For more details, visit the FAQ section on this topic at www.irs.gov/pub/irs-tege/medresident_fica_qa_080410.pdf

Exclusion for employer reimbursements

PPACA generally expanded the Code Sec. 105(b) exclusion from an employee’s gross income for employer-provided reimbursements for the medical care of the employee, employee’s spouse or employee’s dependents to cover employer-provided reimbursements for the medical care of the employee’s child who has not attained age 27 as of the end of the tax year. The newly issued guidance clarifies that an employee’s child includes a child of the employee who is not the employee’s dependent as defined in Code Sec. 152(a). In determining whether the child is not age 27 as of the end of the tax year, the tax year considered is the employee’s tax year. Employers may assume that an employee’s tax year is the calendar year and may rely upon the employee’s representation as to the child’s date of birth.

Prior to the enactment of PPACA, the Code Sec. 106 exclusion from an employee’s gross income for coverage under an employer-provided accident or health plan paralleled the Code Sec. 105(b) exclusion from an employee’s gross income for employer-provided reimbursements for the medical care of the employee, employee’s spouse or employee’s dependents. Given the changes made to Code Sec. 105(b) by PPACA, the IRS and Treasury intend to amend the regulations under Code Sec. 106 retroactively to March 30, 2010, to provide that coverage for an employee’s child under age 27 is also excluded from gross income. Numerous examples, reproduced below, are included in the guidance to illustrate these changes.

Cafeteria plans, FSAs, HRAs

The newly issued guidance clarifies that the exclusion of coverage and reimbursements from an employee’s gross income under Code Sec. 105(b) and Code Sec. 106 for an employee’s child who has not attained age 27 as of the end of the employee’s tax year carries forward automatically to the definition of qualified benefits for cafeteria plans, including health flexible spending accounts (health FSAs). Thus, a benefit will not fail to be a qualified benefit for a cafeteria plan merely because it provides coverage or reimbursements that are excludable under Code Sec. 105(b) and Code Sec. 106 for an employee’s child who has not attained age 27 as of the end of the employee’s tax year. Since Reg. §1.125-4(c) currently does not permit election changes under a cafeteria plan for children under age 27 who are not the employee’s dependents, the IRS and Treasury intend to amend the regulation, effectively retroactively to March 30, 2010, to include change-in-status events affecting nondependent children under age 27. The guidance also clarifies that the same rules that apply to an employee’s child under age 27 for purposes of Code Sec. 105(b) and Code Sec. 106 apply to a health reimbursement arrangement (HRA).

FICA, FUTA, RRTA, income tax withholding

Coverage and reimbursements under an employer-provided accident and health plan for employees and their dependents are excluded from wages for Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) purposes and, in a similar manner, for Railroad Retirement Tax Act (RRTA) purposes. Although an employee’s child is generally a dependent for these purposes, no age limit applies. Thus, coverage and reimbursements under a plan for employees and their dependents that are provided for an employee’s child under age 27 are not wages for FICA or FUTA purposes. Such coverage and reimbursements are also exempt from income tax withholding.

Examples

Example 1. (i) Employer X provides health care coverage for its employees and their spouses and dependents and for any employee’s child (as defined in ) Code Sec. 152(f)(1) who has not attained age 26. For the 2010 taxable year, Employer X provides coverage to Employee A and to A’s son, C. C will attain age 26 on November 15, 2010. During the 2010 taxable year, C is not a full-time student. C has never worked for Employer X. C is not a dependent of A because prior to the close of the 2010 taxable year C had attained age 19 (and was also not a student who had not attained age 24).

(ii) C is a child of A within the meaning of Code Sec. 152(f)(1). Accordingly, and because C will not attain age 27 during the 2010 taxable year, the health care coverage and reimbursements provided to him under the terms of Employer X’s plan are excludible from A’s gross income under Code Sec. 106 and Code Sec. 105(b) for the period on and after March 30, 2010 through November 15, 2010 (when C attains age 26 and loses coverage under the terms of the plan).

Example 2. (i) Employer Y provides health care coverage for its employees and their spouses and dependents and for any employee’s child (as defined in) Code Sec. 152(f)(1) who has not attained age 27 as of the end of the taxable year. For the 2010 taxable year, Employer Y provides health care coverage to Employee E and to E’s son, G. G will not attain age 27 until after the end of the 2010 taxable year. During the 2010 taxable year, G earns $50,000 per year, and does not live with E. G has never worked for Employer Y. G is not eligible for health care coverage from his own employer. G is not a dependent of E because G does not live with E and E does not provide more than one half of his support.

(ii) G is a child of E within the meaning of Code Sec. 152(f)(1). Accordingly, and because G will not attain age 27 during the 2010 taxable year, the health care coverage and reimbursements for G under Employer Y’s plan are excludible from E’s gross income under Code Sec. 106 and Code Sec. 105(b) for the period on and after March 30, 2010 through the end of the 2010 taxable year.

Example 3. (i) Same facts as Example 2, except that G’s employer offers health care coverage, but G has decided not to participate in his employer’s plan.

(ii) G is a child of E within the meaning of Code Sec. 152(f)(1). Accordingly, and because G will not attain age 27 during the 2010 taxable year, the health care coverage and reimbursements for G under Employer Y’s plan are excludible from E’s gross income under Code Sec. 106 and Code Sec. 105(b) for the period on and after March 30, 2010 through the end of the 2010 taxable year.

Example 4. (i) Same facts as Example 3, except that G is married to H, and neither G nor H is a dependent of E. G and H have decided not to participate in the health care coverage offered by G’s employer, and Employer Y provides health care coverage to G and H.

(ii) G is a child of E within the meaning of Code Sec. 152(f)(1). Accordingly, and because G will not attain age 27 during the 2010 taxable year, the health care coverage and reimbursements for G under Employer Y’s plan are excludible from E’s gross income under Code Sec. 106 and Code Sec. 105(b) for the period on and after March 30, 2010 through the end of the 2010 taxable year. The fair market value of the coverage for H is includible in E’s gross income for the 2010 taxable year.

Example 5. (i) Employer Z provides health care coverage for its employees and their spouses and dependents. Effective May 1, 2010, Employer Z amends the health plan to provide coverage for any employee’s child (as defined in) Code Sec. 152(f)(1) who has not attained age 26. Employer Z provides coverage to Employee F and to F’s son, K, for the 2010 taxable year. K will attain age 22 in 2010. During the 2010 taxable year, F provides more than one half of K’s support. K lives with F and graduates from college on May 15, 2010 and thereafter is not a student. K has never worked for Employer Z. Prior to K’s graduation from college, K is a dependent of F. Following graduation from college, K is no longer a dependent of F.

(ii) For the 2010 taxable year, the health care coverage and reimbursements provided to K under the terms of Employer Z’s plan are excludible from F’s gross income under Code Sec. 106 and Code Sec. 105(b). For the period through May 15, 2010, the reimbursements and coverage are excludible because K was a dependent of F. For the period on and after March 30, 2010, the coverage is excludible because K is a child of F within the meaning of Code Sec. 152(f)(1) and because K will not attain age 27 during the 2010 taxable year. (Thus, for the period from March 30 through May 15, 2010, there are two bases for the exclusion.) (Notice 2010-38, IR-2010-53, I.R.B. 2010-20, April 27, 2010; IRS News Release IR-2010-53, April 27, 2010.)

To help stimulate the hiring of workers by the private sector, the new law exempts any private sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer’s 6.2% share of Social Security tax on that employee for the remainder of the 2010 tax year.  This could result in a maximum tax savings of $6,621 for any previously unemployed worker who is paid at least $106,800 by the end of the year.

As an additional incentive, for any qualifying worker hired under this Act and the employer keeps  on the payroll for 52 consecutive weeks, the employer is eligible for an additional non-refundable tax credit up to $1,000.  This credit becomes available after the 52-week threshold has been reached.  The credit will be taken on the employer’s 2011 tax return.  To be eligible for the credit, the employee’s pay in the second 26 week period must be at least 80% of the pay in the first 26 week period.

Workers hired after the introduction date of this legislation (February 3, 2010) are eligible for the payroll tax forgiveness and the retention tax credit.  It should be noted, the only the wages paid after the date of the new law’s enactment receive the exemption for payroll taxes.

Here are some additional features of the new hiring incentive:

·         The tax benefit of the new incentive is immediate.  It puts money into a business’ cash flow immediately, since the tax is simply not collected in the first place.

·         The tax benefit generally applies to private sector employment, including nonprofit organizations.  Public sector jobs are generally not eligible for either benefit, except for employment by a public higher education institution.

·         There is no minimum weekly number of hours that the new employee must work to be eligible.

·         There is no maximum on the dollar amount of payroll taxes per employer that may be forgiven.

·         For workers that would otherwise be eligible for the Work Opportunity Tax Credit, the employer must select one benefit or the other for 2010.  Employers cannot double dip on the tax credits.

·         An employer can’t claim the new tax breaks for hiring family members.

·         A worker who replaces another employee who performed the same job for the employer is not eligible for the benefit, unless the prior employee left the job voluntarily or for cause.

·         For the hiring to qualify, the new hire must sign an affidavit (under penalties of perjury), stating he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employment began.

·         The incentive is not biased towards low-wage or high wage workers.  Under this measure, the business saves the 6.2% on both a $15,000 worker and a $100,000 worker.

·         The payroll tax holiday does not apply with respect to wages paid during the first calendar quarter of 2010, but the amount by which the Social Security tax would have been reduced under the payroll tax holiday provision during the first calendar quarter is applied against the tax imposed on the employer in the second calendar quarter of 2010.

·         The Act creates a similar new set of rules permitting a payroll tax holiday for railroad retirement tax purposes.

·         The credit for retaining qualified new hires is the less of $1,000 or 6.2% of the wages paid by the employer to the retained worker during the 52 consecutive week period.  Thus, the credit for a retained worker will be $1,000 if the retained worker’s wages during the 52 consecutive week period exceeds $16,129.  This credit is not available for pay not treated as wages under the Internal Revenue Code (for example, remuneration paid to domestic workers).

If you have any questions regarding this Act or any other tax provision, please feel free to contact us.

There has been plenty of information about this unique opportunity provided by financial advisors, tax professionals and others.  Even with this wealth of information, the decision to convert your retirement assets to a Roth IRA is not an easy one.  There are several factors to consider in determining whether or not a Roth conversion makes senses.  Anyone suggesting everyone should do a Roth conversion is just plain wrong!

For some people, a Roth conversion makes sense.  The best candidates for conversions are those who have a favorable tax attributes that can offset a majority of Roth conversion income.  Business owners and others with net operating losses (NOLs) or those with charitable deduction carryforwards will find the conversion appealing.  These losses and deductions may be used to lower or eliminate the tax liability created by the conversion.

Other good candidates for a Roth conversion are those who can pay the tax on the conversion from non-retirement funds and fit one of the following criteria:

·         Those who don’t expect a significant decline in their tax rates at retirement;

·         Those who have made a significant amount of non-deductible traditional IRA contributions over the years;

·         Those who are making the conversion at a younger age;

·         Those who don’t expect to spend down their IRA funds to meet living expenses at retirement;

·         Those who intend to transfer all or a significant portion of their IRA at death to their beneficiaries.

While the criterion above suggests who may be good candidates for a Roth conversion, it still does not make the decision to convert an automatic one.  There needs to be thoughtful analysis before making this decision.  One of the major flaws with analysis provided by many advisors is the failure to consider the difference in tax rates before and after retirement. 

Many analysis suggest a retirees tax rates will be equal to or greater than their tax rates prior to retirement.  It is very interesting as the conventional wisdom prior to the Roth conversion opportunity was people would be at a lower tax rate during retirement.  Even if tax rates do rise, most investment allocations for retirees tend to more tax advantaged vehicles.

Tax planning is a critical element of decision making process for implementing a Roth conversion.  There are two options for paying the tax.  The first is including all of the Roth conversion income on your 2010 tax return and paying all of the tax at 2010 tax rates.  The second option is to defer the tax until your 2011 and 2012 tax returns paying tax on 50% of the conversion income in each year.  The risk in deferring the tax is the likely increase in tax rates after 2010.

With the two choices to pay the tax on the conversion, a three year tax planning analysis is an absolute must.   Retirees have to pay particular attention to how the conversion may impact the taxability of their Social Security benefits.  They also need to be aware of how the conversion may affect their Medicare Part B premiums.

One nice feature allowed of a 2010 Roth conversion is the “money-back guarantee”.  If a taxpayer is unhappy with the conversion for any reason he or she may re-characterize the Roth back into a traditional IRA by October 15, 2011.  They will also have the option to re-convert it back into a Roth in the following tax year.  This feature may come in handy if the value of the IRA drops significantly and the re-conversion can be done at a lower tax cost.  Re-converting the IRA is not required.  The only downsides are the need to amend prior tax returns to get a refund of the tax paid from 2010 conversion and the lost investment opportunity from not having use of those funds.

While the above provides a basic framework for deciding to convert a traditional IRA to a Roth IRA, it is highly recommended that you meet with your tax advisor to discuss a customized analysis based on your unique issues.  No matter what advice you getting, the decision for implementing a Roth conversion is not a one size fits all.

Qualified Medical Expenses: Starting January 1, 2011 you will no longer be able to pay for over-the-counter medications from your HSA as a qualified medical expense. Until the end of this year, you can reimburse yourself or pay from your HSA the money used to buy over-the counter medications. The new law removes over-the-counter drugs not prescribed by a physician from being paid from an HSA, FSA, or HRA on a tax-free basis.

Non-qualified expense penalty: Under the new law, if you use your HSA funds for nonqualified expenses, you will face a higher penalty. The tax penalty for non-qualified HSA distributions will increase effective January 1, 2011, from 10% to 20%.

Mandated insurance coverage: Effective January 1, 2014, the legislation will require most U.S. Citizens and legal residents to have health insurance. It also outlines the minimum coverage and essential health benefits that need to be provided for a plan to qualify for the mandated coverage. This could potentially limit the types of health plans that will be available to consumers. Below are a few of the areas which require clarification by the Secretary of Health and Human Services:

Preventive care services: All insurance policies will be required to provide first dollar coverage for preventive care services. While HSA-compatible health plans are currently allowed to provide first-dollar coverage of preventive care services, in the future, all plans will be required to do so. These provisions will go into effect in 2014. Additionally, further clarification must be provided regarding what constitutes “preventive care” under the new regulations and whether or not that definition conflicts with current IRS guidance on what constitutes “preventive care” for HSA purposes.

Minimum actuarial value: All insurance policies will be required to provide a minimum actuarial value of at least 60 percent for the benefits covered. Clarity must be provided regarding how “actuarial value” is defined. It is also not clear whether a plan’s actuarial value would include employer or individual contributions made to the individual’s HSA. Including the contributions in the calculation of a plan’s actuarial value would make it easier for more HSA-compatible health plans to meet the minimum actuarial value requirement. If contributions are not included, many plans could no longer be sold.

Small employer benefit requirements: The legislation also includes a provision that would prevent small employers from offering plans with deductibles greater than $2,000 for singles and $4,000 for families (indexed annually). Employers may offer plans with deductibles higher than $2,000 / $4,000 if the employer offers a flexible spending arrangement (FSA) that reimburses the difference between the higher deductible and $2,000 / $4,000. This provision will affect the health plans that can be offered to small employers and still qualify for HSA contributions. This provision goes into effect in 2014.

Excise tax on ‘Cadillac’ plans: The new law will impose an excise tax of 40 percent on employer-sponsored coverage that has a benefit value in excess of $10,200 for single coverage and $27,500 for family coverage (indexed annually). The benefit value of employer-sponsored coverage would include the value of the group health plan and contributions to employees’ FSAs, HRAs, and HSAs. This tax would be imposed on insurance companies, including self-insured plans and plans sold in the group market, and plan administrators. However, this provision does not go into effect until 2018.

Medical loss ratio requirement: The new law imposes a “medical loss ratio” requirement. It would require a set percentage of premiums to be paid directly to medical claims. Since HSA-compatible plans have lower premiums, this may make it challenging for plans to meet then established ratios and still qualify for HSA coverage. It is HSA Bank’s (and many industry analysts’) perspective that HSA plans may be necessary for healthcare reform to work — by providing affordable insurance options and encouraging people to become involved as conscious health care consumers. HSA plans may be the lifeline needed to provide any chance of success for health care reform by encouraging controls on healthcare spending, regardless of who is paying for it.

For more information, please check out the IRS website at: http://www.irs.gov/newsroom/article/0,,id=218678,00.html?portlet=7