Monday, May 22, 2017

Key Tax Changes in the American Health Care Act

By:  Cyndi Moore


The American Health Care Act ("AHCA"), passed by the House of Representatives on May 4, 2017, repeals many of the taxes added by the Affordable Care Act ("ACA") and makes changes to other tax rules.  Some of the notable changes proposed to be made to the Internal Revenue Code are: 

1.         The individual mandate to maintain health insurance and the employer mandate to offer health insurance remain in the Code, but the taxes are "zeroed out" effective retroactively to 2016.
 
2.         The following taxes, fees, credits and limitations are repealed as of the year shown below:  

·         The net investment income tax (NIIT) (2017)

·         The 0.9% additional Medicare tax (2023)

·         The small employer health insurance credit (2020)

·         The $2500 limitation on contributions to a health flexible spending account (FSA) (2017)

·         The annual fee on branded prescription drug sales (2017)

·         The medical device excise tax (2017)

·         The annual fee on health insurance providers (2017)

·         The elimination of a deduction for expenses allocable to the Medicare Part D subsidy (2017)

·         The 10% tanning salon tax (June 30, 2017) 

3.         The "Cadillac" tax on high cost health plans is delayed until 2026.  

4.         Individuals may be reimbursed for over-the-counter medications under a health savings account (HSA), health FSA or a health reimbursement arrangement (HRA) (2017). 

5.         The penalty tax on withdrawals from an HSA not used for a qualified medical expense is reduced from 20% to 10% (2017). 

6.         The bill would replace the current ACA premium tax credit with a new refundable, advanceable tax credit effective January 1, 2020.  The credit could be applied toward the cost of any eligible health insurance coverage, whether purchased on or off the Exchange.  The credit is age-based as follows:

Age
Annual Credit
Under 30
$2,000
30 – 40
$2,500
40 – 50
$3,000
50 – 60
$3,500
60 and over
$4,000

The maximum credit for a family is $14,000. The credit is adjusted each year by CPI + 1%.

The credit is phased out depending on the individual’s modified adjusted gross income (MAGI) for the year.  It begins phasing out for an individual with income of $75,000 ($150,000 for joint filers) by $100 for every $1,000 in income above those thresholds.  The MAGI dollar limitations are also indexed for inflation beginning in 2021.  

            To be eligible to claim the credit, the individual must be covered by “eligible health insurance,” not be eligible for “other specified coverage” (including employer coverage or a government sponsored health program) and be a U.S. citizen or a qualified alien. 

7.         The bill would make the following changes to health savings accounts, effective in 2018:

§  The maximum contribution to an HSA would be increased to the out-of-pocket maximum (in 2017, $6,550 for self-only and $13,100 for family coverage).  Under current law, HSA contributions are limited to $3,400 for self-only and $6,750 for family coverage.
§  Both spouses could make a “catch-up” contribution to the same HSA.  Under current law, each spouse must have his or her own HSA. 
§  If an HSA is established within 60 days after coverage under a high deductible plan begins, the individual could be reimbursed for medical expenses incurred within that 60-day period.  Under current law, an individual cannot be reimbursed for any expense incurred before the HSA is established.
The bill now moves to the Senate where significant changes are expected.   

Please contact Cyndi Moore (Member and Practice Department Manager: Domestic Relations, Employee Benefits, Estate Planning, Gaming and Immigration) in the Troy, Michigan office at 248-433-7295 or any other member of the Dickinson Wright employee benefits group for further information. 

Monday, May 15, 2017

New Cash Balance Retirement Plan Guidance

By: Roberta Granadier

 
On April 7, 2017, the IRS issued a memorandum relating to cash balance retirement plans.  A cash balance plan is a defined benefit pension plan which looks like a defined contribution plan because participants have individual “hypothetical” account balances.  The employer typically credits a flat percentage of compensation to each eligible employee, and the employee’s account balance grows based on specified interest credits. 

The new IRS guidance addresses cash balance plans that calculate benefits using only a portion of annual compensation, a special bonus or pay over a certain threshold rather than annual compensation.  The IRS cautions that cash balance plans which give the employer discretion to determine what compensation is included for benefit contribution purposes may violate the Internal Revenue Code “definitely determinable” requirement that applies to all defined benefit pension plans, including cash balance plans.  The problem arises when the employer has discretion to determine which part of compensation is considered.  The plan terms may specify whether base compensation,  bonuses or specified pay credits are included in the plan benefit formula.  However, if the employer has discretion or the inherent ability to determine how much W-2 compensation is paid in a way that manipulates pay credits or compensation used in the benefit formula, then the plan may violate IRS rules.  Any operational defect would have to be corrected pursuant to IRS correction procedures. 

Cash balance plans are still relatively popular and can be particularly beneficial for certain employers.  We would be happy to assist in reviewing any cash balance plan to ensure compliance with the recent IRS guidance and to ensure the plan is meeting the employer’s cost and compensatory objectives. 

For more information, please contact Roberta Granadier in our Troy, Michigan office at 248-433-7552.

 

 

Monday, May 8, 2017

Ontario Introduces 15% Tax on Foreign Real Estate Buyers

By: Ted Citrome and Melissa Tayar

The Ontario government announced a new proposal to impose a 15 percent tax on purchases of residential real estate by foreign buyers as part of its Fair Housing Plan.  Similar to the foreign buyer tax enacted last year by the British Columbia government, the Non-Resident Speculation Tax (NRST) is intended to cool the housing market in Ontario.

Key features of the NRST proposal include:

  • The amount of NRST is 15% of the value of the consideration for the land.
  • The NRST only applies to land in the “Greater Golden Horseshoe” area.
  • The NRST is levied when one of the following persons acquires legal or beneficial ownership of land:
            (a) an individual other than a Canadian citizen or permanent resident;
            (b) a corporation incorporated outside Canada;
            (c) a corporation incorporated in Canada that is controlled by a foreign national or a foreign corporation.

Rebates may be available to foreign nationals who subsequently become Canadian citizens or permanent residents, or who are full-time Ontario students.
  • The NRST applies only to a transfer of residential land; purchases of agricultural land, commercial land and industrial land are exempt.  Residential land includes condo units and real estate containing up to six family residences.
  • Transfers registered after the announcement date of April 20, 2017 are subject to the NRST, unless the conveyance occurs pursuant to a binding agreement entered into on or before that date.
  • The proposal also permits “Toronto and potentially other interested municipalities” to introduce an additional tax on vacant homes.
  • Additional details regarding the NRST will become available when draft legislation and administrative guidelines are released. 

The impact of these proposed measures on foreign investors in Ontario real estate could be significant. Dickinson Wright lawyers are available to respond to inquiries regarding NRST and the Fair Housing Plan. For more information please contact Ted Citrome at (416) 649-4609 or Melissa Tayar at (416) 777-4012 in the Toronto, Canada office.

Monday, May 1, 2017

Deducting Cost of Assisted Living Facilities

By:  Cindy Svenson

Assisted living facilities for elderly persons (“ALFs”) can be very expensive, but for many taxpayers, the cost can be fully deducted on federal income tax returns as a medical expense if the ALF resident’s health problems rise to a certain level and if the appropriate documentation is obtained.

Taxpayers over 65 or who have a spouse over 65 can deduct the portion of their medical and dental expenses that exceed 7.5% of their adjusted gross income. Once one or both spouses move to an assisted living facility, most taxpayers will easily exceed this threshold. 

Most ALFs are aware that a resident’s cost for ALF services relating to medical care can be deducted for federal income tax purposes; but not all ALFs are aware that the full cost of ALF services, including room and board, can be deducted as medical expenses if the ALF services are required by a “chronically ill” individual and are “provided pursuant to a plan of care prescribed by a licensed health care practitioner.”  An individual qualifies as “chronically ill” if a licensed health care practitioner certifies that the individual 1) is unable to perform at least two basic activities of daily living (including eating, toileting, transferring, bathing, dressing) without assistance from another individual due to loss of functional capacity, or 2) requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment. A physician, registered professional nurse or licensed social worker would each qualify as a “licensed health care practitioner.”

 
For further information, contact Cindy Svenson in the Troy, Michigan office at 248-433-7530.






 
 
 

Thursday, April 27, 2017

Company Liable for Not Providing Accurate Information about Benefits

By:   Deb Grace

A recent court case, Erwood vs Life Insurance Company of North America, is a reminder that plan sponsors must understand the terms of their welfare and retirement benefit plans, and ensure that their staff follows the provisions of any plan administrative manual.  Failure to provide employees with accurate information is a breach of ERISA fiduciary duty and may result in liability for the plan sponsor. 

In the Erwood case, WellStar contracted with the Life Insurance Company of North America to provide group life insurance for its employees, including Dr. Erwood.  Like many group life insurance plans, the contracts gave employees a short window period after termination to convert the group insurance coverage into an individual policy.  The administrative manual supplied to WellStar by the insurance company included a form that WellStar was to provide to a terminated employee advising the employee of his right to convert the policy.  The manual required that the plan sponsor send the form to a terminated employee within 15 days after the employee’s termination date. 

When Dr. Erwood became terminally ill, he and his spouse had numerous discussions with a WellStar representative about his benefits, including how to continue benefits while on FMLA leave and thereafter.  The representative even completed the employer portion of a form that allowed Dr. Erwood to receive a terminal illness benefit from one of the group life insurance plans.  Unfortunately, the WellStar representative never provided to Dr. Erwood the specific forms that he needed to exercise his conversion rights, and the group coverage lapsed prior to Dr. Erwood’s death. 


The Court found that WellStar’s fiduciary responsibilities to administer the group life plans were set forth in the administrative manual supplied by the insurance company.  Further, once Dr. Erwood had requested information from WellStar, the company had a fiduciary obligation to convey complete and accurate information to Dr. Erwood, even if that information comprises elements about which he had not specifically inquired.  The Court determined that Dr. Erwood relied on the information provided by WellStar, that WellStar breached its fiduciary duty by not providing Dr. Erwood with sufficient information so that he could exercise his conversion rights under the plans and therefore WellStar was liable for the full amount of the proceeds that would have been paid under the policies, $750,000.  

In addition to being a reminder that plan sponsors should check their processes for advising terminated employees of any group life insurance conversion rights, this case is a cautionary tale about administrative documents and service agreements in general.  Plan sponsors rely heavily on their third-party recordkeepers and insurance companies to “administer” plans for them.  But prudent plan sponsors understand that recordkeeping agreements and insurance contracts often contain specific language proscribing how the administration should be handled, in addition to provisions confirming that the plan sponsor is responsible for the administration of the plan.  If you or your clients have questions about their plans’ administrative contracts or their ERISA responsibilities, please call Deb Grace in the Troy, Michigan  office at 248-433-7217. 

Monday, April 24, 2017

DRAFTING IN THE DETAILS

By: Emily Dorisio


The Fifth Circuit Court of Appeals recently affirmed that the devil really is in the details in a case that illustrates the importance of ensuring that deal documents accurately reflect the parties’ agreed upon terms with respect to a transaction.   In Makric Enterprises, Inc. v. CIR, No. 16-60410 (5th Cir. 2017), Makric and its shareholders negotiated a sale of Alpha Circuits, Inc., a wholly owned subsidiary of Makric.  After execution of a letter of intent and preparation of initial document drafts, Makric and its shareholders renegotiated the structure of the sale with buyer.  The deal documents were revised, but failed to accurately reflect the renegotiated structure.  Makric and its shareholders did not report the sale as reflected in the deal documents on their respective tax returns – they reported the transaction based on the renegotiated structure.  The discrepancy resulted in an assessment of additional tax and penalties against Makric of more than $3.4 million.  Makric sought to have the Tax Court reform the transaction from the transaction set forth in the deal documents to the renegotiated structure on grounds of mutual mistake, but the Tax Court refused and the Fifth Circuit agreed with the Tax Court. 

This case illustrates the importance of structuring a deal for maximum tax efficiency and following that up by making sure that the structure is accurately reflected in the deal documents.  If you would like more details about this case or need assistance with a transaction, please contact Emily Dorisio in the Lexington, Kentucky office at (859) 899-8714. 

Thursday, April 20, 2017

STRUCTURING A PARKING REIMBURSEMENT PLAN AS A TAXABLE OR TAX-FREE FRINGE BENEFIT

By:  Cyndi Moore


In Information Letter 2017-0007, the IRS analyzed an employer’s parking reimbursement arrangement and concluded that it was not a tax-free fringe benefit.
The employer purchased parking spots from a parking vendor near the employer’s office and offered employees the opportunity to use the parking spots.  Those employees who elected to use the parking spots were required to pay the employer by having the monthly parking fee deducted from their paychecks, on an after-tax basis, in the month prior to using the parking spot.  The parking fee was less than the statutory limit for qualified parking of $255 per month.  Employees asked the IRS whether they could exclude the parking fee from their income as a “qualified parking benefit” under Section 132(f)(1)(C) of the Internal Revenue Code.

The IRS concluded that the arrangement was not a “qualified parking benefit” because the deductions were made from employee pay on an after-tax basis.  The employer could have made the arrangement a tax-free benefit in one of two ways:

(1)       The employer could have reimbursed the employees for the amounts paid by each employee for parking (up to the monthly limit of $255); or
(2)       The employer could have allowed the employees to pay the cost of parking on a pre-tax basis by offering the employees a choice between cash and a parking benefit through a “compensation reduction arrangement.”  In this type of arrangement, the employee would make his or her election in the month preceding the month in which the parking spot was used, and then payroll deductions for parking expenses would be made in that month.
The employer in this case was clearly trying to give employees a benefit by making parking spots available to them, but it could have been an even better benefit if the employer had structured the arrangement as a qualified parking benefit. 

If you have any questions, please contact Cyndi Moore of our Troy office at 248-433-7295.  Ms. Moore and Will Elwood are the co-authors of BNA Tax Management Portfolio No. 395, "Employee Fringe Benefits."