Wednesday, July 1, 2015

When the Punishment Does Not Fit

Small employers beware.  The Affordable Care Act has bite.  We have all heard of the mandate on large employers to provide health insurance for their employees or face some fearsome penalties, however small employers could also find themselves in the crosshairs for maintaining certain types of health plans which have been outlawed by the Affordable Care Act.

Rather than set up group health insurance plans, some small employers have traditionally had the option of a medical reimbursement plan which could be used to reimburse employees for the health insurance premiums they incurred on their individual health policies.  Such medical reimbursement plans have not been forbidden per se, but the reimbursement of individual health insurance premiums by such plans has been forbidden.  

An arrangement whereby the employer reimburses the employee for individual health insurance premiums is referred to as an "employer payment plan."  Whether a particular brand of health plan is subject to the market reform provisions of the Affordable Care Act depends on whether the plan meets the definition of a "group health plan."  IRS has ruled that the employer payment plans are indeed group health plans, and thus are subject to market reforms.  The why and how of the conflict between the market reforms and such employer payment plans is explained, but it takes a familiarity with the jargon of the legislation that frankly I don't possess.  (Something to do with integration.)  

The Penalty

If an employer runs afoul of this prohibition, the penalty amounts to $ 100 per day per employee for every day the employer maintains such a plan, beginning on July 1, 2015.  Hence the timing of this post.  

But that might not be the end of it as there could also be ERISA to deal with and I won't even go there. 

Limited Relief

There is limited relief from this prohibition on reimbursing individual health insurance premiums. Market reforms do not have to be satisfied by such small employers if the reimbursement arrangement covers only a single employee on the first day of the plan year, or if the arrangement is maintained by an S corporation for the benefit of a 2% shareholder-employee. 

These limited relief provisions are set to extend until the end of 2015.  By that time, IRS expects to have considered whether additional guidance is needed.  (You think?)

The Takeaway

The Affordable Care Act does a lot of good for some people.  Everybody should be able to buy affordable health insurance.  The provisions which mandate individual coverage are intended to stop people without coverage from getting free healthcare in hospital emergency rooms where they can't be turned away and run up the cost of health insurance for everybody else.  I am for that. 

However, some of the provisions of the Act do not make sense and for that reason, maybe it tries to do too much or tries to do it in the wrong way.  This penalty provision is a real stinker.  

Friday, April 24, 2015

When Do It Yourself is Not a Good Idea (Incentive Stock Options)

I am like a lot of people in that I sometimes overreach my abilities when it comes to do it yourself.  Like that time I tried to rehab the bathroom walls and actually ended up worse off than before.  It's like Dirty Harry said, "a man's just got to know his limitations."  This year IRS revised the instructions for a reporting form used by stockbrokers in connection with stock trades, etc., form 1099-B.  The change makes for a confusing situation with regard to exercise of incentive stock options, which is a form of bonus awarded to usually fairly high paid executives.  Now many of these individuals probably already have accountants, but some who are particularly bold and self assured will no doubt try to do their own taxes with Turbo Tax, Tax Cut, or whatever the new thing is.  I expect to meet some of these guys this summer when they figure out they have overpaid on their taxes. 

Doing your taxes with Turbo Tax may be just fine for a great many people and so I don't discourage that for those where it fits, and I will tell people that to my own disadvantage.  However, if you have doubts, don't do it yourself.  With the exercise of incentive stock options, you have a couple of choices.  You can pay the exercise price yourself and buy the stock at a bargain price.  You hold the stock for over a year and you get capital gains treatment, which is favorable to you.  However, if you do as a great many people do and have the stock sold immediately upon exercise so that you don't have to come up with any cash, then the gain is treated as compensation and is included with your salary on your W-2.  The gain is taxed as ordinary income rather than capital gains, and the company gets a deduction no less.  Now here's where it gets interesting. 

The IRS instructed the brokers that they have to report the exercise price as the cost basis in the stock rather than the amount included in your W-2, which is the correct number.  Trust me, this is sneaky stuff.  If you use Turbo Tax and enter the numbers right off the official IRS approved forms, you will wind up reporting the same gain twice on your taxes.  I said it was sneaky, didn't I?

There is a proper way to report this gain, and IRS has provided the instructions to do this, but you have to read very carefully to find the instructions, and then they are written in IRSspeak which is a language in and of itself.  Now I guess here is where I could provide a line or two on how it should be done, that would save the self-assured high paid executive a lot of grief, and it would be the nice thing to do, but noooooooooooo.  

Sometimes it's just better to hire the pro.