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IRS Issues a Proposed Regulation Regarding Employer-Sponsored Healthcare Plans

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The IRS recently issued a proposed rule entitled, “Minimum Value of Eligible Employer-Sponsored Plans and Other Rules Regarding the Health Insurance Premium Tax Credit” (see, 26 CFR Part 1) regarding the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, and related rules and laws (generally, “PPACA”). In the proposed regulation, the IRS has ruled that employer-sponsored healthcare plans will be unable to include various wellness programs in order to meet minimum value (MV) coverage requirements under the PPACA and related rules. In general, large employers (typically 50 full-time employees or more) who do not meet certain minimum coverage standards under the PPACA must pay an excise tax.

Many employers sought to include wellness programs in their plans in order to reduce health care coverage costs. In general, wellness programs are often designed to reduce potential health problems for employees through various means. Certain wellness programs may even require employees to meet an established health standard.

The article will give a basic summary of a proposed rule and the MV calculation. It is not intended to constitute tax or legal advice. The new rules under the PPACA will involve many complex tax and legal issues, so you are advised to seek an experienced attorney if you have questions in these areas. Sherayzen Law Office, PLLC can assist you in all of your tax, business-planning and legal needs, and help you avoid making costly mistakes.

MV Determinations under the Proposed Regulation

In making its proposed rule, the IRS noted:

“Commentators offered differing opinions about how nondiscriminatory wellness program incentives that may affect an employee’s cost sharing should be taken into account for purposes of the MV calculation. Some commentators noted that the rules governing wellness incentives require that they be available to all similarly situated individuals. These commentators suggested that because eligible individuals have the opportunity to reduce their cost-sharing if they choose, a plan’s share of costs should be based on the costs paid by individuals who satisfy the terms of the wellness program. Other commentators expressed concern that, despite the safeguards of the regulations governing wellness incentives, certain individuals inevitably will face barriers to participation and fail to qualify for rewards. These commentators suggested that a plan’s share of costs should be determined without assuming that individuals would qualify for the reduced cost-sharing available under a wellness program.”

The IRS stated that there are several methods for determining MV (under Notice 2012-31 and 45 CFR 156.145(a)): “the MV Calculator, a safe harbor, actuarial certification, and, for small group market plans, a metal level.” According to the proposed rule, employers may determine whether a certain plan provides MV by utilizing an HHS and IRS MV calculator, unless a safe harbor exists. Certain safe harbor plans will be specified in future guidance.

Under 45 CFR 156.145(a) and the proposed rule, “[P]lans with nonstandard features that cannot determine MV using the MV Calculator or a safe harbor” must use the actuarial certification method. Further, it is required that the actuary performing the MV calculation must be a member of the American Academy of Actuaries and perform the analysis in accordance with generally accepted actuarial principles and methodologies, and its related standards.

Exception to the Wellness Program Rule

The IRS proposed rule does provide one exception to the wellness program MV calculations for certain anti-tobacco related programs. Under the proposed regulation, “…[F]or nondiscriminatory wellness programs designed to prevent or reduce tobacco use, MV may be calculated assuming that every eligible individual satisfies the terms of the program relating to prevention or reduction of tobacco use.”

Last Estimated Tax Payments for the Tax Year 2011 are Due on January 17, 2012

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Estimated tax payments for the fourth-quarter of 2011 are due on January 17, 2012. The estimated tax payments should be made using Form 1040-ES. Note, if the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be considered on time if it is made on the next business day.

This is the last chance to make the payment of estimated taxes for the tax year 2011.

Expanded Tax Credit for Hiring Unemployed Veterans

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On November 21, 2011, the VOW to Hire Heroes Act of 2011 was signed into law.    The new law provides an expanded work opportunity tax credit to businesses that hire eligible unemployed veterans and for the first time also makes part of the credit available to tax-exempt organizations. Businesses can claim the credit as part of the general business credit and tax-exempt organizations can claim it against their payroll tax liability. The credit is available for eligible unemployed veterans who begin work on or after November 22, 2011, and before January 1, 2013.

Also included in this new law is the Veterans Retraining Assistance Program (VRAP) for unemployed Veterans. The Department of Veteran Affairs (VA) and the Department of Labor (DoL) are working together to roll out this new program on July 1, 2012.  Specific eligibility requirements apply.  Moreover, the program is only limited to 45,000 participants for the 2012 fiscal year (and to 54,000 participants between October 1, 2012 and March 31, 2014).

Underpayment and Overpayment Interest Rates for the First Quarter of 2012

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On November 29, 2011, the Internal Revenue Service announced that underpayment and overpayment interest rates will remain the same for the calendar quarter beginning January 1, 2012. The rates will be:

  • three (3) percent for overpayments (two (2) percent in the case of a corporation)
  • three (3) percent for underpayments
  • five (5) percent for large corporate underpayments
  • one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points.

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

Notice 88-59, 1988-1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding.

Interest factors for daily compound interest for annual rates of 0.5 percent are published in Appendix A of Revenue Ruling 2011-32. Interest factors for daily compound interest for annual rates of 2 percent, 3 percent and 5 percent are published in Tables 7, 9, 11, and 15 of Rev. Proc. 95-17, 1995-1 C.B. 561, 563, 565, and 569.

Mortgage Debt Forgiveness Tax Relief: Basic Facts

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Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence during tax years 2007 through 2012. The limit is $1 million for a married person filing a separate return. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

In order to qualify for the tax relief, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

However, proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion. Debt forgiven on second homes, rental property, business property, credit cards or car loans also does not qualify for the tax relief provision.

If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed. You should examine the Form 1099-C carefully and notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

If you qualify for tax relief, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

Note that other tax relief provisions – such as insolvency – may be applicable.