How to Survive ObamaCare – Take Two Aspirin and Keep Reading

By Pete Kennedy, CPA, CVA - Director at Cover & Rossiter, P.A. “GetInvolved Nonprofit Guide”

Article for March 2013 from Cover & Rossiter, P.A. "GetInvolved Nonprofit Guide" is changing from a bi-monthly schedule to a quarterly schedule. You can find the published version of Kennedy's article on April 25th.  Ever since the Patient Protection and Affordable Care Act of 2010 (a.k.a.

“ObamaCare”) was upheld by the Supreme Court in 2012, people have been waiting for an official diagnosis. Uncertainty around the implications of the Act has been enough to measurably raise the blood pressure of many folks who are charged with compliance. We’ve been getting many completely logical questions – “How and when will this impact my organization?” or “What changes will require compliance?” If thinking about the healthcare legislation gives you a migraine, take two aspirin and keep reading. This article will attempt to synthesize over 1,000 pages of legislation into some of the important aspects.

We will start with the good news. If your organization has fewer than 25 full-time equivalent (FTE) employees, an average salary of less than $50,000, and a qualifying healthcare plan that is at least 50% paid for by the employer, you have an excellent prognosis for getting money back. The provision that governs the Small Business Health Care Tax Credit has been in effect since 2010 and it is applicable to nonprofits, yet we continue to find small nonprofit employers who are missing the opportunity. We recently picked up a new client and calculated the credit at over $8,500 for one year – we will also be filing for back years. If you think you may qualify, but haven’t filed, contact your tax preparer (or Cover & Rossiter). You can still file for back years, but the clock is ticking and the ability to file for the 2010 credit will expire on 5/15/2014 for calendar year filers.

This credit will continue through tax-year 2013 before being replaced with Phase II, which allows a similar credit for small employers who subsidize insurance for their employees through the state-run exchanges (every state is required to establish an insurance exchange or set of coverages available to all state residents – intended to increase competition with traditional health insurance carriers).

Beginning 1/1/2014, many of the most significant provisions of ObamaCare will kick in.

If you are a small employer (fewer than 50 full-time equivalent employees), none of the significant regulatory changes apply to you – although you will probably want to think it over before you hire the fiftieth employee. If you are close to 50, you better crunch the numbers to be sure (use the instructions for IRS Form 8941 for calculations).

If you have over 50 FTEs and currently offer a qualifying healthcare plan to your employees at a cost to the employee of less than 9.5% of that employee’s income, your condition is stable – you do not need to make dramatic changes to be in compliance. You can continue offering the same benefits and not be subject to any penalties.

Employers with 50 or more FTEs may have a bitter pill to swallow. Those “large” employers are required to offer qualifying coverage at a cost of less than 9.5% of the employee’s adjusted gross income or face a penalty. To figure the maximum penalty, take the number of FTEs, subtract 30 and multiply by $2,000. For example, if you have 130, the maximum financial pain is $200,000. That will almost certainly be less than half of what it costs to offer a qualifying plan to the same number of employees – which poses an interesting scenario.

One school of thought is that it would make more sense for employers to fix their costs by abandoning their traditional health plan arrangement, pay the maximum penalty, and also increase the pay of their employees to allow them to purchase insurance through the state-run exchange. Some experts have opined that this is precisely the goal of ObamaCare.

Many folks would like to begin crunching the numbers to see what might work best for them under the new rules, but it’s hard to crunch numbers that don’t yet exist. There are two major variables which make forecasting and decision-making extremely difficult – the cost of the State Exchange policies and the cost of continuing existing policies. The states are required to have their exchanges up and running by October 2013.

The direction of private insurance rates is difficult to predict. Several ObamaCare provisions will likely put a damper on future insurance rate hikes. In one, insurance companies must specifically validate any increases over 10%. In another, insurance companies are now required to issue a rebate to their policyholders when actual claims do not equal or exceed 80% or 85% of premiums paid, depending on the size of the plan. I was thinking “Yeah, and I’ll invest my rebate money in a unicorn ranch,” but we did have a client actually receive a check recently.

Obviously, there are many facets to ObamaCare that are not covered here. If you crave more details, the Kaiser Family Foundation does an excellent job of summarizing the significant aspects of ObamaCare from different perspectives.

If you are still under the weather just thinking about the upcoming healthcare changes, please contact Pete Kennedy, or any other member of our Nonprofit Practice team, at Cover & Rossiter at (302) 656-6632.

Cover & Rossiter, P.A. is one of the most respected and experienced CPA firms serving the accounting, tax and audit needs of the nonprofit community in Delaware.  

Cover & Rossiter Recognized As "Business of the Year"

On January 18, 2013 at the Middletown Area Chamber of Commerce (MACC) Annual Dinner, Cover & Rossiter was recognized with the Business of the Year award. Nominations for this honor are collected from the membership as well as the community and then voted on by a selection committee. The award recipients are not revealed until the Annual Dinner.

Marie Holliday, Director of Tax, accepted the award on the company’s behalf. Also in attendance were Lynn Ritter, Rachael Leberstien, Susan Marley, Jeff Willis and Luci Roseman. We are absolutely thrilled to be honored by MACC with this award. It’s been a great year for Cover & Rossiter as we have been recognized with awards from several organizations!

To read the article as published on the MiddletownTranscript.com on January 30, 2013 click here.

Fiscal Cliff Notes

By Pete Kennedy, CPA, CVA

GetInvolved Nonprofit Guide Article published in the January 2013 News Journal

At Cover & Rossiter, we don’t care how much Jessica Simpson weighs, we don’t know Gangnam from Gingham, we don’t know boo about “Honey Boo Boo,” we don’t keep up with the Kardashians, and, after seeing Justin Beiber on New Year’s Eve, my only lasting thought was “What’s with those pants?” But we do follow the latest changes to the tax code.

If there was an award for the most overused cliché of 2012, the “Fiscal Cliff” would win. The Cliff was intended as an artificial crisis to spur Congress and the President into action to reduce the federal deficit. But just as our elected officials can create artificial crises, they can postpone them. The American Taxpayer Relief Act, which passed in the wake of the initial “Cliff,” is a stop-gap measure that includes some significant changes to the tax code about which all nonprofits should be aware. Since the reduction of the employee portion of the Social Security tax from 6.2% to 4.2% was not extended, all workers will by now have an additional 2% taken out of their gross pay. There is a bit of irony to calling a law which effectively raises the taxes on all workers the “American Taxpayers Relief Act.” I suppose we should count our blessings that they didn’t work in a tortured acronym as well – how about the “Senators And Representatives Can’t Agree So Much” Act (SARCASM)?

The Fate of the Charitable Contribution Deduction

After the release of the Simpson-Bowles report, there was widespread concern regarding the future of the charitable contribution deduction. The 2010 report called for a vast reduction in the tax benefit of the deduction by replacing it with a very limited credit. The good news is that the deduction was not fundamentally changed, although it has been indirectly altered.

After a hiatus, the “Pease” limitation is back. This will limit all itemized deductions – including the charitable deduction - by 3% for every dollar above a stated income threshold ($300,000 for married couples for 2013). For example, let’s assume a couple with $500,000 in taxable income donates $20,000. The Pease limitation would reduce the $20,000 by $6,000 [($500,000 - $300,000) x 3%] for an effective deduction of $14,000. The limit is itself limited to 80% of the deduction, meaning that if the same couple had only donated $5,000, they would still get to claim a $1,000 deduction (since $6,000 is greater than $5,000, the limit would be limited to $4,000 ($5,000 x 80%) leaving $1,000 to claim).

In some quirky situations, the charitable deduction could actually be worth more to the donor in 2013 than it was in 2012. If the same donor above gave $110,000 to charity, the Pease limitation would leave $104,000 to deduct. But since the top tax rate has changed to 39.6% from 35% for incomes over $450,000, the economic benefit to the donor would actually be greater (all other things being equal). Obviously, this is a simplistic example and not intended to represent tax advice, but it serves to illustrate that the charitable deduction has not changed dramatically from 2012 and prior rules.

At the end of the day, donors do not give for strictly economic reasons. If that was true, they would most likely just keep their money in their pocket, pay the tax due and be farther ahead financially than gifting the money regardless of the tax break. The impact of the overall economy does far more to dictate charitable giving than changes to the tax treatment of the donation.

Other Nonprofit Tax Issues for the New Year

Direct rollover IRA contributions survived for another year as did gifts of conservation easements. The same strict rules and caveats still apply to both of those. Favorable tax treatment of contributions of book inventories and used computer equipment, however, were not allowed to continue.

The estate tax changed slightly – the top rate went from 35 to 40%, but there is a permanent $5,000,000 exclusion per person which can be transferred between spouses to create a joint $10,000,000 exclusion before the first dollar of federal estate tax kicks in. There was some concern that doing away with the estate tax altogether – as proposed during the presidential campaign – would severely curtail planned giving efforts at many charities.

Anyone who is involved in any capacity with a non-functionally integrated Type III Supporting Organization (hopefully you know who you are) received a bit of a Christmas present. IRS final rules defining the required distributions for those organizations were issued, but at 3.5% of assets instead of the 5% they had previously advertised. The requirement will be effective for 2014 based on 2013 asset values.

If your organization has questions about any existing or new tax laws for nonprofits, please contact Pete Kennedy, or any other member of our Nonprofit Practice team, at Cover & Rossiter at (302) 656-6632.

See the printable version of the article here.

The Fiscal Cliff

Talk of “going off the fiscal cliff” has been haunting me over the last several months. I started researching the provisions, and realized that the impact was much more far reaching than I had originally understood. The combination of the expiration of the Bush-era tax cuts as well as the impending start of the Obama Care tax provisions would have resulted in significant tax increases for virtually all of the American population, which could potentially cripple economic recovery. However, most people believed that these negotiations were related only to higher income taxpayers. For several months now, Cover & Rossiter has been providing emails, conducting seminars and even meeting individually with our clients to inform them of the impact of the pending changes. It was extremely difficult to adequately predict what would actually transpire because of the differing proposals from the Democrats and Republicans. I suspected these negotiations would go to the last minute, but hoped that legislation would pass with significant time to assist each one of you with year-end planning opportunities.

However, in true Congressional fashion of recent years, nothing was agreed upon until January 1, 2013. The tax side of the fiscal cliff was averted when the American Taxpayer Relief Act of 2012 was signed into law by President Obama on January 2. Outlined below are many of the provisions of this law:

• The Bush-era tax rates were extended for taxpayers with incomes below $400,000 (single) and $450,000 (married filing jointly); a new ordinary income tax bracket of 39.6% was created for taxpayers who exceed those thresholds. Originally, President Obama proposed that these increases would apply to AGI levels of $200,000 (single) and $250,000 (married filing jointly).
• Capital gains and qualified dividends for taxpayers that exceed those thresholds will now be 20% (to the extent that their income exceeds the thresholds). Taxpayers below the thresholds will continue to be taxed at the 15% rate on this income.
• The payroll tax holiday, which reduced Social Security tax from 6.2% to 4.2% in 2011 and 2012, was not extended. All wage earners will see a 2% increase in their Social Security tax withholdings for 2013.
• Trusts will continue to be taxed at the Bush-era tax rate levels except for the highest bracket. Trusts with income in excess of $11,950 will be taxed at the top rate of 39.6%.
• A permanent Alternative Minimum Tax (AMT) “patch” was enacted increasing the 2012 exemption levels to $50,600 for single taxpayers and $78,750 for married filing jointly taxpayers. In future years, the amounts will be indexed for inflation.
• Itemized deductions will once again be subject to phaseouts when income exceeds the threshold of $250,000 for single and $300,000 for married filing jointly.
• Personal exemption phaseouts will be reinstated as well once incomes exceed the threshold levels also indicated for itemized deductions.
• The maximum federal estate tax rate will be 40% for decedents dying after December 31, 2012 who have taxable estates in excess of approximately $5.12 million. The portability election between spouses will now be permanent.
• The child tax credit level was scheduled to be reduced to $500 in 2013, but has been permanently extended to $1,000.
• The 50% bonus depreciation provisions were extended through 2013.

There are many other provisions that were extended with this Act, so if you have specific questions please feel free to contact Marie Holliday at (302) 691-2211 or MHolliday@CoverRossiter.com.  
You can view this article on our website here.