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Our news articles are posted on a regular basis to give our clients relevant and timely information about matters pertaining to our financial services. Browse through our current and archived articles to learn more.

Category: Small Business News

IRS Releases Updated Form W-4 and Withholding Calculator

The IRS has released an updated version of Form W-4 (Employee’s Withholding Allowance Certificate) and its online withholding calculator. These tools allow taxpayers to check their 2018 tax withholding following passage of the Tax Cuts and Jobs Act (TCJA).


The IRS is encouraging taxpayers to perform a quick “paycheck checkup” to make sure sufficient tax is being withheld from their paychecks. This is particularly important for (1) two-income families; (2) people with two or more jobs at the same time or who only work for part of the year; (3) people with children who claim credits (such as the child tax credit); (4) people who itemized deductions in 2017; and (5) people with high incomes and more complex tax returns.

 

The IRS anticipates making further withholding changes for 2019 and will work with businesses and the tax and payroll communities to implement these changes.

The revised withholding calculator can be accessed at www.irs.gov/individuals/irs-withholding-calculator

 

G.R. Reid Payroll Services can handle all of your business payroll needs. Contact us to learn more.

 

 

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Commercial Insurance :: Is Forming a Corporation Enough to Shield Your Personal Assets?

For hundreds of years, people starting businesses have formed corporations. They’ve done this in order to shield their private property from the obligations of their businesses. But is simply creating a corporation or a limited liability company enough to accomplish this? No.

HomeFinancialProtection

 

 

Both forms of ownership attempt to insulate the owners’ personal assets from the business’s liabilities. If a corporation cannot pay its debts, the owners stand to lose the amounts of their investments but not their personal holdings. However, neither the corporation nor the LLC is a perfect shield against personal liability. There are several factors that should be considered regarding these forms of ownership.

In some states, members of certain professions cannot incorporate or form LLC’s. These may include physicians, attorneys, architects, and accountants, among others. In such situations, the corporate liability shield is simply not available.

Corporations and LLC’s are required to perform certain activities. Corporations must create by-laws; LLC’s must create operating agreements. Both documents explain in detail how the organization will be run. They obligate the organization to do things such as hold formal stockholder meetings, conduct elections of officers, and so on. A corporation must also file tax returns. All of these activities cost time and money.

Corporations and LLC’s are liable for their debts, performance of contracts, and their torts. Even though the owners (or “members,” as the individuals comprising an LLC are called) have limited individual liability, the organizations have no such limitation. It must obtain funding for potential liabilities.

In extreme cases, courts may discard the liability protections entirely. Individual stockholders or members may then face legal actions. These tend to be instances  involving fraud or outrageous disregard of the public good. For example, the stockholders of a corporation that performs dangerous activities and that deliberately fails to buy liability insurance could lose their liability protection.

Individual directors and officers of a corporation can be the targets of stockholder lawsuits. This could happen if the stockholders believe that their investments have suffered because the corporation has been mismanaged.

Organizations can finance many of these liabilities with appropriate insurance in sufficient amounts. General liability insurance covers responsibility for injuries and damages to third parties. Employment practices liability insurance covers the organization’s legal liability for wrongful acts committed against current or prospective employees. Directors and officers insurance protects against stockholder lawsuits.

Corporations and LLC’s need all of these, and in large amounts. Business owners should discuss with a professional insurance agent and an attorney the limits of insurance that are appropriate for their situations. In addition to general liability policies, all businesses should purchase umbrella policies for adequate protection. Small businesses need umbrella policies that provide limits of at least $5 million. Medium to larger sized businesses should consult with a risk manager who can evaluate their exposures and suggest appropriate limits.

The corporate and LLC forms of business ownership provide many advantages to the owners. In many cases, they will protect owners’ personal assets. However, that protection is not absolute. Before you form a corporation or LLC, consult with a qualified attorney and with a professional insurance agent who can provide advice on the types of insurance coverage needed.

Contact G.R. Reid Insurance Services to arrange for a consultation.

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Accounting & Tax :: The Aragona Trust Case: Can A Trust Be Treated as a Real Estate Professional?

During the last week of March 2014, the Tax Court, in the Frank Aragona Trust Case, held that a trust can qualify as a real estate professional under the passive activity loss rules based on the participation of trustees acting as employees of the rental activities. In its analysis, the Court addressed the issue of how a trust can determine material participation in a business. This decision becomes applicable to a broad range of businesses and not limited to real estate rentals.

There are two major consequences to a trust if a business interest is considered to be a passive activity:

1. Tax losses generated by the business interest can only be applied against income generated from other passive activity interests and cannot be used to offset investment income (e.g., interest, dividends, capital gains) and other non-passive business interests. This causes many trusts to be unable to currently use losses and increases income taxes. The limitation on the use of tax losses is particularly harmful to trusts due to the compressed income tax brackets. The maximum 39.6% tax rate applies to taxable income in excess of $11,950 for 2013.

2. For 2013 and later, the new 3.8% net investment income tax applies to passive activity business interests held by a trust. Unlike individuals, where the tax applies if modified adjusted gross income exceeds $200,000 (single filers) or $250,000 (joint filers), the new tax applies to trusts with modified adjusted gross income in excess of only $11,500. Additionally, the 3.8% tax will be imposed on gains generated from a sale of the business interest in the future.

If “material participation” can be demonstrated in the business activity, then income or loss generated from such activity will not be considered passive. However, rental activities are generally treated as passive regardless of the level of participation, unless a specific exception applies.  An exception exists for real estate professionals. A taxpayer is considered to be a real estate professional if:

a. More than one-half of “personal services” performed in trades or businesses during the year relate to certain real property trades or businesses; and

b. Personal Service hours exceed 750 hours.

If these requirements are satisfied, the rental activity is not deemed to automatically be passive. However, the taxpayer must still demonstrate “material participation” in the activity. In its regulations, the Service has provided several methods to determine material participation in an activity, several of which involve counting the hours worked in the business.

The facts of the new Tax Court case are:

• Frank Aragona (the grantor) formed a trust as grantor and trustee with his five children as beneficiaries. The five children were to share equally in the income of the trust. When Frank died in 1981, he was succeeded as trustee by five 5 children (as non-independent trustees) and his attorney (as the independent trustee). Three of the children (Paul, Frank and Annette) worked full-time as paid employees for a limited liability company which was wholly-owned by the trust (Holiday Enterprises LLC). The LLC also employed other persons, including a controller, leasing agents, maintenance workers, accounts payable clerks and accounts receivable clerks. All six trustees formally delegated their powers to Paul (the Executive Trustee) to facilitate the daily business operations. However, the trustees acted as a management board, met every few months, and made all major decisions regarding the trust’s business. The trust conducted some of its rental real estate activities through wholly-owned entities and some through entities in which it held a majority interest. Two of the working trustees (Frank and Paul) also owned minority direct interests in the flow-through entities.

• The trust treated losses from the real estate rental activities as deductible and not subject to the passive activity loss rules. The trust claimed that it should be treated as a real estate professional and that the trust materially participated in its real estate rental activities.

• The IRS determined on audit that the real estate losses should be subject to the passive activity loss limitation rules and were not deducible against non-passive activity income.

The IRS’ position is that a trust can never satisfy the requirements for real estate professional status since it must demonstrate that more than one-half of its “personal services” performed in the tax year were in real property related trades or businesses. The Service argued that “personal services” refer to the acts of individuals and cannot apply to an entity, like a trust.

The court rejected this position. It reasoned that if Congress wanted to exclude trusts from real estate professional status, it could have done so by explicit statutory language. Additionally, it stated that if the trustees are individuals, then personal services can be performed.

Even if a trust satisfies the requirements of being a real estate professional, this merely means that its rental activities are not considered to be per se passive activities. The trust must still demonstrate that it materially participates in the same manner as any non-rental activity. The IRS position has historically been that a trust can materially participate in a business activity only if the trustee of the trust sufficiently participates in the business,in his or her capacity as a trustee . This means that any time spent in the activity in some other capacity (e.g., employee of the business entity) must be ignored.

The Trust argued that it should be able to count the hours worked by certain trustees as employees of the business. It also argued that it should be able to count the hours of non-trustee employees and agents in demonstrating material participation.

The Court stated that the trustees were bound under Michigan law to administer the trust solely for the interests of the trust beneficiaries and they were not relieved of this duty even when acting in another capacity. Therefore, the time of the trustees spent as employees of the businesses owned by the trust should be used in determining material participation. From all the facts of the case, it was clear that the trustees materially participated in the business activities.

This case offers a number of planning opportunities for trusts to maximize the benefits of business losses and to avoid the new net investment income tax.

 

 

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Human Resource Services :: Talent Acquisition, Employee Retention Solutions & Strategies

HRmagnificationOur Human Resource experts specialize in talent acquisition that has successfully matched candidates and employers at a stay-rate of over 95%. The proprietary process we have developed can assist with the hiring needs at every level in any industry. The recruitment process includes placing ads in multiple modalities, telephone interviews, in-person behavioral based interviews, assessments, interview summaries, salary negotiation, background and reference checks and on-boarding assistance.

Once you have the latest addition to your team, it is the “honeymoon” period that is going to be the most critical in your new hire’s career within your organization. We advise and assist you to help your business with the integration of new hires at every level.

Contact us for more information on our Human Resource Management Services.

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Accounting & Tax :: The Supreme Court Rules that Severance Payments can be Subject to FICA

In an 8-0 decision, the U.S. Supreme Court, on March 25, ruled that retailer, Quality Stores Inc., a large specialty agricultural retailer, was not entitled to a refund of FICA paid on severance payments the company paid to its employees due to layoffs.

Quality Stores, which had over 300 stores, closed all stores and fired all employees in 2001 and 2002. The company paid the disputed taxes and sought a refund claiming that wages should not include severance paid as a result of bankruptcy. Quality Stores contended that the payments represented supplemental unemployment compensation, not wages.

The case was presented in many lower courts that were divided on the issue. The Supreme Court decision reverses rulings by the 6th U.S. Circuit Court of Appeals and a federal district court, which found the payments were not considered taxable wages. The payments were made to 1,850 former employees let go after the company filed for bankruptcy.

The decision is a victory for the present administration and the Justice Department who estimated that the government could face more than $1 billion in tax refund claims from other employers if the decision was upheld. Therefore, all protective claims that were previously filed will be denied and no refunds will be forthcoming to any similarly situated taxpayers.

Text of the opinion is available at http://www.supremecourt.gov/opinions/13pdf/12-1408_6468.pdf.

 

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Accounting & Tax :: New York State Enacts Broad and Significant Tax Reform in New Budget

On March 31, 2014, Governor Andrew Cuomo signed into law a Budget Bill that contains broad and sweeping tax reform provisions that impact both businesses and individuals. These new laws include changes which will impact tax base, tax rates, apportionment methodology, nexus, tax credits and estate tax reform. Except where noted, the changes below are effective for taxable years beginning on or after January 1, 2015.

Notable Changes Adopted in the Budget

Property Tax Relief for Homeowners
For years beginning on or after January 1, 2014, the Budget includes a two-year property tax freeze to homeowners. This will be accomplished through payment of a rebate by New York State. In year one of the freeze, New York will provide tax rebates to homeowners who live in a jurisdiction that does not impose a property tax increase greater than 2%. In year two, rebates will be provided to homeowners who live in a jurisdiction that does not impose a property tax increase greater than 2% and agree to implement a shared services or administrative consolidation plan. This rebate does not apply to New York City homeowners.

Corporation Tax Rates
For tax years beginning on or after January 1, 2016, the Budget provides for a tax rate reduction from the current 7.1 percent to 6.5 percent of Entire Net Income (ENI) for corporate taxpayers. Certain New York manufacturing taxpayers will benefit from a zero tax rate effective for tax years beginning January 1, 2014 (more detail below). The Budget also contains:

  • A reduction of the tax rate applied to the capital base computation, such that the current rate of 0.15 percent will be phased out for tax years beginning on or after January 1, 2021.
  • Changes to fixed dollar minimum tax that could increase the tax for taxpayers who pay under this methodology.
  • Additional tax brackets added to the fixed dollar minimum computation. Current law has a top bracket for the minimum tax which includes taxpayers with New York receipts over $25 million and a corresponding tax of $4,500. The new law has a top bracket of New York receipts of over $1 billion and a corresponding tax of $200,000.
  • Elimination of the tax on minimum taxable income and the separate tax on subsidiary capital.
  • An increase in the Metropolitan Business Surcharge from the 17 percent to 25.6 percent for tax years beginning on or after January 1, 2015, but before January 1, 2016. (The rates for future years will be determined at a later date.)

Rate Reduction for New York Manufacturers
Effective for tax years beginning on or after January 1, 2014, the Budget provides for a zero tax rate to be imposed on “qualified New York manufacturers”. A qualified New York manufacturer is a manufacturer owning property in New York that would be eligible for the investment tax credit and meets certain dollar value thresholds. It should be noted that the zero tax rate is applicable only to New York C corporations. The current legislation does not address the availability of a zero tax rate to flow- through entities such as New York S Corporations or entities taxed as partnerships. To qualify for the corporate income tax elimination available to manufacturers, non C corporation companies would have to restructure. This provision is deemed to be a major boon to businesses, especially in the upstate regions.

Apportionment Method
New York will join the trend of other states who have adopted a single sales factor apportionment methodology by adopting a market based sourcing regime for purposes of determining the revenue allocated to New York State. New rules are provided to address receipts from services, intangible property, sales of digital property and transactions in various types of securities. These rules will not impact businesses who sell tangible personal property.

Combined Reporting
New York’s current law provides for combined reporting based on the presence of substantial intercompany transactions. The new law replaces these rules with combined reporting now based upon unitary provisions. Combined reporting will now be required by any taxpayer:

  • That owns or controls, directly or indirectly, more than 50% of the capital stock of one or more corporations or
  • More than 50% of the capital stock of which is owned or controlled either directly or indirectly by one or more other corporations or
  • More than 50% of the capital stock of which, and the capital stock of one or more other corporations, is owned or controlled , directly or indirectly, by the same interests and
  • That is engaged in a unitary business with those corporations.

Corporations may elect to be combined with non-unitary companies provided that ownership thresholds are met. This election is irrevocable and is binding for the current year plus six additional years. The election will be automatically renewed for the next seven year period unless revoked.

Net Operating Losses (NOL)
The new law changes the NOL provisions from a pre-apportionment to post-apportionment computation. It also ends the requirement that the New York NOL usage will be limited to the same amount of NOL used for federal tax purposes. This will serve to “decouple” the New York NOL from the federal NOL. New rules also allow taxpayers to reduce future taxable income using NOL’s generated under the old (pre-apportionment basis) using a computation of a modified amount. A three year carryback period is permitted for NOL’s incurred in post-reform taxable years (but no NOL can be carried back to a taxable year beginning before January 1, 2015.)

Tax Credits
Several new and expanded tax credits are contained in the budget including:

  • Effective January 1, 2014, a new property tax credit equal to 20% of the real property taxes paid during the taxable year by qualified New York manufacturers. The budget will reduce manufacturers’ property taxes-even if they are paid through a lease. Manufacturers already getting tax breaks through other state programs, such as the Empire Zone or IDA, cannot claim the additional property tax reductions.
  • Extension of the Empire State Commercial Production Credit through December 31, 2017,
  • A refundable credit for telecommunications excise taxes paid by Start-Up New York companies,
  • A new tax credit for musical and theatrical production companies equal to 25% of qualified production and transportation expenses, capped at $4 million per year,
  • Extension of the Lower Manhattan Sales and Use Tax Exemption through September 1, 2017,
  • Expands the investment tax credit to include the purchase of qualified depreciable property used in New York by businesses, in addition to manufacturers, including industrial waste facilities, research and development activities, broker-dealers in connection with the purchase or sale of stocks, bonds and securities, businesses providing investment advisory services for a regulated investment company, or loan origination services in connection with the purchase or sale of securities and businesses engaged in qualified film production activities.

Economic Nexus Standards
The Budget adopts an economic nexus standard such that a corporation deriving receipts of $1 million or more in a taxable year will now be subject to New York State tax. A corporation will be deemed to be doing business in the state if it has issued credit cards to 1,000 or more customers with mailing addresses within New York State. This provision will have the effect of bringing more out-of-state corporations into the grasp of New York State taxation.

Corporate Partner Nexus
Current law provides that a non-New York corporation is “doing business” and subject to New York taxation if it is a partner in a partnership or a member in a limited liability company or partnership (other than a portfolio investment partnership) and meets one of 10 tests such as holding a greater than 1% LP interest. The new law provides that a corporate partner will now be subject to tax in New York by holding any type of partnership/LLC/LLP interest that is doing business in the state.

Fulfillment Center Exception
Current New York law included an exception to the establishment of nexus if an out-of-state corporation’s only activity in the State was the use of an unrelated fulfillment center in New York to store and ship inventory. The new law repeals this exception.

Merger of Bank Tax and Corporate Tax Regime
One of the Governor’s stated reasons at the beginning of the budget process was to provide tax simplification and relief and improve voluntary compliance. The elimination of the separate bank tax regime is purported to address this simplification. Banks will now be taxed under the corporate tax provisions. Thrift institutions and Qualified Community Banks (“QCB”) will be entitled to one of three special subtraction modifications effective for tax years beginning on or after January 1, 2015:

  • Special subtraction modification #1 – Thrifts and QCB will be allowed a deduction of 32% of entire net income that exceed charge-offs, or
  • Special subtraction modification #2 – Small Thrifts and QCB will be allowed a deduction of 50% of the net interest income related to “Qualifying Loans”. One of the qualifications for Small Thrifts is the average assets of the taxpayer or affiliated group must not exceed $8 billion. Qualifying loans are small business loans or a residential loan the principal amount is $5 million or less, or
  • Special subtraction modification #3 – Small Thrifts and QCB that has maintained a captive REIT on April 1, 2014 will be allowed a deduction of 160% of the dividends paid deduction allowed for federal income tax purposes. A small Thrift or a QCB that maintains a captive REIT will not be allowed to utilize either of the first two modifications.

One of the qualifications of a QCB is that the average assets of the taxpayer or affiliated group must not exceed $8 billion. Each of these subtraction modifications require detailed information that will all be subject to questions under audit. Depending on which subtraction modification used the change to the taxpayers’ effective tax rate could be a permanent benefit or a temporary benefit.

Other change effecting financial institutions includes

  • Apportionment for loan interest income will be customer sourced instead of the greater of the income producing activities.
  • Qualified financial instruments can be allocated to NYS on a fixed percentage method of 8% instead of commercial domicile.

Estate and Gift Tax Reform
The budget includes language which will generally conform New York’s estate tax to the federal estate tax law as of January 1, 2014. The New York estate tax exemption rises to $2,062,500 for decedents dying on or after April 1, 2014 and will increase each year until reaching an exemption of $5,250,000 for those dying on or after April 1, 2017 and before January 1, 2019. The exemption will then be indexed for inflation. The new law also requires an addition to the estate tax base for gifts made by the decedent within 3 years of death if the decedent was a New York resident at the time the gift was made (applies to gifts made on or after April 1, 2014 and before January 1, 2019). The law makes no changes in the current New York estate tax rate.

Concluding Summary
As described above the new budget contains a myriad of changes which will impact many taxpayers – located both within and outside of New York State. As the effective date for many of these provisions is January 1, 2015, taxpayers should evaluate the impact the changes have on their tax filing methodology and overall tax liability.

It should be noted that the enactment date of this bill, March 31, 2014, creates a first quarter 2014 law change. Impact on financial statement disclosures and deferred tax assets or liabilities should be taken into account when evaluating the potential effect to financial statement preparation.

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Human Resource Services :: Information Dictates the Strategy

Our team of trained and certified Human Resource specialists use comprehensive assessment tools to enable you to assess your current unique organizational culture, which provides significant benefits for both recruiting and management purposes. What makes one person successful, or less successful, in an organization can be very telling in terms of how you manage those people, and how you hire similar employees to create a team that works well together and produces maximum returns.

Once the combination of assessment tools are completed and analyzed, we deliver a full in-depth “Core” report on the results per individual and as a team. We will also provide management strategies and recommendations based on the results to use for future recruiting purposes.

Contact us for more information our Human Resource Management Services.

 

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Accounting & Tax :: Get Tax Transcripts FAST

TaxReturn

In mid-January 2014, the IRS introduced the ability for taxpayers to instantly view and print tax transcripts. Prior to the introduction of this new online service, taxpayers were able to request either returns or transcripts, which would take approximately 5-10 days to be delivered.

 

Tax return and tax account transcripts are available
for the current year plus the previous 3 processed years.
Wage and income transcripts are available for
the past 10 processing years.

The new online feature will give taxpayers instant access to:

Tax Return Transcripts — Reflecting most items from the tax return as it was originally filed. (It does not reflect any changes made after it was originally filed.)
Tax Account Transcripts — Showing any adjustments made after the return was filed, including basic data, such as marital status, type of return, gross and taxable income.
Record of Account Transcripts — Combines the information from a tax return transcript and a tax account transcript.
Wage and Income Transcripts — Provides data from W-2s, 1099s, 1098s, etc.
Verification of Non-filing Letter — Proof from the IRS that the taxpayer did not file a return this year.

To access this feature, follow this link:
http://www.irs.gov/Individuals/Get-Transcript.

After creating an account and signing in, the taxpayer will answer security questions and have immediate access to a page listing the years available for each transcript. Tax return and tax account transcripts are available for the current year plus the previous 3 processed years. Wage and income transcripts are available for the past 10 processing years.
This is a quick and easy way for taxpayers to get immediate access to their past tax return information.

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Healthcare & Benefit Services :: Employer Penalty Final Regulations Full-time Employees, Affordability and Offer of Coverage

On February 10, 2014, the IRS released final regulations implementing the employer penalty under the Affordable Care Act (“ACA”). The final regulations are complex and address numerous aspects of the employer penalty. We previously released an article dealing with the transition rules under the final regulations and we will be issuing an article in the near future regarding seasonal and variable hour employees. Below, you will find information on the following from the final regulations:

• Changes regarding how to determine full-time employee status;
• Clarifications regarding how to determine affordability; and
• Further explanation of what constitutes an “offer of coverage.”

Full-Time Employee Status
Under the ACA and the proposed regulations, a full-time employee (“FTE”) is, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week with an employer. 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week. These methods are referred to as the “monthly measurement method.” Look back measurement methods are also available and are not discussed herein.

New Weekly Rule
Under the monthly measurement method, employers have the option of determining FTE status by using a weekly rule. Under the weekly rule, FTE status for certain calendar months is based on hours of service over 4 weekly periods and for certain other calendar months is based on hours of service over 5 weekly periods as follows:

• with respect to a month with 4 weekly periods, an employee with at least 120 hours of service is an FTE; and
• with respect to a month with 5 weekly periods, an employee with at least 150 hours of services is an FTE. For purposes of this rule, the 7 continuous calendar days that constitute a week (for example Sunday through Saturday) must be consistently applied for all calendar months of the calendar year.

Rehired Employees and Employees Returning from a Short Leave of Absence
To avoid characterizing former employees as rehired employees after a short period of absence, the final regulations clarify that under the monthly measurement method, an employee must be treated as a continuing employee, rather than a new hire, unless:

• the employee has had a period of at least 13 weeks during which no hours of service were credited (26 weeks for an employee of an employer that is an educational organization); or

• the employee is not credited with any hours of service during a period that is both at least 4 consecutive weeks’ duration and longer than the employee’s immediately preceding period of employment.

Aggregation of Hours of Service
Hours of service must be counted across all large employer members of a controlled group where an employee accrues hours of service in a calendar month for various large employer members. For example, an employee who for a calendar month averaged 25 hours of service per week with large employer member A and 15 hours of service per week with large employer member B, the employee would be an FTE for that calendar month.

Exclusions from Definition of Hour of Service
On-Call Hours “On-call” hours are hours for which an employee has been directed by the employer to remain available to work, but where s/he is not performing services. In some cases, employees are paid a reduced hourly wage for on-call hours. In other cases, employees are not paid additional compensation for on-call hours but are required to remain on call periodically as a condition of employment. Until further guidance is issued, employers of employees who have on-call hours are required to use a reasonable method for crediting hours of service that is consistent with the employer penalty provisions. The regulations indicate that it is not reasonable for an employer to fail to credit an employee This document is designed to highlight various employee benefit matters of general interest to our readers. It is not intended to interpret laws or regulations, or to address specific client situations. You should not act or rely on any information contained herein without seeking the advice of an attorney or tax professional. with an hour of service for any on-call hour for which (a) payment is made or due by the employer; (b) the employee is required to remain on-call on the employer’s premises or (c) the employee’s activities while remaining on-call are subject to substantial restrictions that prevent the employee from using the time effectively for the employee’s own purposes. Volunteer Employees An hour of service is generally defined as an hour for which an employee is paid or entitled to payment. Hours worked by a volunteer who does not receive, and is not entitled to receive, compensation in exchange for the performance of services are not treated as hours of service for purposes of the employer penalty. However, to address volunteers who receive compensation in the form of expense reimbursements, stipends, contributions to employee benefit plans, or nominal wages, the final regulations provide that hours of service do not include hours worked as a “bona fide volunteer.” A “bona fide volunteer” is any volunteer who is an employee of a government entity or an organization described in Code Section 501(c) that is exempt from taxation under Code Section 501(a) whose only compensation from that entity or organization is in the form of (i) reimbursement for (or reasonable allowance for) reasonable expenses incurred in the performance of services by volunteers, or (ii) reasonable benefits (including length of service awards), and nominal fees, customarily paid by similar entities in connection with the performance of services by volunteers. Student Employees The final regulations do not include a general exception for student employees; however, they do provide that hours of service do not include hours of service performed by students in positions subsidized through the federal work study program or a substantially similar program of a state or political subdivision thereof.

Members of Religious Orders
Until further guidance is issued, a religious order is permitted, for purposes of determining whether an employee is an FTE, to not count as an hour of service any work performed by an individual who is subject to a vow of poverty as a member of that order when the work is in the performance of tasks usually required (and to the extent usually required) of an active member of the order. Adjunct Faculty, etc. Until further guidance is issued, employers of adjunct faculty (and of employees in other positions that raise similar issues with respect to the crediting of hours of service) are required to use a reasonable method for crediting hours of service with respect to those employees that is consistent with the employer penalty provisions. With respect to adjunct faculty members of an educational organization who are compensated on the basis of the number of courses or credit hours assigned, it is noted a wide variation of work patterns, duties, and circumstances apply in different institutions, academic disciplines, and departments, and apply to different courses and individuals, and that this might factor into the reasonableness of a particular method of crediting hours of service in particular circumstances. Until further guidance is issued, one (but not the only) method that is reasonable for this purpose would credit an adjunct faculty member of an institution of higher education with (a) 2¼ hours of service (representing a combination of teaching or classroom time and time performing related tasks such as class preparation and grading of examinations or papers) per week for each hour of teaching or classroom time (in other words, in addition to crediting an hour of service for each hour teaching in the classroom, this method would credit an additional 1¼ hours for activities such as class preparation and grading) and, separately, (b) an hour of service per week for each additional hour outside of the classroom the faculty member spends performing duties s/he is required to perform (such as required office hours or required attendance at faculty meetings). Although further guidance may be issued regarding these matters, the method described above may be relied upon at least through the end of 2015. To the extent any future guidance modifies an employer’s ability to rely on that method, the period of reliance will not end earlier than January 1 of the calendar year beginning at least 6 months after the date of issuance of the guidance (but in no event earlier than January 1, 2016). Of course, employers may credit more hours of service than would result under the method described above and also may offer coverage to additional employees beyond those identified as FTEs under that method.

Layover Hours for Airline Industry Employees and
Others
Until further guidance is issued, with respect to categories of employees whose hours of service are especially difficult to identify or track, or for whom the final regulations’ general rules for determining hours of service may present special challenges, employers are required to use a reasonable method for crediting hours of service that is consistent with the employer penalty provisions. With respect to layover hours, it is not unreasonable for an employer to not credit a layover hour as an hour of service if the employee receives compensation for the layover hour
beyond any compensation that the employee would have received without regard to the layover hour or if the layover hour is counted by the employer towards the required hours of service for the employee to earn his or her regular compensation. For example, if an employer requires that an employee perform services for 40 hours and credits layover hours towards the 40 hours, then it would not be reasonable for the employer to fail to credit the layover hours as hours of service. For layover hours for which an employee does not receive additional compensation and that are not counted by the employer towards required hours of service, it would be reasonable for an employer to credit an employee in the airline industry with 8 hours of service for each day on
which an employee is required, as a practical matter, to stay away from home overnight for business purposes (that is, 8 hours each day (or 16 hours total) for the two days encompassing the overnight stay). The employee must be credited with the employee’s actual hours of service for a day if crediting 8 hours of service substantially understates the employee’s actual hours of service for the day (including layover hours for which an employee receives compensation or that are counted by the employer towards required hours of service). Other methods of counting hours of service may also be reasonable, depending on the relevant facts and circumstances.

Affordability
There are three safe harbors for determining affordability: (1) the Form W-2 wages safe harbor, (2) the rate of pay safe harbor, and (3) the federal poverty line safe harbor. If an employer meets the requirements of the safe harbor, the This document is designed to highlight various employee benefit matters of general interest to our readers. It is not intended to interpret laws or regulations, or to address specific client situations. You should not act or rely on any information contained herein without seeking the advice of an attorney or tax professional. offer of coverage is deemed affordable for purposes of the Offer Coverage Penalty regardless of whether it is affordable
to the employee for subsidy purposes which take into account household income and number of tax dependents.

Use of Multiple Methods
An employer may choose to use one or more of the safe harbors for all of its employees or for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category. Reasonable categories generally include specified job categories, nature of compensation (e.g., salaried or hourly), geographic location, and similar bona fide business criteria. An enumeration of employees by name would not be considered a reasonable category.

Rate of Pay Safe Harbor
The final regulations allow an employer to apply the rate of pay safe harbor to an hourly employee even if the employee’s rate of pay is reduced during the year. In this situation, the rate of pay is applied separately to each calendar month, rather than to the entire year and the employee’s required contribution may be treated as affordable if it is affordable based on the lowest rate of pay for the calendar month multiplied by 130 hours. The rate of pay safe harbor cannot
be used, as a practical matter, for tipped employees or for employees who are compensated solely on the basis of commissions. In this case, employers can use the two other
affordability safe harbors.

Federal Poverty Line Safe Harbor
The proposed regulations provided that, in the interest of administrative convenience, employers may use the most recently published poverty guidelines as of the first day of the plan year of the large employer’s health plan. The final regulations specify that employers are permitted to use the
guidelines in effect 6 months prior to the beginning of the plan year, to provide employers with adequate time to establish premium amounts in advance of the plan’s open enrollment
period.

Multiemployer Arrangements
For purposes of determining whether coverage under the multiemployer plan is affordable, employers participating in the plan may use any of the affordability safe harbors set forth in the final regulations. Coverage under a multiemployer plan will also be considered affordable with respect to an FTE if the employee’s required contribution, if any, toward self-only health coverage under the plan does not exceed 9.5% of the wages reported to the multiemployer plan, which may
be determined based on actual wages or an hourly wage rate under the applicable collective bargaining agreement or participation agreement. If any assessable payment were due under the employer penalty, it would be payable by a participating large employer member and that member
would be responsible for identifying its FTEs for this purpose (which would be based on hours of service for that employer).If the large employer member contributes to one or more multiemployer plans and also maintains a single employer plan, the interim guidance applies to each multiemployer plan but not to the single employer plan.

Dependents
To ensure avoidance of the employer penalty, large employers must, in part, offer coverage to their FTEs and their dependent children. For employer penalty purposes only, the final regulations exclude both foster children and stepchildren from the definition of dependent – the final definition now only includes any biological or adopted child. However, foster children and stepchildren may have to be eligible for purposes of the requirement of a plan to cover children to age 26. The final regulations exclude a child who is not a U.S. citizen or national from the definition of dependent, unless that child is a resident of a country contiguous to the United States or that child is adopted where (a) for the taxable year of the taxpayer, the child has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household and (b) the taxpayer is a citizen or national of the United States. To avoid penalty, large employers must extend coverage through the end of the month in which the dependents attain age 26.

Offer of Coverage
Staffing Firms
An offer of coverage to an employee performing services for an employer that is a client of a professional employer organization (“PEO”) or other staffing firm (in the typical case in which the PEO or staffing firm is not the common law employer of the individual) (referred to here as a “staffing firm”) made by the staffing firm on behalf of the client This document is designed to highlight various employee benefit matters of general interest to our readers. It is not intended to interpret laws or regulations, or to address specific client situations. You should not act or rely on any information contained herein without seeking the advice of an attorney or tax professional. employer under a plan established or maintained by the staffing firm, is treated as an offer of coverage made by the client employer if the fee the client employer would pay to the staffing firm for an employee enrolled in health coverage under the plan is higher than the fee the client employer would pay to the staffing firm for the same employees if the employee did not enroll in health coverage under the plan.

Home Care Workers
The final regulations clarify that the recipient of service by a home care worker may be the common law employer of the home care worker, rather than the home care agency. Therefore, the home care agency would not be required to make an offer of coverage to the home care worker in such case. For example, if the service recipient has the right to direct and control the home care provider as to how they perform services, including choosing the provider, electing the services to be performed, and setting hours of service, the service recipient is the common law employer and the home care agency would not be subject to the employer penalty for that particular provider.

Application to Multiemployer and Single Employer
Taft-Hartley Plans, MEWAs and Other Similar
Arrangements
The final regulations clarify that for purposes of the employer penalty, an offer of coverage includes an offer of coverage made on behalf of an employer, and that this would include
an offer made by a multiemployer or single employer Taft- Hartley plan or a MEWA to an employee on behalf of a contributing employer of that employee.

Method of Offer

The offer can be made electronically. An employee’s election of coverage from a prior year that continues for every succeeding plan year unless the employee affirmatively elects to opt out of the plan constitutes an offer of coverage for purposes of the employer penalty provisions.

Recordkeeping
The final regulations do not apply any specific rules for demonstrating that an offer of coverage was made. The otherwise generally applicable substantiation and recordkeeping requirements apply.

 

This document is designed to highlight various employee benefit matters of general interest to our readers. It is not intended to interpret laws or regulations, or to address specific client situations. You should not act or rely on any information contained herein without seeking the advice of an attorney or tax professional.

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Healthcare & Benefit Services :: Regulations Issued on Waiting Period

RegonWaitingImage

For plan years beginning on or after January 1, 2014, a group health plan and an insurance carrier offering group health insurance coverage may not apply any waiting period that exceeds 90 days. This rule applies to both grandfathered and non-grandfathered plans. It should be noted that nothing in the Affordable Care Act requires a group health plan or carrier to have a waiting period. Further, state insurance law may be more restrictive than what the federal law requires (state insurance requirements are generally not applicable to ERISA self-insured plans).

On February 20, 2014, final and additional proposed rules on the waiting period provision were issued. Below you will find notable changes from the previously issued proposed regulations. Effective Date The final regulations apply to plan years beginning on or after January 1, 2015. For plan years beginning in 2014, employers may comply with either the previously-issued proposed regulations or the final regulations.

Bona Fide Employment-Based Orientation Period
A waiting period is the period that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of a group health plan can become effective. To be otherwise eligible to enroll in a plan means that an individual has met the plan’s substantive eligibility conditions (such as being in an eligible job classification or achieving job-related licensure requirements specified in the plan’s terms). So, the maximum 90-day waiting period does not have to begin until the first day after the substantive eligibility conditions are met. The final regulations indicate that a reasonable and bona fide employment-based orientation period can be a substantive eligibility condition and the proposed rule offers a one-month orientation period. The idea is that, during an orientation period, an employer and employee could evaluate whether the employment situation was satisfactory for each party, and standard orientation and training processes would begin. One month would be determined by adding one calendar month and subtracting one calendar day, measured from an employee’s start date in a position that is otherwise eligible for coverage.

For example, if an employee’s start date in an otherwise eligible position is May 3, the last permitted day of the orientation period is June 2. Similarly, if an employee’s start date in an otherwise eligible position is October 1, the last permitted day of the orientation period is October 31. If there is not a corresponding date in the next calendar month upon adding a calendar month, the last permitted day of the orientation period is the last day of the next calendar month. For example, if the employee’s start date is January 30, the last permitted day of the orientation period is February 28 (or February 29 in a leap year). Similarly, if the employee’s start date is August 31, the last permitted day of the orientation period is September 30.

Rehired Employees/Employees Changing to and from Eligible Job Classifications
The final regulations provide that a former employee who is rehired may be treated as newly eligible for coverage upon rehire and, therefore, a plan may require that individual to meet the plan’s eligibility criteria and to satisfy the plan’s waiting period anew, if reasonable under the circumstances. For example, the termination and rehire cannot be a subterfuge to avoid compliance with the 90-day waiting period limitation. The same analysis would apply to an individual who moves to a job classification that is ineligible for coverage under the plan but then later moves back to an eligible job classification.

Multiemployer Plans
Multiemployer plans maintained pursuant to collective bargaining agreements have unique operating structures and may include different eligibility conditions based on the participating employer’s industry or the employee’s occupation. On September 4, 2013, the Departments issued a set of frequently asked questions (FAQs) stating that if a multiemployer plan operating pursuant to an arms-length collective bargaining agreement has an eligibility provision that allows employees to become eligible for coverage by working hours of covered employment across multiple contributing employers (which often aggregates hours by calendar quarter and then permits coverage to extend for the next full calendar quarter, regardless of whether an employee has terminated employment), the Departments would consider that provision designed to accommodate a unique operating structure, (and, therefore, not designed to avoid compliance with the 90-day waiting period limitation).

Employer Action
Eligibility rules should carefully be reviewed for compliance with the 90-day waiting period rules as well as the employer penalty provisions and nondiscrimination rules. While it is permissible under the 90-day waiting period rules for a plan to use substantive eligibility conditions (e.g., job classification) to deny coverage to certain employees, have a waiting period of an additional month during a “bona fide employmentbased orientation period,” and impose a new waiting period for rehired employees and/or employees changing to and from eligible job classifications, this raises issues for large employers subject to the employer penalty beginning in 2015. These employees may be viewed as continuing employees for purposes of the employer mandate and the imposition of another 90-day waiting period may result in a penalty exposure for the employer as continuing employees generally need to be offered by the first of the month following return to work. In addition, having less generous eligibility rules for lower paid employees or protected classes can also violate various nondiscrimination rules.

 

This document is designed to highlight various employee benefit matters of general interest to our readers. It is not intended to interpret laws or regulations, or to address specific client situations. You should not act or rely on any information contained herein without seeking the advice of an attorney or tax professional.

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