November 2014 Newsletter
In This Issue:
- Tax Alert! The Comptroller v. Wynne Case
- ACA & Related IRS Guidance Prohibit Tax-Free Payment or Reimbursement of Employee's Individual Insurance Premiums or Out-of-Pocket Medical Expenses
- HSAs - What Are They and How Do They Work?
- Free Parking May Be Taxable
- Did You Know?
On May 27, 2014, the Supreme Court granted a writ of certiorari petition for the Comptroller v. Wynne Case.
At issue in this case is whether states must provide a credit against its own taxes for taxes a resident pays to another state. Maryland allows such a credit against its state income tax, but not against its local county and city income taxes often referred to as the "piggyback tax".
According to the Wynne's and their supporters, the failure to allow a credit with respect to the piggyback tax for out-of-state income taxes paid to other states on "pass-through" income earned in those states discriminates against interstate commerce and violates the Commerce Clause of the federal Constitution.
What does this mean to you?
You may be entitled to file an amended tax return, protective claim, requesting a refund of prior Maryland taxes paid if:
- You are a Maryland resident (or were a Maryland resident in the past 3 years); and
- You own a pass-through business (partnership or S-Corp); and
- The business paid taxes on income to states other than Maryland (very common for S-Corps operating in the District of Columbia
ACA & Related IRS Guidance Prohibit Tax-Free Payment or Reimbursement of Employee's Individual Insurance Premiums or Out-of-Pocket Medical Expenses
Certain companies are marketing what are commonly described as "defined contribution" arrangement, whereby an employee would purchase individual health insurance, and then the employer would reimburse the employee with employer monies contributed on a pre-tax basis to an "account" in the employee's name. However, such arrangements do not appear to comply with the rules established under the Affordable Care Act (ACA) and may result in significant adverse tax penalties for these employers. These kinds of arrangements include:
- Establishment of an IRC section 125 cafeteria plan to permit employees to pay for individual insurance premiums on a tax-free basis through salary reductions. These arrangements were commonly referred to as "premium-only-plans" or "POPs"
- An employer's use of a stand-alone health reimbursement arrangement or "stand-alone HRA" to reimburse an employee's medical expenses (including individual insurance premiums) on a tax-free basis
- An employer's direct payment or reimbursement of an employee's individual insurance premiums. These arrangements are referred to under federal tax guidance as "employer payment plans" or "EPPs"
In September 2013, the IRS, in conjunction with the Department of Labor, issued guidance interpreting how new ACA market reforms affect the above mentioned arrangements. The guidance is effective for plan years beginning in 2014 and preclude any arrangements that would allow an employee to use tax-free wages to purchase individual major medical insurance. The guidance also suggests that an employer cannot generally reimburse an employee's out-of-pocket medical expenses unless the employee is also enrolled in an employer-sponsored group major medical plan.
What these New Rules Mean
These new rules mean that employers that want to help pay for employees' medical expenses with fax-free dollars will generally only be able to do this in connection with the employer's sponsorship of a group medical plan. Therefore, the new rules mean the following for employers:
- Employers cannot use a cafeteria plan to allow employees to salary reduce their ages to pay for individual major medical insurance on a tax-free basis (no more use of premium-only-plans or "POPs")
- Employers cannot use a stand-alone health reimbursement arrangement or "stand-alone HRA" to pay for employees' medical expenses (including individual insurance premiums) on a tax-free basis
- Employers cannot pay directly, or reimburse a n employee's individual insurance premiums (no "employer payment plans" or EPPs")
Under the ACA, failure to abide by these new rules can result in penalties of up to $36,500 per plan participant or beneficiary – for each year!
Employers considering implementing an arrangement involving the tax-free financing of individual major medical insurance (through a cafeteria plan or otherwise), employer payment of employee individual insurance premiums, or reimbursement of employees' out-of-pocket medical expense, should consider the following actions:
- Seek the advice of independent legal counsel to determine the impact of the ACA on the employer's specific circumstances
- Request that the vendor provide indemnification for any excise taxes imposed as a result of the pre-tax funding of Individual Medical (IM) coverage. Please note that indemnification could require the vendor to pay any financial penalties and/or other costs (subject to the specific contractual terms) that might be imposed in the event the arrangement is found to violate the guidance - it would not, however, change the fact the plan violated the guidance or eliminate the possibility of an IRS audit of your company.
A Health Savings Account (HSA) combines high deductible health insurance with a tax-favored savings account. Money in the savings account can help pay the deductible. Once the deductible is met, the insurance starts paying. Money left in the savings account earns interest and is yours to keep.
Advantages of an HSA
- Tax deductible: Contributions to the HSA are 100% deductible (up to the legal limit) – just like an IRA.
- Tax-free: Withdrawals to pay qualified medical expenses, including dental and vision, are never taxed.
- Tax-deferred: Interest earnings accumulate tax-deferred, and if used to pay qualified medical expenses, are tax-free.
- HSA money is yours to keep: Unlike a flexible spending account (FSA), unused money in your HSA is not forfeited at the end of the year; it continues to grow tax-deferred.
- HSA money can also be used for: health insurance premiums if you are between jobs, qualified long-term care premiums, Medicare premiums and out-of-pocket expenses, and living expenses after age 65.
How does an HSA work?
- An HSA works in conjunction with high deductible health insurance. Why? To get the benefits of an HSA, the law requires that the savings account be combined with a qualified high deductible health insurance plan which can cost less than other health insurance plans. In 2014, the minimum annual deductible of a qualified HSA plan for an individual is $1,250 and $2,500 for a family.
- Your HSA dollars can be used to help pay the health insurance deductible and qualified medical expenses, including those not covered by the health insurance, such as dental and vision care.
- Any funds you withdraw for non-qualified medical expenses will be taxed at your income-tax rate, plus 20% if you're under the age of 65.
- Once you meet the calendar-year deductible, health insurance pays the remaining covered expenses in accordance with the terms and conditions of your particular plan. For example, some plans pay 100% of covered expenses after the calendar-year deductible is met.
For more information or if you have a question about your current health insurance plan and HSA, please contact your Client Services Specialist at 410-451-4202.
In Information Letter 2014-17, the IRS reminds employers that "free" parking for employees may result in taxes both for the employee and the employer. The letter explains that if an employer provides a free benefit to employees for qualified parking – the value of which exceeds the maximum amount that may be excluded from an employee's income per month – the value of the benefit exceeding the exclusion limit is included in the employee's wages for income and employment tax purposes.
Qualified Transportation Fringe Benefits
Employers may provide certain transportation fringe benefits to their employees without including their fair market value in their income, including qualified parking; transit passes; vouchers; fare cards or reimbursements for fare cards by the employer; or transportation between home and work in an employer-provided commuter highway vehicle. Up to $130 per month (for 2014) is excluded from income for employer-provided transit passes and transportation in a commuter highway vehicle.
Up to $250 per month (for 2014) is excluded from income for qualified parking, and it is not reduced if combined with other qualified transportation fringe benefits.
Qualified Parking Expenses
"Qualified parking" is parking provided to an employee by an employer on or near the employer's business premises or at a location from which the employee commutes to work using mass transit (such as a park-and-ride lot). Parking is "provided" to an employee if the employer pays for the parking (either to the operator or by reimbursing the employee) or the employer provides the parking on premises that it owns or leases.
Qualified parking does not include parking at or near the employee's home. Also, qualified parking does not include parking on or near a work location where the employee works for the employer, if (i) the value of parking provided by the employer or reimbursement for the employee's parking expenses is otherwise excluded from income as a working condition fringe benefit or (ii) the value of parking provided by the employer or reimbursement for the employee's parking expenses is an employee business expense reimbursed under an accountable plan.
HRi was a sponsor and exhibitor at TEDCO's 2014 Entrepreneur Expo held at the BWI Marriott on Tuesday, November 12th. The theme for the 4th Annual Entrepreneur Expo was "E2E: Entrepreneurs Inspiring Entrepreneurs" and created an environment where leading entrepreneurs can inspire the next generation of innovators, and where up-and-comers can make valuable connections to ideas, mentors and capital.
This year's Expo was an event that drew more than 500 people, including some of the region's top entrepreneurs, small business executives, angel and venture capital investors, federal and state economic development officials and university leaders.
The event had 5 different tracks throughout the day and in addition to traditional panels, featured sessions such as an introduction to HR and employee relations, opportunities to pitch to investors, speed networking, workshops, and roundtable discussions with industry experts.
We had a wonderful time and met many new faces – we hope to see you at next year's Expo!