Skip to content

Notes from IRS webinar on Affordable Care Act implementation tax issues

Webinar , September 17, 2014, 2 PM eastern time.

The presentation handout is at http://www.visualwebcaster.com/files/100208/SBSE%20ACA%20Webinar%20PPT%20Final_pdf_version_blk_wht.pdf

Small businesses

I had not heard previously that the small business credit for non-profits was limited to the amount of their wage tax, which for a small company may be less than 35% of their health insurance costs.

Q&A was led by Richard G. Furlong

See 1040 draft form for the new lines related to health insurance

Furlong emphasized that the federal and state exchanges as opposed to private exchanges, seemingly to imply that this does not apply to insurance purchased on private insurance exchanges. That’s not right, is it? Why would IRS be making this distinction? What about the millions who private exchanges?

Line 61 “healthcare individual responsibility”. There is a full year coverage check box. If they qualify for an exemption, Form 8965 is required.

  • Form 8962 is calculation of premium tax credit instructions are not yet published.
  • Form 8965 exemption instructions are not yet out but will be out very soon.
  • 1095A – from health insurance plan

Furlong said “smaller population that qualify for premium tax credits”? why is this smaller?

I understand 4 million (10% of 40 million) will be subject to the individual premium penalty whereas more than 4 million are receiving a premium tax credit.

about 8 million actually enrolled through individual exchanges and should receive a Form 1065A

- tax preparers should make inquiries if this is not provided by the client.

Disagreements about taxation of individual health insurance in 2014

It seems that the most confusing tax topic this year in the wake of the Affordable Care Act implementation is the taxation of individual health insurance when an employer is involved in the payment of the cost. No doubt other confusing issues are still on the horizon, but this one is here and now. Small business clients seeking an answer now are sometimes met with conflicting opinions on the issue.

The legal community has been equivocal on its position against the use of individual insurance as an employer paid expense in 2014. Meanwhile, CPAs have been noticeably quiet on the topic after issuance of Internal Revenue Bulletin 2013-40. My take is that accountants are still trying to take it all in, and certainly there are many nuances to consider before forming an opinion. This blog post is meant to break that silence among accountants and perhaps stir some more discussion.

What others are saying

Here is a summary of some of the better-written commentary:

Angela Bohmann, an attorney with Stinson Leonard Street writes in her blog post “Employers were hoping that by providing funds to employees to purchase coverage on the individual market, the employer could avoid the penalty for failure to offer coverage while limiting the employer’s cost. In recently issued guidance, the IRS and the Department of Labor have essentially said no to this alternative.” (emphasis added) Note that Ms. Bohmann hedges her statement, much like I did in my article on the same topic, based on independent research. Her article also reaches the same conclusions on some other points: “The IRS did not revoke the 1961 Revenue Ruling permitting pre-tax payment of employee premiums for individual market policies.  Some employers are hoping that they can continue to allow employees to pay for individual market health insurance policies on a pre-tax basis through a cafeteria plan even if the employer provides no subsidy for the coverage.  The recent guidance is not clear on that point.” (emphasis added)

Law firm Alston and Bird LLP publishes a well-written opinion on the impact of ACA on individual health insurance. The author is not identified. Their conclusion is stated: “Thus, the Agency Guidance (referring to IRS Notice 2013-54 and Technical Release 2013-03) indicates that any arrangement that provides for the purchase of IM Coverage on a pre-tax basis will fail PHSA Sections 2711 and/or 2713.” (emphasis added) I am not convinced by Alston’s summary conclusion. The author takes a giant leap from the guidance’s lengthy discussion of disallowed reimbursement plans to saying “any plan” without a discussion of other possible arrangements that might fall into the category of “employer payment plan” and not fall into the category of reimbursement plan. An example is presented below in the one employee corporation situation.

The insurance brokerage firm Parker Smith Feek states “The DOL recently issued Technical Release 2013-03 which answers a question that has been unclear since the Affordable Care Act (ACA) was passed. Can employers pay for the purchase of individual health insurance plans for employees on a tax-free basis? The DOL’s answer to this question is no.  emphasis added. We should be generally skeptical of posts be the employee benefits industry because of their financial addiction to group health insurance commissions.

Likewise, firms that sell software and individual health insurance exchange support services like Zane Benefits have the opposite financial interests and are among the strongest proponents of the use of individual health insurance in employer-paid situations. I avoid specific citations of Zane Benefits statements.

Getting to the heart of the issue

The IRS logic in the 2013 guidance is based on the assumption that employer payments are part of a qualified employee benefit plan and all of the published guidance focuses on various types of qualified employee health benefit plans. We might borrow concepts learned from the estate tax planning field where it is common to deliberately fail to meet a code section laid out in the tax code in order to default into different and more desirable tax treatment.

The one person corporation example

Theorems may be best tested by consideration of an example that defies the principle. For that purpose, consider the case of a one employee “C” corporation. This employer is bared from the group health insurance market (in most states) by virtue of the single employee. Most states consider a one person business to be a candidate for individual insurance, with two employees the minimum for a group health insurance plan. The employee is not eligible to claim a self-employment health insurance deduction. None of these fact patterns changed with the implementation of the Affordable Care Act; one person “C” corporations are well-accustomed to reporting health benefits as a non-taxable benefit to the employee. Was this meant to change with implementation of the Affordable Care Act? There is no indication whatsoever in the new guidance that this business cannot continue to deduct the cost of insurance for this employee. Of greater interest, there is no guidance stating that insurance purchased by this business outside of an employee benefit plan is taxable to the employee. Should we now conclude that every payment of health insurance by corporations with one employee are now taxable to the employee? I suspect that a CPA is warranted and has reasonable basis to not change the tax treatment of this transaction for 2014 in the absence of further guidance from the Service.

Audit consideration approach

Accountants sometimes consider a tax position in terms of the audit procedures and legal procedures that might be used to challenge a specific tax position. While audit procedures do not determine the law, and I’m not suggesting “do it if you think you’ll get away with it”, the consideration of audit procedures does help clarify the step-by-step application of the law and testing logic that might be used to interpret the law in questionable situations.

In this case, the validity of the business deduction for an insurance payment for individual health insurance might be questioned in a full audit of the company. I am not aware of any basis upon which the deduction might be challenged if paid on behalf of a legitimate employee. The second step would be to consider the tax withholding and treatment. The basis for which IRS might assert taxes would be to claim that the payment was part of an “employer-sponsored employee health benefit plan”. It seems less likely that the Service would assert this to be a “group health plan”. By the services’ own requirements an employer-sponsored health benefit plan must be in writing. In the example proposed we presume that there is no written employee benefit plan. From a technical perspective, we could argue that any attempt to form a qualified employee benefit plan was defeated by failure to meet documentation requirements. What we are left with in this theoretical audit example is a check written by an employer that is or is not taxable compensation to the employee. Given the current language of the law and recent guidance, it is my opinion that any tax court would find it difficult to conclude that the payment amount is taxable to the employee.

Conclusion

My conclusion is that we are likely to receive more guidance from Treasury Department on this issue. Common sense and experience tells me that guidance is more likely to be influenced by the political climate in the future rather than technical explanation of prior positions.

 

NAPFA definition of fee-only excludes insurance company owner

The National Association of Personal Financial Advisers (NAPFA) confirmed in am email received Friday that I would not be eligible for membership as a fee-only adviser because I maintain ownership of Freedom Benefits web sites that receives fees from insurance exchange operators, brokers or other third party firrms. Even though my accounting/advisory practice is completely separate from Freedom Benefits and no accounting/advisory client has ever used Freedom Benefits or vice versa. Apparently the membership exclusion applies even if the adviser, like myself has no contact with the insurance company customers and is only paid for web services. A spokesperson for Bevin Callan, NAPFA Membership Director, wrote “you would not be eligible for NAPFA membership while receiving referral fees from insurance agents or brokers”. This reinforces what I’ve read in industry publications that the association is more concerned with segregating and delineating its membership than engaging with fee-only practitioners with a divergent background like mine.

Am I a fee-only financial adviser?

This question “Am I a fee-only financial adviser?” is self-imposed. Even though I’ve received literally tens of thousands of consumer finance questions over the past 30 years, never has this question been raised by anyone. I could also raise the next logical question at this point of whether perhaps the public just does not care but that should actually be a different topic for another time (probably a future blog post). I raise this basic question now about “fee-only financial adviser” at this time because the financial planning industry is going through a phase where it is wrestling with the concept and the definition itself.

Before you say “of course you are”, consider that the common sense answer may not be what I’m looking for here. The underlying point of the fee-only debate is to distinguish from those who are motivated by the generation of commissions. Sure, I charge only fees and don’t get involved with commissions. As I haven’t undertaken a commission transaction in many years, it would seem that there is no connection to the commission-based industry. But what about affiliations with commission-generating firms? What about residual commissions from transactions a decade ago? Some might logically say that of course any accountant provides some financial advice in the mix of services provided to a client in return for an agreed upon fee; so isn’t that’s fee-only financial advice if the adviser is paid only a fee and not product commissions? Yet it turns out those most obvious considerations are not the only factors considered by some industry forces. I am interested in what others have to say on the subject.

Background

The complicating factor in my personal question stems from my ownership of Freedom Benefits, a business that is related to health insurance. Freedom benefits is not a producer, agent or broker, nor am I individually. I don’t personally get involved in the insurance transactions of Freedom Benefits web site users but I am the owner of the business and I do write articles or record videos that promote the business and refer people to it. There’s never been an overlap of a client being both a customer of Freedom Benefits and a client of my accounting/advisory practice. But it is theoretically possible that his could happen and therefore create a conflict of interest stemming from this compensation model. So what’s not clear is whether my compensation from Freedom Benefits falls into the category that “fee-only” seeks to distinguish itself from in the financial services commission model.

Perhaps even more significant is that I’ve never rules out the possibility that I could handle a commission-based transaction as part of compensation in the future if it appeared that it would be in the client’s best interest. Besides, even if I did say so, there is no impediment for me or any other adviser from changing our business model in the future to adapt to changing circumstances. A declaration of “fee-only” is clearly a momentary condition regardless of what definition or standards apply.

The Wikipedia entry for the term “financial adviser” is very well written and provides background context that need not be reproduced here. I should note here that the industry uses the terms “advisor” and “adviser” interchangeably without any other implication. It’s only the “fee-only” part that I needs to focus on in my question. I notice that of the industry authorities listed (as well as some not listed in the Wikipedia article), apparently the only ones that apply to me with regard to use of the term “fee-only financial adviser” would be state accountancy organizations where I may practice under reciprocity rules (meaning that it is legal to practice there even though I may not be directly licensed with the state authority). State CPA associations tend to receive guidance on developing industry issues from the American Association of Certified Public Accountants (AICPA) which serves as a national authority on issues. So in the event that a state does not have specific regulations on the term “fee-only” then the fall-back authority for me would be the AICPA.

The other authorities, including Financial Industry Regulatory Authority (FINRA), Certified Financial Planner (CFP) Board and National Association of Personal Financial Advisers (NAPFA) that do regulate the term “fee-only” do not apply to me because I am not a member nor under their jurisdiction.

State law

I did not find any governing law on the topic of “fee-only” from the three primary states where I actively practice. I did not search the laws in all 50 states and DC where I hold insurance licenses.

AICPA

The American Association of Certified Public Accountants published an article that weighs in on the issue by criticizing the fee-only financial adviser business model for not being holistic and ignoring clients life insurance needs. The article points out that commission-based compensation “despite the fact that most life insurance can be purchased only in this way”. I agree with the premise that CPAs avoid discussing life insurance to the detriment of their clients.

To help practitioners determine which regulations apply, the AICPA offers an assessment tool. I learned that I may be subject to the rules for referral arrangements, but that topic is also outside of the focus of this blog post.

NAPFA and CFP Board

Even though I am not a member of either NAPFA or the CFP, it is worth considering whether I could be a member and, if so, would I be considered a fee-only financial adviser. Well-known financial planning industry author Bob Veres recently wrote about this issue. I don’t link to it here because the issue is apparently not yet resolved and the discussion would more likely lend to confusion rather than lead to an answer to the question posed. The distinctions being argued about the consequences of ownership interest in other financial service companies are too complex for my basic question posed here.

For about seven years In the 1990s NAPFA was actually engaged in a legal campaign to trademark the term “fee-only” and cancelled its trademark application in 2000 amid industry opposition. I made a direct written inquiry to the Membership Director of NAPFA posing the question directly. See the next post in this blog for the response. In short, NAPFA invites me to consider them when I am no longer an owner of an insurance company.

Conclusion

Notwithstanding any response I may receive from NAPFA and without regard to whether that association’s practices may be applicable at some time in my future, I arrive at the primary conclusion that I do not have any third-party basis to assert that I am a “fee-only financial adviser”. I believe that if  a third-party reference or implied determination did exist, it would likely have tangible value for myself and for consumers.

Second, I conclude that here is neither any legal nor professional ethics detriment that would persuade me from using the term “fee-only financial adviser”.

Third, I am clear that the determination of whether I (or any other person) am a “fee-only financial adviser” is a momentary issue. No regulation contemplates or prohibits the possibility that this determination will change in the future, either from evolving industry trends or a change in the advisor’s business practice, (CFP Board uses a “look back” period of one year to determine compensation model so presumably a prior determination of business model may carry for at least a year after a change  in business practice).

Finally, and still most perplexing, is the issue of insurance. I conclude that:

1) It is inappropriate for a financial adviser to ignore a client’s insurance simply because of discomfort with the compensation issue.

2) It is inappropriate, in most cases, to charge a fee when compensation is already intended to be included in the price of the product.

3) No-load insurance products are not the answer, for many reasons outside the scope of this post.

4) Considering #1, #2, and #3 above in total, it is wrong for NAPFA and some public media to imply that fee-only is in the best interests of middle market consumers when the facts simply do not support this conclusion.

5) It would be misleading to advertise “fee-only financial advice” and then at some point later realize that it is in some future client’s best interest to offer to handle an insurance transaction without a fee based on splitting the included commission with an insurance specialist. It does not matter that this is not my business model. Rather, simply the possibility that is could and the realization that it actually should happen in the client’s best interest is enough to cause discomfort with the use of the phrase “fee-only”.

6) The term “fee-based financial adviser” may be more appropriate and descriptive term to describe the most-efficient and most-preferred arrangement for compensation for financial advice for the majority of middle market clients. Yet I am unlikely to use that term out of concern that it implies a commission connection within the business model; something that I and many other accountants do not wish to consider.

The end result, it seems, is that I’ll likely continue to avoid using any descriptive label like “fee-only”, avoid association with financial planning organizations that push such labeling of service, and continue to keep the compensation issue off the front page in communications about my work.

The verdict on caffeine: “everything in moderation”

Caffeine remains the world’s most widely used but least understood psychoactive drug with regard to its overall impact on public health. We know that caffeine has both desirable and undesirable effects. These effects are well documented in the medical research and widely accepted by consumers. Yet most, if not all, of the often-cited research dating back to the 1970s focus only on a narrow range of short-term effects associated with caffeine rather than its overall impact on us.

 

Too much of the published research, in my opinion, has focused on short-term athletic and cognitive performance and too little on long-term work performance and public health. The most often cited evidence in connection with negative effects actually relates to withdrawal symptoms rather than the effect of the drug itself; these are not the same issue! Other reports are hopelessly confusing. We can find well-considered studies, for example, that caffeine is associated with a lower incidence of depression and other studies associating the drug with higher incidence of depression. How do we weigh the positive against the negative? The scientific research, taken as a whole, has been unsatisfactory and unfulfilling from a consumer’s perspective.

 

I’m not aware of any analysis that effectively weighs the positive effects against the negative effects on long-term health and performance under a range of human experiences. Further, there does not seem to have been any successful attempts to isolate the impact of caffeine from the larger negative factors of chronic sleep deprivation, lack of exercise, and other stress factors that likely combine to produce negative effects on long-term health and performance.

 

We need more information that isolates the impact of caffeine and weighs the positive and negative effects. For now, I’ll just stick with the position “everything in moderation”.

Preparing for increased investment volatility

There is wide-spread agreement now among financial advisers that we will see an increase in volatility in the U.S. stock market followed by an increase in global market volatility. Notwithstanding the fact that widespread agreement does not make it more likely to happen, it makes sense to consider the impact of the expected consequences. When the market is at an all-time high point there is significant risk that increased volatility will be viewed as a “crash” by the investing public. So how should advisors help their clients prepare for increased volatility?

I can only say that from my own experience, an unstable investment market leads to lack of confidence and more difficulty making commitments and reaching decisions in a wide range of business and personal financial planning. Those with less debt tend to be less affected.The impact of an unstable investment market can last for years after the regain stability at a lower market value. The spill-over effects extend to increased unemployment and marital stress.

While there is no point to yelling “the sky is falling”, advisors who encourage a conservative financial approach may find themselves working with clients who are less stress next year.

How to remain depressed: 10 tips for the depression-challenged

Staying depressed for a long period of time is difficult. It actually takes quite a bit of work and effort.  Few people have the knack for it. In fact, according to a recent course I took at Coursera.org, the World Health Organization estimates that while as many as 125 million people worldwide that manage to achieve clinical level of chronic depression, in most places depression is accompanied and overshadowed by massive challenges like the threat of starvation, fear of violence or long term warfare. Here in the U.S., even with our comparably staggering national wealth and civility as well as our vast mental health treatment resources, about 1 in 10 of us still suffers from occasional clinical depression. Even so, among these U.S. sufferers, only 1 in 3 are able to manage to maintain this condition as a long term ailment.

Here are ten tips to help make it happen for the rest of us here in the U.S. who are “chronic depression challenged”:

1) It helps to sit with the lights off, at home, in a quiet surrounding without other people. You must avoid getting involved or engaging in bright, lively active scenes like a hectic office or work environment or high energy social scenes.
2) Stick to the “tried and true”. Don’t have an open mind toward change or engage in new experiences.
3) Remind yourself frequently that you already have all the tools and answers that are relevant to your own life. Keep focused on what’s wrong “out there” and never consider what’s going on “inside here”.
4) When you are with other people, you have to stay focused on your own problems and not be drawn into engaged conversation about their lives and other topics. Don’t engage in “active listening” and try to do most of the talking; again keep focused on your own problems. If you company strays off course let them know that you don’t appreciate their attempt to introduce other topics into the conversation. Your response has the added benefit of ensuring that they will not wish to speak with you much again.
5) Don’t get enough sleep.
6) Avoid outdoor activity and exercise as this also make it difficult to remain depressed. Avoid these even in small doses.
7) It is almost impossible to remain depressed if you force or fake a smile too often so this must definitely be avoided.
8) Do not allow yourself to be exposed to people whose problems are greater than your own, especially if they have found a way to cope with the challenges that life has posed.
9) Hold a strong conviction of how the path of your life ought to play out. Consider any deviation from this certain path to be unfair to you.
10) Frequently compare your life with the lives of others, especially what they post on Facebook. Read meaning into the pictures posted to confirm how their relationships, financial status and experiences are so much richer than yours.

Follow

Get every new post delivered to your Inbox.

Join 342 other followers