Virginia Business Law Blog

The heath care reform measures recently signed into law by signed by President Obama promise to have a significant impact on every American.  Because employer-provided health insurance and related tax incentives will remain an important part of the post-reform system, businesses should pay particular attention to the new rules

Below is a brief overview and summary of the key components of the health care reform legislation and how it may impact individuals and small businesses. In a broad sense, the legislation will:

• Mandate that everyone must have insurance.
• Provide for subsidized coverage for people that can’t afford it and increase the number of people that will qualify for Medicaid.
• Make cuts to Medicare Advantage Plans and change their payment formula.
• Make many changes to the way insurance companies do business from not allowing them to restrict coverage based on pre-existing conditions to limiting their rates based on medical loss ratios.

Specific changes that take effect this year include:

• Tax credits for certain small businesses
• Small businesses qualify for a 35% tax credit if they have 10 or fewer employees, and they earn less than $25,000/year on average.
• Small businesses qualify for a smaller tax credit if they have 25 or fewer employees with an average wage of $50,000/year or less.
• However, small businesses do not qualify for a tax credit if they have more than 25 employees; also, any employee who earns more than $80,000/year will be excluded from the credit.
  • In 90 days, the bill will enact a temporary reinsurance program that allows employers to provide coverage for employees over the age of 55 who are not eligible for Medicare.  Concurrently, the bill enacts a temporary high-risk insurance pool for individuals with pre-existing conditions that have not had insurance for at least six months.
    • Closing the so called “doughnut hole” by providing immediate tax credits for Medicare patients who face a gap in prescription drug coverage.
    • Creation of a temporary reinsurance program to provide coverage for retirees over 55 who are not eligible for Medicare.

Those changes that are expected to take effect in, or by, 2014 are:

• Beginning in 2014, the maximum small business tax credit will increase to 50% of the cost of health insurance obtained through an Exchange. When determining the number of full-time employees for this purpose, all members of the employer’s controlled group are taken into account, and the aggregate hours of part-time employees are converted into full-time equivalents (based on service of 2,080 hours per year). After 2014, the credit may not be taken for more than two consecutive years, beginning with the first year in which the employer offers health insurance through the Exchange.
• By no later than 2014, states will have to set up Small Business Health Options Programs, or “SHOP Exchanges,” where small businesses will be able to pool together to buy insurance, where small business is defined as 100 employees or less though states will have the option of limiting pools to companies with 50 or fewer employees.   
• Starting in 2014, an employer that offers a group health plan must provide “free choice vouchers” for the purchase of health coverage through an Exchange to any employee who is eligible for a premium subsidy and whose required contribution to the employer’s plan would exceed 8%, but not exceed 9.8%, of his or her household income, in each case indexed for the rate of premium growth. The voucher must be for no less than the maximum amount that the employer would have contributed to provide group health care to the employee. If the voucher exceeds the health care premium under the Exchange, the employee may receive the difference in cash, subject to income taxes.
• Starting in 2014, businesses with more than 50 employees will be required to either offer healthcare coverage or pay a penalty of $750 a year per full-time worker. 
• Effective upon the issuance of implementing regulations, employers with more than 200 employees will have to automatically enroll full-time employees in health coverage. The legislation would allow employees to opt-out of the coverage after automatic enrollment.
  • Elimination of pre-existing conditions and an increase in dependent coverage to age 26
  • The legislation would also require that health plans that provide dependent coverage to provide it up to age 26. Under the modified legislation, this provision would apply to existing health plans in addition to new plans beginning six months after enactment. For coverage of these non-dependent children prior to 2014, the requirement on group health plans is limited to those adult children without an employer offer of coverage.

 Those changes that are expected to take effect after 2014 are:

• Beginning in 2018, there would be an excise tax on any “excess benefit” of employer-sponsored coverage. The legislation defines “excess benefit” as one that exceeds $10,200 for individual coverage and $27,500 for family coverage. The thresholds would be indexed to inflation.

Businesses should consult with their insurance brokers, CPAs, and lawyers to determine how the post-reform health care system affects their particular situation.  Congress and the president likely will continue to tinker with additional changes and amendments, so businesses should continue to stay informed of how they should prepare and budget for health insurance in the future.

If you would like to discuss how these changes will affect your workplace, please contact Merritt Green or Jessica Kelty of General Counsel, P.C.’s Employment Practice Group.

Has your business paid severance to employees within the last three tax years?  Did the business withhold FICA taxes on those severance payments?  If so, you may want to notify the IRS that your business is claiming a refund.

The federal tax code specifies that employers must withhold income taxes on most severance payments to employees.  Courts have been struggling for several years over whether employers must also withhold FICA taxes – the payroll taxes that cover Social Security and Medicare programs.

The IRS has taken the position that income taxes and FICA taxes are both due on severance payments.  Some taxpayers have disagreed and taken that disagreement to court.  The dispute centers on whether the reference to income taxes in the relevant section of the tax code (a) constitutes an exclusive list of required withholdings and thus employers should not also withhold FICA taxes from severance payments,  or (b) constitutes an example of required withholdings and thus employers are required to withhold FICA taxes from severance payments just as they would have withheld FICA taxes from regular salary payments.  The results of those cases have not been consistent.

THE COURT DECISIONS (SO FAR)

As of this writing, there are two relevant cases working their way through the courts.

In the first case, CSX Corp., Inc. v. United States (the “CSX case”), the U.S. Court of Federal Claims  found that severance payments were not subject to FICA tax.  The IRS appealed and the U.S. Court of Appeals for the Federal Circuit held that severance payments are subject to FICA tax.

In the second case, Quality Stores, Inc. v. United States (the “Quality Stores case”), the Bankruptcy Court for the Western District of Michigan found that severance payments are not subject to FICA tax and, on appeal, the U.S. District Court for the Western District of Michigan agreed (and expressly disagreed with the Federal Circuit’s logic in the CSX case).  The IRS is appealing the Quality Stores case to the U.S. Court of Appeals for the Sixth Circuit.

WHAT BUSINESSES SHOULD DO TODAY

If your business has paid severance since 2006, you should consider whether to file a request for a refund of FICA payments related to that severance.  Because the courts are clearly split, there is a significant chance that the end result will be a decision that FICA taxes are owed on the severance payments.  But you certainly will not receive a refund if you do not file a request for one.

Businesses may apply for a refund for any FICA taxes they paid on severance pay.  Because of a three year deadline, any request for a refund for severance payments that occurred during 2006 must be made by April 15, 2010.  The IRS has two options for handling the refund requests: it may defer any decision on the requests until the Quality Stores case reaches a final resolution or it may immediately reject the requests based on the decision in the CSX case.  If the IRS rejects the requests, then an applicant business will have to take court action within two years to attempt to have the court order the IRS to make the refund.

Thus, you must decide whether it is worth the time and expense of preparing a refund request given the uncertainty of success.

If you want to discuss these issues with a General Counsel, P.C. attorney and develop a strategy the works best for your business, please contact Merritt Green or Jessica Kelty of General Counsel, P.C.’s Employment Practice Group.

Continuing on our theme of incentive given to expanding businesses, today we draw your attention to the potential tax benefits of hiring unemployed workers.  The provisions were included in Congress’s HIRE Act, which was recently signed by President Obama.

For purposes of the incentives, unemployed workers are persons who have not worked more than 40 hours in the 60 days before being hired.  The reason the person has not been working is immaterial.  These incentives may not be used to hire relatives of the business owner and may not be used to replace employees laid off fewer than 60 days before the new hire is made.

The incentives have two parts.  The first is an immediate payroll tax exemption: during calendar year 2010, an employer will not pay their portion of the payroll taxes for any unemployed worker they hire.  The second part is a tax credit: if the employer retains the unemployed worker for a year, then the employer receives a $1,000 tax credit.

The IRS has a detailed set of questions and answers about the tax incentives.

As your business adds employees, keep these incentives in mind.  And, contact Jessica Kelty or Merritt Green of our Employment Practice Group to discuss other issues you should consider when bringing on employees.

This BusinessWeek article reports on how the Internal Revenue Service, without explanation, decided that some 12,000 delivery people working for FedEx Ground were properly classified as independent contractors instead of employees, thus enabling FedEx to not have to pay $319 million in unpaid employment taxes.  While that is good news for FedEx, the IRS also announced that early next year it will be undertaking extensive audits of some 6,000 other companies, yet to be determined, to see if they are properly categorizing their workers.

The holiday season often features an increase of hiring to handle Christmas shopping, and some economists are predicting that most laid off workers that get rehired will be rehired as independent contractors instead of employees when the economy improves.  As a result, it is important for employers to understand the difference between employees and independent contractors so that they won’t run afoul of the IRS.  We blogged earlier on the IRS’s tips on distinguishing between these types of hires here.

Employees and independent contractors are treated differently under the tax laws.  As a result, employers sometimes prefer to be hiring one rather than the other.  However, the test as to whether a given hire is an employee or an independent contractor is an objective one — an employer who thinks they are hiring an independent contractor may well find out down the line that the hire is actually an employee, thus subjecting the employer to potential tax bills and penalties.  To help employers determine whether a given hire is an employee or an independent contractor, the IRS has recently issued ten tips for guidance.  A more in-depth examination is here.