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Annette Nellen
Health care law presents new opportunities for CPAs

Becoming an expert on the numerous and complex provisions of the 2010 health care legislation that affect your individual and business clients can increase business and may be essential to a successful practice.

February 14, 2013
by Annette Nellen, Esq., CPA

There is a lot to know about the 2010 health care legislation in order to take advantage of favorable provisions and to avoid or minimize penalties. CPA firms need to be up to speed for their own compliance. Also, clients are likely to look to their CPA to help understand this immense law and its financial impact. Clients may also be looking for objective explanations of how the rules work and for assistance with projections on various coverage options for employers. CPAs will also need to be aware of any financial statement impact of the law and its voluminous administrative guidance.

CPA firms need to be ready for clients whose need for help is likely to increase as more provisions of the health care legislation come into effect. This article highlights the complexity of health care legislation, why CPAs need to be familiar with the tax and some nontax rules, and resources for addressing this task.

The immensity of it all

The health care legislation enacted in March 2010—the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, as amended by the Health Care and Education Reconciliation Act, P.L.111-152—is almost 1,000 pages long. It involves numerous rules on employer-provided health care, insurance exchanges, insured rights, and the health care delivery system. There are numerous tax provisions (see list below).

Guidance from the IRS and other government agencies has been emerging since 2010, and much of it is quite lengthy. For example, Notice 2012-9 on how to compute the dollar amount of employer-provided health insurance reported on Form W-2 is 23 pages. The proposed regulations under Sec. 1411 on the net investment income tax fill 42 pages of the Federal Register (REG-130507-11). The proposed regulations under Sec. 4980H, Shared Responsibility for Employers Regarding Health Coverage, include 44 definitions (Prop. Reg. Sec. 54.4980H-1(a); REG-138006-12). The IRS website on the Affordable Care Act lists more than two dozen topics (as of February 2013).

Provisions in the tax law coming into effect in 2014 involve a new vocabulary that includes the following terms in Sec. 4375, Sec. 4980H, and Sec. 5000A:

  • Specified health insurance policy.
  • Applicable large employer.
  • Minimum essential coverage.
  • Eligible employer-sponsored plan.

Starting in 2014, individuals and large employers may face penalties for not having or offering adequate insurance, i.e., minimum essential coverage.

New tax rules

Another perspective on the immensity of health care legislation is the number of new, amended, or broadened tax provisions, most of which are listed below:

  • Sec. 36B, refundable credit for coverage under a qualified health plan (premium tax credit) (starts in 2014).
  • Sec. 280C(g), disallowance of deduction for premiums equal to Sec. 36B credit claimed.
  • Sec. 45R, employee health insurance expenses of small employers—a tax credit for small employers.
  • Sec. 280C(h), disallowance of deduction for premiums equal to Sec. 45R credit claimed.
  • Sec. 48D, qualifying therapeutic discovery project credit.
  • Sec. 125(i), limitation on health flexible spending arrangements.
  • Sec. 139D, Indian health care benefits.
  • Sec. 162(m)(6), special rule for application to certain health insurance providers.
  • Sec. 213(a), deduction for medical expenses changed from the excess of such expenses over 7.5% of adjusted gross income (AGI) to 10% of AGI (applies to taxpayers 65 and older starting in 2017).
  • Secs. 1401(b)(2) and 3101(b)(2), additional 0.9% Medicare tax on upper-income employees and self-employed individuals.
  • Sec. 1411, imposition of 3.8% tax on net investment income of certain individuals, estates, and trusts.
  • Sec. 4191, medical device excise tax (2.3% tax starting in 2013).
  • Sec. 4375, health insurance (fee).
  • Sec. 4376, self-insured health plans (fee).
  • Sec. 4377, definitions and special rules (related to Secs. 4375 and 4376).
  • Sec. 4959, taxes on failures by hospital organizations.
  • Sec. 4980H, shared-responsibility for employers regarding health coverage (starts in 2014 for “applicable large employers”).
  • Sec. 4980I, excise tax on high-cost employer-sponsored health coverage (starts in 2018).
  • Sec. 5000A, requirement to maintain minimum essential coverage (the so-called individual mandate starts in 2014).
  • Sec. 5000B, imposition of tax on indoor tanning services.
  • Sec. 6051(a)(14), W-2 reporting for certain employer-provided coverage.
  • Sec. 6055, reporting of health insurance coverage (starts in 2014 for “every person who provides minimum essential coverage to an individual during a calendar year”).
  • Sec. 6056, certain employers required to report on health insurance coverage (starts in 2014 for “applicable large employers”).
  • Sec. 6103(l)(21), disclosure of return information to carry out eligibility requirements for certain programs.
  • Sec. 9815, additional market reforms (new requirements for group health plans).
  • Branded prescription drug fee, PPACA Section 9008 and temporary regulations (T.D. 9544).

The above Code and other health care provisions are accompanied by or will soon be accompanied by administrative guidance in the form of regulations, notices, forms, and information posted to the IRS website.

Importance of having a health care expert

No doubt, there is a lot to know to determine which clients are affected by new tax rules and what that effect is. In addition, there are numerous rules outside of the tax area that can affect a firm’s and client’s health insurance coverage and finances. The health care legislation presents a new practice area for many, including CPAs.

The new rules affect not only the finances and taxes of individuals and businesses, but also the financial statements of businesses. For example, to know if liabilities and expenses are properly reflected for financial statement purposes, auditors will need to know if their clients are large employers subject to the Sec. 4980H “assessable payment,” which can be as high as $3,000 per employee. In addition, there are penalties for failure to follow certain reporting and compliance requirements.

A lot of time is needed to become and remain a health care expert. There are a lot of rules and definitions to understand to determine how some of the new taxes, payments, and penalties apply. For example, to know whether any business clients are subject to the Sec. 4980H assessable payment, it must be determined if the client is an “applicable large employer.” That determination involves identifying and counting the number of full-time employees (generally, those employed an average of at least 30 hours per week during any month) as well as the full-time equivalent (FTE) employees.

Under Prop. Regs. Sec. 54.4980H-1(a)(4), an applicable large employer is “an employer that employed an average of at least 50 full-time employees (including full-time equivalent employees) on business days during the preceding calendar year.” For many employers, there will be no need to perform any calculations to determine if they meet this definition (because, for example, they clearly have 100 full-time employees). But for others, there will be a need to calculate the FTE workers and determine the effect of seasonal and “variable hour” employees. Business clients may also seek advice on whether changes are needed or desirable to their health plans, worker status, and employment arrangements in complying with Sec. 4980H.

Conclusion

CPA firms should find it valuable and perhaps absolutely necessary to have in-house expertise to identify clients who may need to take actions to avoid penalties, comply with new payments, take advantage of tax credits, and ensure proper tax and financial statement reporting. The immensity of the legislation, number of new rules, and lengthy and often complex guidance has created a new practice area, including for CPAs.

Resources

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Annette Nellen, Esq., CPA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA, and California State Bar. She is the immediate past chair of the AICPA Individual Income Taxation Technical Resource Panel. She has several reports on tax policy and reform and a blog.