, HHS explained.

Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.

Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.

SHOP

The Affordable Care Act created two vehicles to deliver health insurance: Marketplaces for individuals and the SHOP for small businesses. Marketplaces launched as scheduled on October 1 in every state and the District of Columbia. Qualified individuals can enroll in a Marketplace to obtain health insurance. Coverage through a Marketplace will begin January 1, 2014.

The October 1 start of SHOP, however, was delayed. Small employers may start the application process on October 1, 2013 but all functions of SHOP will not be available until November, the U.S. Department of Health and Human Services (HHS) reported. If employers and employees enroll by December 15, 2013, coverage will begin January 1, 2014, HHS explained.

SHOP is closely related to the Code Sec. 45R small employer health insurance tax credit. This tax credit is designed to help small employers offset the cost of providing health insurance to their employees. After 2013, small employers must participate in SHOP to take advantage of the Code Sec. 45R tax credit. For tax years beginning during or after 2014, the maximum Code Sec. 45R credit for an eligible small employer (other than a tax-exempt employer) is 50 percent of the employer's premium payments made on behalf of its employees under a qualifying arrangement for QHPs offered through a SHOP Marketplace. The maximum credit for tax-exempt employers for those years is 35 percent. Maximum and minimum credits are based upon the level of employee wages. If you have any questions about SHOP and the Code Sec. 45R credit, please contact our office.

Code Sec. 36B tax credit

Effective January 1, 2014, qualified individuals may be eligible for the Code Sec. 36B premium assistance tax credit to help pay for health coverage through a Marketplace. The credit is linked to household income in relation to the federal poverty line (FPL). Generally, taxpayers whose household income for the year is between 100 percent and 400 percent of the federal poverty line for their family size may be eligible for the credit.

When taxpayers apply for coverage in a Marketplace, the Marketplace will estimate the amount of the Code Sec. 36B credit that the taxpayer may be able to claim for the tax year. Based upon the estimate made by the Marketplace, the individual can decide if he or she wants to have all, some, or none of the estimated credit paid in advance directly to the insurance company to be applied to monthly premiums. Taxpayers who do not opt for advance payment may claim the credit when they file their federal income tax return for the year.

The October 16 agreement to reopen the federal government directed HHS to certify to Congress that Marketplaces verify eligibility for the Code Sec. 36B credit. HHS must submit a report to Congress by January 1, 2014 on the procedures for verifying eligibility for the credit and follow-up with a report by July 1, 2014 on the effectiveness of its income verification procedures.

Employer mandate

The Affordable Care Act generally requires an applicable large employer to make an assessable payment (a penalty) if the employer fails to offer minimum essential health coverage and a number of other requirements are not met. The employer mandate was scheduled to take effect January 1, 2014. However, the Obama administration delayed it for an additional year, to 2015.

In October, the House Small Business Committee heard testimony on the definition of full-time employee status for purposes of the employer mandate. An applicable large employer for purposes of the employer mandate is an employer that employs at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50. A full-time employee with respect to any month is an employee who is employed on average at least 30 hours of service per week.

Employers testifying before the GOP-chaired committee urged an increase in the 30-hour threshold. "Many small businesses simply cannot afford to provide coverage to employees who average 30 hours per week," the owner of a supermarket told the committee. "Business owners will have to make tough choices and many part-time employees will face reduced hours," he added. "Many franchise businesses are being turned upside down by the new costs, complexities and requirements of the law," another business owner told the committee.

Legislation (HR 2575) has been introduced in the House to repeal the 30-hour threshold for classification as a full-time equivalent employee for purposes of the employer mandate and to replace it with 40 hours. The bill has been referred to the House Ways and Means Committee.

HealthCare.gov

As has been widely reported, the individuals seeking to enroll in Marketplace coverage through HealthCare.gov experienced some online problems in October. The U.S. Department of Health and Human Services (HHS) has undertaken a comprehensive review of HealthCare.gov. In the meantime, HHS reminded individuals that in-person assistance centers are open as are customer call centers.

Enrollment

The Affordable Care Act generally requires individuals to carry health insurance after 2013 or make a shared responsibility payment (also known as a penalty). For 2014, the penalty is $95 or the flat fee of one percent of taxable income, $325 in 2015 or the flat fee of two percent of taxable income, $695 in 2016 or 2.5 percent of taxable income (the $695 amount is indexed for inflation after 2016).

Open enrollment in the Affordable Care Act's Marketplaces began October 1, 2013 and runs through March 31, 2014. The enrollment period overlaps with the January 1, 2014 requirement to carry health insurance or make a shared responsibility payment. On social media, the Obama administration clarified that individuals who enroll in coverage through a Marketplace at anytime during the enrollment period will not be responsible for a penalty.

If you have any questions about these developments or the Affordable Care Act in general, please contact our office.

The IRS has issued much-anticipated final "repair" regulations that provide guidance on the treatment of costs to acquire, produce or improve tangible property. These regulations take effect January 1, 2014. They affect virtually any business with tangible assets. The IRS has estimated that about 4 million businesses must comply.

The IRS has issued much-anticipated final "repair" regulations that provide guidance on the treatment of costs to acquire, produce or improve tangible property. These regulations take effect January 1, 2014. They affect virtually any business with tangible assets. The IRS has estimated that about 4 million businesses must comply.

At a length of over 200 pages, the regulations remain complex. Taxpayers will need to devote significant time and effort to study these regulations and to address their impact on their tax accounting. Taxpayers must decide whether they can deduct costs as repairs and maintenance or must capitalize the costs and recover their costs over a period of years. Every business, especially those with significant fixed assets, must develop an understanding of the regulations and their requirements.

Effective dates, decisions and opportunities

The final regulations retain the basic structure of the temporary and proposed regulations issued in December 2011 (the 2011 regulations). The IRS is not expected to delay these effective dates, since taxpayers were informed of the impending changes in many of the rules almost two years ago. Moreover, taxpayers will have the decision of whether to apply the regulations (either the temporary or the final) to the 2012 or 2013 tax years.

The IRS must provide additional guidance for taxpayers to change their methods of accounting to elect to apply either set of regulations retroactively and to comply with the 2014 effective date. Some accounting method changes will require taxpayers to make adjustments under Code Sec. 481(a), in effect, applying the regulations to past years and calculating the impact on income.

The final regulations make significant changes that can benefit most taxpayers if applied correctly. The changes include new and revised safe harbors, as well as new relief provisions for small business. The regulations will provide simplification and reduce controversy by allowing taxpayers to follow their financial accounting ("book") policies in some areas.

The IRS did not finalize every portion of the 2011 regulations. To address some problems with the temporary regulations on the disposition of depreciable property, the IRS issued new proposed regulations that ease the requirements for taxpayers to deduct the cost of building components that they replace.

Significant provisions in the final regulations include the following:

Materials and supplies - The threshold for deducting materials and supplies was increased from $100 to $200 and generally applies to items expected to be consumed in 12 months or less, or that have an economically useful life of 12 months or less.

De minimis safe harbor - The final regulations eliminate a controversial ceiling on the use of this safe harbor. Taxpayers with applicable financial statements can apply the safe harbor to an item that is $5,000 or less. The regulations extend the safe harbor to taxpayers without a financial statement, but only for property that costs $500 or less. Taxpayers must have written book policies in place at the beginning of the year to apply the safe harbor.

Routine maintenance and improvements - The final regulations retain controversial unit of property rules that apply the rules for real property to eight separate building systems. However, the rules do extend the routine maintenance safe harbor to real property and provide a new safe harbor for small taxpayers. The safe harbor for real property limits the period for recurring maintenance to 10 years, which many practitioners believe is too short.

Capitalization election - The final regulations allow taxpayers to capitalize repair and maintenance costs if these costs are capitalized for financial accounting purposes. This provides significant simplification over the temporary regulations, although the tax impact is contrary to what taxpayers normally want.

If you have any questions regarding the compliance obligations that your business now must face, and the opportunities that many of these new rules present, please do not hesitate to call this office.

Despite the passage of the American Tax Relief Act of 2012 - which its supporters argued would bring greater certainty to tax planning - many taxpayers have questions about the tax rates on qualified dividends and capital gains.

Despite the passage of the American Tax Relief Act of 2012 - which its supporters argued would bring greater certainty to tax planning - many taxpayers have questions about the tax rates on qualified dividends and capital gains.

Background

Before ATRA, the maximum tax rate on net capital gains and qualified dividends was 15 percent for taxpayers in the 25, 28, 33, or 35 percent individual income tax brackets (the 35 percent rate was the highest individual tax bracket before ATRA). For 2008 through 2012, taxpayers in the 10 and 15 percent individual income tax brackets enjoyed a zero percent tax rate on net capital gains and qualified dividends. Generally, the 15 and zero percent rates applied to long-term capital gains (resulting from the sale of an asset held for longer than one year) and qualified dividends (such as dividends received from a domestic corporation and certain foreign corporations).

ATRA's rates

Under ATRA, the 15 percent rate on net capital gains and qualified dividends is made permanent for taxpayers in the 25, 28, 33, or 35 percent individual income tax brackets. This treatment applies for 2013 and all subsequent years unless modified by Congress in the future. ATRA also made permanent the zero percent tax rate on net capital gains and qualified dividends for taxpayers in the 10 and 15 percent income tax brackets. This treatment applies for 2013 and all subsequent years unless modified by Congress.

Additionally, ATRA created a 20 percent tax rate on net capital gains and qualified dividends intended to apply to higher income taxpayers. The 20 percent tax rate applies to qualified capital gains and dividends of taxpayers subject to the revived 39.6 percent income tax bracket. Taxpayers are subject to the 39.6 percent income tax bracket to the extent their taxable income exceeds certain thresholds: $450,000 for married couples filing joint returns and surviving spouses, $425,000 for heads of households, $400,000 for single filers, and $225,000 for married couples filing separate returns. These threshold amounts are projected to be slightly higher in 2014 as indexed for inflation.

Collectibles and unrecaptured Code Sec. 1250 gain

The Tax Code has special tax rates for collectibles and unrecaptured Code. Sec. 1250 gain. These tax rates were not changed by ATRA or other legislation. A 28 percent tax rate applies to collectibles, and a 25 percent tax rate applies to unrecaptured Code Sec. 1250 gain.

Short-term capital gains

The tax rates are significantly different for short-term capital gains than for long-term capital gains. Short-term capital gains are taxed at ordinary income tax rates. This means that the tax rate on short-term capital gains can range from 10 percent to 39.6 percent, depending on the taxpayer's situation. Income generated from non-capital assets are also subject to these rates.

Net investment income surtax

Unrelated to ATRA's changes is a new 3.8 percent surtax imposed by the Patient Protection and Affordable Care Act (PPACA) on individuals, estates and trusts that have certain investment income above threshold amounts including $250,000 for married couples filing jointly and $200,000 for single filers. These amounts are not subject to an annual adjustment for inflation. The 3.8 percent surtax took effect January 1, 2013 and therefore will be reflected on 2013 returns filed in 2014.

Timing the recognition of capital gain and offsetting losses when possible can frequently lower overall tax liability. Year-end tax planning can be a particularly advantageous in this regard. If you have any questions about the capital gains and dividends tax rates, please contact our office.

The Patient Protection and Affordable Care Act (PPACA)-the Obama administration's health care reform law-was enacted in 2010 and many of its provisions have taken effect. But other important provisions will first take effect in 2014 and 2015. These provisions of the law will require affected parties to take action-or at least to be aware of the law's impact-in 2013 and 2014. These provisions affect individuals, families, employers, and health insurers, among others.

The Patient Protection and Affordable Care Act (PPACA)-the Obama administration's health care reform law-was enacted in 2010 and many of its provisions have taken effect. But other important provisions will first take effect in 2014 and 2015. These provisions of the law will require affected parties to take action-or at least to be aware of the law's impact-in 2013 and 2014. These provisions affect individuals, families, employers, and health insurers, among others.

Individual mandate

The individual mandate will apply beginning in 2014. The mandate applies separately for each month. Individuals and their dependents must either carry health insurance or pay a penalty, known as the individual shared responsibility payment. The health insurance must qualify as minimum essential coverage (MEC). Most employer-offered plans, as well as Medicare and Medicaid, qualify as MEC. Certain groups are exempt from the individual mandate, including members of a health sharing ministry, taxpayers without an income tax filing requirement, members of federally-recognized Indian tribes, and persons for whom coverage is unaffordable (more than eight percent of the individual's household income).

Exchanges

Affordable health insurance marketplaces (exchanges) are ramping up and will be open for business October 1, 2013. Exchanges will provide an open enrollment season during which individuals and families without health insurance can sign up for an insurance policy offered through the exchange, effective January 1, 2014. Anyone needing insurance, or looking for cheaper insurance, can use an exchange. Persons who obtain coverage through an exchange will avoid owing a penalty under the individual mandate. Employers have to start notifying existing employees about the existence of exchanges by October 1, 2013, and must notify new employees when hired.

Low-income individuals and families who purchase insurance through an exchange may qualify for the health insurance premium tax credit for 2014 if their household income falls between 100 percent and 400 percent of the federal poverty level for 2013. Individuals who do not have a filing requirement for 2013 do not need to file a return to qualify for the credit. Individuals will generally self-certify as to their eligibility for the credit. Based on this information, the exchange will determine whether the insured person qualifies for the credit. Taxpayers may qualify for an advanced credit; in this case, the exchange will pay the credit directly to the insurer during 2014 to offset a portion of the health insurance premium.

Small employer credit

Small employers may be able to claim the maximum small employer health insurance credit, if the employer has 10 or fewer employees and average wages per employee of $25,000 or less. While the credit has been around since 2010, the amount of the credit increases for 2014 and 2015 to 50 percent of premiums paid for taxable employers, and 35 percent for nonprofit employers.

Employer mandate

The employer mandate (the employer shared responsibility payment) was scheduled to take effect in 2014, but the IRS postponed it until 2015. Nevertheless, during 2014 employers will want to start paying attention to whether they would qualify as an "applicable large employer" (ALE), since status as an ALE for 2015 depends on 2014 employees. An employer who has 50 or more full-time equivalent employees is an ALE. New employers will be treated as an ALE if they "reasonable expect" to have 50 employees. Employers that are members of an affiliated group of companies under Code Sec. 414 must determine their status as ALEs based on the number of employees in the group.

Employers will also want to look at their health insurance offerings. Once the employer mandate applies, employers must offer MEC to 95 percent of their full-time employees. The coverage must also be affordable and must provide minimum value. Employers should look at whether they need to redesign their plan offerings or change the employees' share of the cost to comply with these requirements. If the employer's coverage does not satisfy these requirements, if the employee purchases insurance through an exchange, and if an employee qualifies for the insurance premium tax credit, the employer may be responsible for the employer mandate and owe a penalty.

Employer reporting. The requirements for employers and insurers to report health insurance coverage provided to employees and others were also postponed until 2015. Nevertheless, the IRS is encouraging health insurer issuers to experiment with the requirements by filing the necessary reports for 2014. Larger employers also have to report the value of their health insurance coverage on the employee's Form W-2. The amount reported is not taxable.

Wellness programs. Beginning in 2014, employers may offer wellness programs as part of their health care benefits offered to employees. Employers may offer benefits, such as premium reductions, to employees who satisfy certain health-related requirements.

The Affordable Care Act set January 1, 2014 as the start date for many of its new rules, most notably, the employer shared responsibility provisions (known as the "employer mandate") and the individual shared responsibility provisions (known as the "individual mandate").  One - the employer mandate - has been delayed to 2015; the other - the individual mandate - has not been delayed.

The Affordable Care Act set January 1, 2014 as the start date for many of its new rules, most notably, the employer shared responsibility provisions (known as the "employer mandate") and the individual shared responsibility provisions (known as the "individual mandate").  One - the employer mandate - has been delayed to 2015; the other - the individual mandate - has not been delayed.

Employer shared responsibility payments

Very broadly, the Affordable Care Act imposes a shared responsibility payment (also known as a penalty) on an applicable large employer that either:

• Fails to offer to its full-time employees (and their dependents) the opportunity to enroll in MEC (Minimum Essential Coverage) under an eligible employer-sponsored plan and  has under its employ one or more full-time employees that are certified to the employer as having received a premium assistance tax credit or cost-sharing reduction (Code Sec. 4980H(a) liability), or
• Offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan and has under its employ one or more full-time employees that are certified to the employer as having received a premium assistance tax credit or cost-sharing reduction (Code Sec. 4980H(b) liability).

The amount of the employer shared responsibility penalty varies depending on whether the employer is liable under Code Sec. 4980H(a) or Code Sec. 4980H(b). The calculations of the payment are very complex but two examples help to shed some light on how they are intended to work. Example 1 is based on Code Sec. 4980H(a) liability and Example 2 is based on Code Sec. 4980H(b) liability.

Example 1.  Employer A fails to offer minimum essential coverage and has 100 full-time employees, 10 of whom receive a Code Sec. 36B premium assistance tax credit for the year for enrolling in a Marketplace plan. For each employee over a 30-employee threshold, the employer would owe $2,000, for a total penalty of $140,000. The Code Sec. 4980H(a) penalty is assessed on a monthly basis. 

Example 2.  Employer B offers minimum essential coverage and has 100 full-time employees, 20 of whom receive a Code Sec. 36B premium assistance tax credit for the year for enrolling in a Marketplace plan. For each employee receiving a tax credit, the employer would owe $3,000 for a total penalty of $60,000. The maximum penalty for Employer B would be capped at the amount of the penalty that would have been assessed for a failure to provide coverage ($140,000 above in Example 1). Since the calculated penalty of $60,000 is less than the maximum amount, Employer B would pay the calculated penalty of $60,000. The Code Sec. 4980H(b) penalty is assessed on a monthly basis.

These examples are merely provided to illustrate how the employer shared responsibility payment is intended to work.  Every employer's situation will be different depending on the number of employees, the type of insurance offered and many other factors. Please contact our office for more details.

IRS guidance

Since enactment of the Affordable Care Act, the IRS and other federal agencies have issued guidance on the employer shared responsibility provision.  The IRS has defined what is an applicable large employer (generally defined as businesses with 50 or more employees), who is a full-time employee with certain exceptions for seasonal workers, and much more.

The IRS has not, however, issued guidance on reporting requirements by employers and insurers.  The Affordable Care Act generally requires employers, insurers and other entities that offer minimum essential coverage to file annual information returns reporting information about the coverage. As originally enacted, this information reporting was scheduled to take effect in 2014, the same year that the employer shared responsibility provisions were scheduled to take effect.

Delay

In early July, the Treasury Department announced that information reporting by employers, insurers and other entities offering minimum essential coverage will not start in 2014 but will be delayed until 2015. The IRS followed-up with transitional guidance. Information reporting by employers, insurers and other entities offering minimum essential coverage is waived for 2014. However, the IRS encouraged employers, insurers and others to voluntarily report this information. The IRS reported it is working on guidance and expects to issue regulations before year-end.

Because information reporting has been delayed, the Affordable Care Act's employer shared responsibility provisions are waived for 2014. The IRS explained that the transitional relief is expected to make it impractical to determine which employers would owe shared responsibility payments for 2014. As a result, no employer shared responsibility payments will be assessed for 2014.

Individual mandate

The January 1, 2014 scheduled start date of the Affordable Care Act's individual shared responsibility provisions is not delayed. Unless exempt, individuals must carry minimum essential health coverage after 2013 or pay a shared responsibility payment (also called a penalty). The Affordable Care Act exempts many individuals, such as most individuals covered by employer-provided health insurance, individuals enrolled in Medicare and Medicaid, and many others.  

After 2013, individuals may be eligible for a new tax credit (the Code Sec. 36B credit) to help offset the cost of obtaining health insurance. The credit is payable in advance to the insurer.
The January 1, 2014 scheduled start date of the Code Sec. 36B is also not delayed.

Small employers

Qualified small employers will be able to offer health insurance to their employees through the Small Business Health Options Program (SHOP). Enrollment for coverage through SHOP is scheduled to begin October 1, 2013 for coverage starting January 1, 2014. For 2014, SHOP is open to employers with 50 or fewer employees. Beginning in 2016, SHOP will be open to employers with up to 100 employees.

After 2013, the small employer health insurance tax credit is scheduled to increase from 35 percent to 50 percent for small business employers (and from 25 percent to 35 percent for tax-exempt employers). However, the credit is only available after 2013 to employers that obtain coverage through SHOP. This credit is targeted to very small employers with the credit gradually phasing out as the number of employees reaches 50.

If you have any questions about employer reporting or the employer shared responsibility payment-or any questions about the Affordable Care Act-please contact our office.

The government continues to push out guidance under the Patient Protection and Affordable Care Act (PPACA). Several major provisions of the law take effect January 1, 2014, including the employer mandate, the individual mandate, the premium assistance tax credit, and the operation of health insurance exchanges. The three agencies responsible for administering PPACA - the IRS, the Department of Labor (DOL), and the Department of Health and Human Services (HHS) - are under pressure to provide needed guidance, and they are responding with regulations, notices, and frequently asked questions.

The government continues to push out guidance under the Patient Protection and Affordable Care Act (PPACA). Several major provisions of the law take effect January 1, 2014, including the employer mandate, the individual mandate, the premium assistance tax credit, and the operation of health insurance exchanges. The three agencies responsible for administering PPACA - the IRS, the Department of Labor (DOL), and the Department of Health and Human Services (HHS) - are under pressure to provide needed guidance, and they are responding with regulations, notices, and frequently asked questions.

The health law provisions interact. Individuals are supposed to carry health insurance or pay a tax. Employers are supposed to offer coverage or pay a tax. The exchanges will provide information about the availability of different health care plans and will certify individuals eligible for the premium assistance tax credit. Individuals who cannot obtain affordable coverage may purchase insurance through an exchange and may be entitled to a premium assistance tax credit.

Exchanges

The DOL, in a technical release, provided temporary guidance to employers about their obligation to notify their employees of the availability of health insurance through an exchange and of the potential to qualify for the premium assistance tax credit if they purchase insurance through an exchange. Exchanges will begin operating January 1, 2014 and will provide open enrollment for their coverage beginning October 1, 2013. DOL provided model notices for employers to send out beginning October 1, 2013. Notices must be issued to all employees, whether or not the employer offers insurance and whether or not the employee enrolls in the employer's insurance.

Employer mandate

As part of the regulatory process, the IRS recently held a hearing on proposed regulations regarding the employer mandate, which imposes a penalty on employers who fail to provide adequate health insurance coverage in certain circumstances. The employer mandate takes effect January 1, 2014. Twenty different groups testified on relevant issues, including: the definition of a large employer subject to the penalty, the definition of a full-time employee who must be offered coverage, and the determination whether the coverage is affordable.

Minimum value

The IRS issued proposed regulations to clarify the minimum value requirement for employer-provided health insurance. The regulations provide additional guidance on how to determine whether an individual is eligible for the premium assistance tax credit. Taxpayers will not be eligible for the credit if they are eligible for other "minimum essential (health insurance) coverage" (MEC). MEC includes employer-sponsored coverage that is affordable and that provides minimum value. Employer coverage fails to provide minimum value if the employer pays less than 60 percent of the cost of plan benefits. Taxpayers may rely on the proposed regulations for years ending before January 1, 2015.

Medical loss ratio (MLR)

The IRS issued proposed regulations on MLRs. Insurance companies must provide premium rebates to their customers if they fail to spend at least 80 percent (85 percent for large companies) of their premiums directly on health care, as opposed to executive salaries and other expenses. The provision took effect in 2012; and the first round of MLR rebates was distributed in 2012. The IRS issued several notices to implement the program; the proposed regulation would apply to tax years beginning after December 31, 2013.

Annual limits on benefits

PPACA generally prohibits group health plans and health insurance issuers that offer group or individual health insurance from imposing annual or lifetime limits on the value of essential health benefits. Although some limits are allowed for plan years beginning before January 1, 2014, HHS regulations provide that HHS may waive the limits if they would cause a significant decrease in benefits or significant increase in premiums. IRS, DOL, and HHS issued frequently asked questions (FAQs) to clarify that plan or issuer receiving a waiver may not extend the waiver to a different plan or policy year.

Summary of benefits and coverage

PPACA generally requires insurers, employers and other health care plan providers to give a Summary of Benefits and Coverage (SBC) to participants and other affected individuals. In recent FAQs, the three government agencies advised that an updated SBC template and a sample SBC are available on the DOL's website. These documents can be used for coverage beginning in 2014. The agencies also extended certain enforcement relief. The agencies issued final regulations in 2012, and indicated that providers can continue to use coverage examples in current guidance, without adding new examples to their SBC.

Employer reporting

The Treasury Inspector General for Tax Administration (TIGTA) issued a recent report on some of the new information reporting requirements that PPACA has imposed on employers. For example, health insurance providers must report information for each individual who receives coverage. Large employers must report details about the coverage offered to employees and their dependents, including the premiums and the employer's share of costs. Employers must also report the cost of coverage to employees on their Forms W-2. The IRS will use these reports to administer PPACA's requirements.

PPACA is a complicated law. Many of its most important provisions take effect in 2014. The IRS and other responsible federal agencies continue to issue guidance and to take comments on the administration of the law.

If you have any questions about PPACA and what strategies you or your business might adopt, please contact our office.