Why is this Topic Important to Wealth Managers? This blogticle presents discussion related to the Affordable Care Act with regards to the establishment of state health insurance exchanges. The information is provided to wealth managers to keep them informed on the health insurance law changes which will begin to appear so that they may better prepare clients.

New York Governor Andrew M. Cuomo announced earlier this week that he has submitted a Governor’s program bill that would establish a new Health Benefit Exchange in order to comply with the Affordable Care Act passed by Congress and signed into law by President Barack Obama in 2010.

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act are collectively referred to as the Affordable Care Act, and include a number of policies intended to help physicians, hospitals, and other caregivers improve the safety and quality of patient care and make health care more affordable. The idea is by focusing on the needs of patients and linking payments to outcomes, delivery system reforms should help improve the health of individuals and communities and slow national health care cost growth. [1]

New York has made the decision to operate its own exchange, rather than have the federal government operate one for the state, given the complexity and diversity of the insurance market in New York.

“This legislation would fulfill New York’s commitment to the federal government to set up a health benefit exchange that will enhance access to affordable quality health care for all New Yorkers,” Governor Cuomo said. “This is a dynamic and flexible proposal that will protect consumers and help bring down the cost of health care for families, businesses, and taxpayers.”

The purpose of the proposed legislation is to establish a single Exchange in New York – a centralized, customer-service oriented marketplace where individuals and small groups will be able to purchase qualified health plans, receive eligibility and subsidy determinations, and be enrolled in a range of coverage options, including public health coverage programs.

The Exchange will make available health plans, including certain qualified dental plans, to individuals and employers beginning on or before January 1, 2014. Under this proposed legislation, the Exchange will establish the minimum requirements an insurer shall meet to be considered for participation in the Exchange and will implement procedures for the certification, recertification, and decertification of health plans as qualified health plans. The Exchange will also assign ratings to qualified health plans offered through the Exchange on the basis of relative quality and price, in accordance with the Affordable Care Act.

In addition, the Exchange will include a Small Business Health Options Program (SHOP), which will assist small employers in facilitating the enrollment of their employees in qualified health plans offered in the group market.

While the Federal law requires each Exchange to be “self-sustaining” by January 1, 2015, federal funds will support the planning, implementation, and operation of the Exchange through December 2014. New York has already been selected to receive funding under an Early Innovator Grant ($27 million) and an Exchange Planning Grant ($1 million).

The bill also provides critical protections meant to assist individuals in using the Exchange. For example, the bill provides that the Exchange will operate a toll-free telephone line to assist consumers and an Internet website containing standardized comparative information on qualified health plans. The website will also feature a calculator allowing individuals to determine the actual cost of coverage. The bill also requires the Exchange to establish a program to award grants to entities to serve as “navigators” to help educate consumers and facilitate enrollment.

With the enactment of this legislation, assuming other applicable criteria are met, New York will qualify to apply for additional federal funding to support Exchange planning and establishment through December 31, 2014.

Next week’s blogticles will discuss important planning aspects of 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

---

[1] See Public Law 111-148; Pub. L. 111-152.

Why is this Topic Important to Wealth Managers? This blogticle provides discussion and analysis of health insurance costs for self-employed individuals. The topic is relevant to those wealth managers with small business clients as well as self-employed wealth managers themselves, as it discusses treatment of deductions and the calculation of self-employment income with regards to health insurance costs.

In calculating adjusted gross income for income tax purposes, self-employed individuals may deduct the cost of health insurance for themselves and their spouses, dependents, and any children who have not attained age 27 as of the end of the taxable year. [1]

The deduction is not available for any month in which the self-employed individual is eligible to participate in an employer-subsidized health plan (maintained by the employer of the taxpayer or the taxpayer’s spouse). Moreover, the deduction may not exceed the earned income (within the meaning of section 401(c)(2)) derived by the self-employed individual from the trade or business with respect to which the plan providing the health insurance coverage is established.[2] The deduction applies only to the cost of insurance (i.e., it does not apply to out-of-pocket expenses that are not reimbursed by insurance).

The Self-Employment Contributions Act (‘‘SECA’’) imposes taxes on the net earnings from self-employment of self-employed individuals (‘‘self-employment income’’). The tax is composed of two parts: (1) the old age, survivors, and disability insurance (‘‘OASDI’’) tax; and (2) the hospital insurance (‘‘HI’’) tax. The rate of the OASDI portion of SECA taxes is equal to 12.4 percent of self-employment income and generally applies to self-employment income up to the Federal Insurance Contributions Act (‘‘FICA’’) taxable wage base ($106,800 in 2010). The current rate of the HI portion is equal to 2.9 percent[3] of self-employment income and there is no cap on the amount of self-employment income to which the rate applies.

For purposes of computing net earnings from self-employment, taxpayers are permitted a deduction equal to the product of the taxpayer’s earnings (determined without regard to this deduction) and one-half of the sum of the rates for OASDI (12.4 percent) and HI (2.9 percent), i.e., 7.65 percent of net earnings. This deduction reflects the fact that the FICA rates apply to an employee’s wages, which do not include FICA taxes paid by the employer, whereas the self-employed individual’s net earnings are economically equivalent to an employee’s wages plus the employer share of FICA taxes.

The deduction allowable for the cost of health insurance for the self-employed individual and the individual’s spouse, dependents, and children who have not attained age 27 as of the end of the taxable year for income taxes is not taken into account in determining an individual’s net earnings from self-employment for purposes of SECA taxes.[4]

Under Section 2042 of the Small Business Jobs Act of 2010,[5] the deduction for income tax purposes allowed to self-employed individuals for the cost of health insurance for themselves, their spouses, dependents, and children who have not attained age 27 as of the end of the taxable year 2010 was taken into account, and thus was also allowed, in calculating net earnings from self-employment for purposes of SECA taxes for taxable year 2010 only.

However, the provision only applied to tax year 2010 and the treatment for health insurance costs for self-employed individuals reverted back to its original treatment in 2011.

Tomorrow’s blogticle will continue our series on tax law changes related to wealth managers in 2011.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

---

[1] IRC Sec. 162(l)(1). See Notice 2010–38 for a discussion of the deduction for children who have not attained age 27 as of the end of the taxable year.

[2] IRC Sec. 162(l)(2).

[3] IRC Sec. 1401; However, under section 9015 of the Patient Protection and Affordable Care Act, Pub. L. No. 111–148, for remuneration and self-employment income received for taxable years beginning after December 31, 2012, the HI tax under SECA is increased by an additional tax of 0.9 percent on self-employment income received in excess of a threshold amount.

[4] IRC Sec. 162(l)(4).

[5] Public Law 111–240.

Why is this Topic Important to Wealth Managers? This blogticle presents discussion related to the new Health Care Act which affects both employers and employees alike. Thus, it is important for wealth managers to be informed on the changes which will begin to appear so that they may better prepare clients.

The Internal Revenue Service issued interim guidance earlier this week to employers on informational reporting on each employee’s annual Form W-2 of the cost of the health insurance coverage they sponsor for employees. The IRS emphasized that this new reporting to employees is for their information only, to inform them of the cost of their health coverage, and does not cause excludable employer-provided health coverage to become taxable; employer-provided health coverage continues to be excludable from an employee’s income, and is not taxable.

Section 9002 of the Patient Protection and  Affordable Care Act of 2010  (Affordable Care Act),[1] provides that employers are required to report the cost of employer-provided health care coverage on the Form W-2. The IRS issued a notice last fall, which made this requirement optional for all employers for the 2011 Forms W-2 (generally furnished to employees in January 2012).[2] In the newest guidance, the IRS provided further relief for smaller employers (those filing fewer than 250 W-2 forms) by making this requirement optional for them at least for 2012 (i.e., for 2012 Forms W-2 that generally would be furnished to employees in January 2013) and continuing this optional treatment for smaller employers until further guidance is issued.[3]

The new notice also provides guidance for employers that are subject to this requirement for the 2012 Forms W-2 and those that choose to voluntarily comply with it for either 2011 or 2012. The notice includes information on how to report, what coverage to include and how to determine the cost of the coverage.

Generally, Notice 2011-38 provides interim guidance on informational reporting to employees of the cost of their employer-sponsored group health plan coverage. This informational reporting is required under § 6051(a)(14) of the Code, enacted as part of the Affordable Care Act  to provide useful and comparable consumer information to employees on the cost of their health care coverage.

This reporting to employees is for their information only, to inform them of the cost of their health care coverage, and does not cause excludable employer provided health care coverage to become taxable.

Notice 2011-38 provides interim guidance that generally applies beginning with 2012 Forms W-2 (that is, the forms required for the calendar year 2012 that employers generally are required to furnish to employees in January 2013 and then file with the Social Security Administration (SSA)). Employers are not required to report the cost of health coverage on any forms required to be furnished to employees prior to January 2013.[4]

The notice also provides additional transition relief for certain employers and with respect to certain types of employer-sponsored coverage. This transition relief will continue at least through the 2012 Forms W-2 which are required to be furnished to employees in January 2013. In other words, those employers to which the additional transition relief applies (which includes smaller employers that are required to file fewer than 250 2011 Forms W-2) will not be required to report the cost of health coverage on any forms required to be furnished to employees prior to January 2014. This transition relief will continue until the issuance of further guidance by the IRS.

For additional discussion on the Affordable Care Act see Study Exposes Impact of Health Care Act’s Employer Penalties, and Health Insurance Coverage for All Americans.

The 2011 Form W-2, prior IRS Notice 2010-69 deferring the reporting requirement for 2011, and Notice 2011-28 containing the new guidance are available on IRS.gov.

Tomorrow’s blogticle will continue to discuss important planning aspects of 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

---

[1] Public Law 111-148.

[2] See Notice 2010-69.

[3] See Notice 2011-28.

[4] See Notice 2010-69.

Why is this Topic Important to Wealth Managers? Presents an introduction into the taxation of U.S. life insurance companies.  Provides insight for wealth managers considering advanced planning techniques involving the use of life insurance companies.

Congress has determined, generally, that insurance companies by issuing insurance contracts are serving the public good.  Moreover, Congress has determined that the tax accounting applicable to corporations does not adequately align to the operations of the insurance industry.  Thus, to distinguish insurance companies, Congress created a special chapter of the Internal Revenue Code (subchapter “L”) applicable only for them.  Subchapter L is divided into Section 801 to 848 of which 801 to 818 address the taxation of lile insurance companies.

By example, because of the nature of the life insurance business, in that liabilities carry long into the future, Congress has afforded special deductions to this class.  To avoid potential reserve deficiencies by recognizing income (and therefore incurring a present tax liability) when premiums are collected, Congress essentially allows underwriting gains to occur once the insurance liability obligations have expired.

Let’s take a look at the Code specifically to see how these mechanics actually work.  First and foremost, pursuant to IRC Sec. 801 a life insurance company is taxed at the same rates as other corporations.  These rates can be found in IRC § 11.

A life insurance company means under IRC § 816(a), “ an insurance company which is engaged in the business of issuing life insurance and annuity contracts”, generally, as well as accident or health contracts, so long as, the company’s “life insurance reserves, plus unearned premiums” on “noncancellable” policies, “comprise more than 50 percent of its total reserves.”

In other words, life insurance company means any company with “more than half of the business of which during the taxable year is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies.”  IRC § 816 (a).

IRC § 816 (b)(1) defines for the purposes of the previous Subsection (a), life insurance reserves’ to mean, “amounts which are computed or estimated on the basis of recognized mortality…and assumed rates of interest, and which are set aside to mature or liquidate, either by payment or reinsurance, future unaccrued claims arising from life insurance, annuity, and noncancellable accident and health insurance contracts” based on current contingencies.

Another way of stating the above – amounts that are calculated based on mortality tables and are reserved for payment of future obligations – would be considered in other terms, essentially, liabilities for payment of death benefits.  For calculation purposes to see if life reserves are more than half of total reserves, total reserves must be defined.  Total reserves means “life insurance reserves, unearned premiums, and unpaid losses…, and all other insurance reserves required by law.”   IRC Sec. 816 (c).

We now know when a company is taxed as a life insurance company, and the rates at what it is taxed at, but do not yet know the taxable base.  In order to determine this, one must consider the taxable income of the insurance company.  Insurance company taxable income is defined in § 801(b) to mean, “life insurance gross income, reduced by life insurance deductions.”

This basic formula needs then to be expanded to define life insurance gross income and life insurance deductions.  Section 803 states that life insurance gross income is the premiums less return of premiums as well as decreases in insurance reserves.  The latter category is recognition of gross income of premiums used (notwithstanding the deduction for cost) at the time the insurance payment is actually made to the insured’s beneficiary.

Section 805 lists the deductions allowed to an insurance company.  This list includes, “all claims and benefit accrued” in relation to death benefits.  As well as, the net increase in insurance reserves to pay future obligations (which includes premium reserves and unearned premiums [IRC 807]).  Additionally, increases in cash values of polices are deductible under § 805.  Furthermore, under § 806 there are supplementary deductions for taxable underwriting income for small insurance companies of 60% of income up to $3,000,000 with certain phase-out provisions after that amount.

In sum, the life insurance company recognizes premiums as gross income but deducts premium reserves and unearned premiums associated to the long-term liabilities carried as future payment obligations this year.

Tomorrow’s blogticle will discuss taxation of foreign insurance companies.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.