A whirlwind of talk and action has occurred in Washington and across the country since the Presidential inauguration. Though many large items are still on the table (Tax Overhaul, Affordable Care Act), there have been some significant changes affecting many dentists. Below you will find an update on changes in legislation affecting you as well as the discussions that have been occurring on not yet passed legislation.
Stand-alone HRAs OK for small employers
Health Reimbursement Arrangements (HRA) were a widely used employee benefit prior to the Affordable Care Act (ACA) which limited the use of HRA and enforced penalties for non-compliance with those ACA rules. These benefits were a way to help employees defray healthcare costs without fully sponsoring a health insurance plan. Additionally, they were utilized by many dentists as a recruiting and retention tool when demonstrating the total compensation package available to employees. Recent law changes have once again made the HRA a valuable deduction available to dentists and other small business.
On Dec. 13, President Obama signed into law the 21st Century Cures Act which allows an employer with fewer than 50 employees that doesn't offer group health insurance coverage to establish a small employer health reimbursement arrangement (HRA) without facing penalties for failing to satisfy certain ACA requirements. This is good news for any dentist that does not offer health insurance but does want to help employees with their health care costs. These plans are known as Qualified Small Employer HRAs, or QSEHRA, and must satisfy the following requirements:
- It is maintained by an eligible employer – one that has fewer than 50 employees and does not offer a group health plan to any of its employees.
- It is provided on the same terms to all eligible employees – certain employees can be excluded.
- It is funded solely by an eligible employer, and no salary reduction contributions may be made under the HRA
- It provides, after the employee provides proof of coverage, for the payment of, or reimbursement of, an eligible employee for expenses for medical care incurred by the eligible employee or the eligible employee's family members (as determined under the HRA's terms); and
- The amount of payments and reimbursements do not exceed $4,950 ($10,000 in the case of an arrangement that also provides for payments or reimbursements for family members of the employee).
Reporting and notice requirements:
For tax years beginning after Dec. 31, 2016, a small employer funding a qualified HRA for any year must, not later than 90 days before the beginning of such year, provide a written notice to each eligible employee which includes;
- a statement of the amount of the employee's permitted benefit under the arrangement for the year;
- a statement that the eligible employee should provide the information described in clause (i) to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit; and
- a statement that if the employee is not covered under minimum essential coverage for any month, the employee may be subject to tax under Code Sec. 5000A (i.e., the individual mandate) for such month, and reimbursements under the arrangement may be includible in gross income.
If an employer fails to provide the required notice, unless such failure is shown to be due to reasonable cause and willful neglect, the employer will be subject to a $50 per-employee, per-incident-of-failure penalty, subject to a $2,500 calendar year maximum for all such failures. Employers also have to report the total amount of permitted benefit for the year under a qualified arrangement on their employees' W-2s.
Due to the late enactment, the IRS is giving employers up to 90 days after the date of enactment, March 13, 2017, to provide required notice to employees.
Given the complexities related to the compliance of these accounts, employers who wish to offer QSEHRAs to their employees should be strongly advised to outsource the operations of these accounts to a qualified administrator.
Standard mileage rates down for 2017
The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) decreased by 0.5¢ to 53.5¢ per mile for business travel after 2016. This rate can also be used by employers to provide tax-free reimbursements to employees who supply their own autos for business use, under an accountable plan, and to value personal use of certain low-cost employer-provided vehicles. The rate for using a car to get medical care or in connection with a move that qualifies for the moving expense decreased by 2¢ to 17¢ per mile.
There is a lot of speculation regarding what the tax reform will potentially look like and when it will be enacted. Though nothing is certain yet, there is a lot of buzz around a Destination-Based Cash-Flow Border-Adjustment (DBCF) Tax. If passed, it would completely change the way businesses are taxed.
What should you know about the DBCF model?
- It is a form of a Value Added Tax (VAT) and would replace much of the current business income tax system
- Taxable income would be calculated differently:
- Revenue from export sales would not be subject to tax
- Imported cost of sales and expenses will be non-deductible
- All capital improvements such as equipment and buildings are deducted in full in the year of purchase (no depreciation), land would not be deductible
- Business interest expense would be non-deductible other than it can be used to offset your business interest income.
- C corporations would be taxed at 20 percent and S corporation or partnership income would be taxed at 25 percent (at the individual level)
The above is merely one of many proposals being considered at this time. As with any tax proposal, it is likely to be modified, or possibly discarded entirely before any final legislation is enacted.
How would the DBCF affect a dental office?
Dental offices will not benefit from the exclusion of revenue due to export sales. However, they could see a rise in their taxable income due to not being able to deduct expenses related to foreign made supplies, tools, equipment or drugs. In most scenarios, dental offices are below the threshold for expensing capital assets under section 179 limits so the immediate expensing of capital assets would also have little impact. The section 179 limits were permanently increased at the end of 2015 for the small business expensing limitation and phase-out amounts to $500,000 and $2 million, respectively. Additionally, because many practices are mostly, if not completely, fund by debt, the interest deduction can be significant. The lack of that deduction is detrimental from a tax standpoint. However, the good news comes in the form of lower tax rates. It is far too early in the reform process to know if lower rates will outweigh the limitations on deductions that will incur if reform is intended to be revenue neutral.
Affordable Care Act (ACA)
Under the new presidential administration, Republicans have plans to either replace or modify the Affordable Care Act (ACA). These changes will cause some reporting uncertainty for dental practices and their employees.
Outside of the healthcare implications, there are important tax considerations tied to the ACA. Many dentists are subject to the additional 3.8 percent net investment income tax (NIIT). At this point it is unclear if the initial legislation would also repeal ACA related taxes or if those taxes will be addressed as part of overall tax reform.
To keep up to date on the most recent news, visit Baker Tilly’s Healthcare Reform Resource Center.
If you have any questions about this article or other tax or management questions, please contact any of our dental practice specialists.