February 2014

February 2014

We recognize that time is at a premium with the 2013 tax season in full swing. We’ve designed our newsletter to efficiently bring you timely information crucial to your business. For up-to-the minute alerts on important matters, follow us on Twitter and Facebook. We now post important developments to social media as they occur. As always, we love to hear from you. Contact us any time with your questions, feedback, or observations.

New Farm Bill Signed into Law

We posted an article on the new farm bill the day it was passed by the Senate.  You can find that article here.  As we note in the article, direct and counter-cyclical payments are gone.  They are replaced with “Agricultural Risk Coverage” (ARC) and Price Loss Coverage (PLC).  What works best for any particular farmer will depend on the facts.  Paul Neiffer, a CPA in Washington State and member of one of our Day 2 Tax School teams and also a presenter at our summer seminars has blogged about the options and what might work best for a farmer.  You can find his comments here:  http://www.farmcpatoday.com/2014/02/06/better-arc-plc-sco/ and here http://www.farmcpatoday.com/2014/01/29/make-extra-100-per-acre/.

Obamacare and Health Reimbursement Arrangements

One of the issues that we addressed at the tax schools last fall and that we continue to get questions on involves the impact of Obamacare on health reimbursement arrangements (HRAs).  Starting in 2014, the playing field for small businesses that have established HRAs has changed – and not in a positive way.  In addition, if a small employer violates Obamacare, the penalty is $100/day/employee.  Obamacare establishes annual dollar-limit rules and preventative care rules.  Whether an HRA satisfies the annual dollar limit rules depends on whether it is an “integrated” plan or a “stand-alone” plan.  They must be an integrated plan to come within the rules, and that other group health plan coverage must also comply with the rules.  So, a covered employee must also be enrolled in the primary group health plan coverage.  In addition, an HRA is not an integrated HRA if it is paired with individual market coverage or with an employer plan that provides coverage through individual market policies.  So, again, no stand-alone coverage.  However, if the HRA is a retiree-only plan, it is allowed.  Also, if the HRA only covers one employee, it is allowed if it is offered in a nondiscriminatory fashion.  In addition, as we pointed out at last fall’s tax schools, beyond covering one employee, only ancillary benefits (dental, vision, long-term care and disability) can be provided.

Apparently, some HRA providers think that they have found a way around the Obamacare restrictions on HRAs by utilizing a Health Reimbursement Plan (HRP).  But, according to IRS Notice 2013-54, Q & A No. 1, other types of group health plans that are used to purchase coverage on the individual market cannot be integrated with that individual market coverage for purposes of Obamacare’s annual dollar limit prohibition.

As we have been noting for some time, Health Savings Accounts (HSAs) are a great tool for handling medical expenses.  See our article here.   An HSA is a tax-advantaged savings account for medical expenses.  To make contributions to the account, the account holder must have a high deductible health plan (HDHP) – at least $1,250 for individuals and $2,500 for families in 2014.  Out-of-pocket costs (including deductibles and co-pay amounts) are capped at $6,350 for individuals and $12,700 for families in 2014.  The maximum contribution amount for 2014 is $3,300 for an individual and $6,550 for families.  Obamacare puts additional restrictions on HSAs in 2014 by prohibiting their use to buy over-the-counter medications and increasing the penalty for withdrawals used for non-medical purposes from 10 percent to 20 percent.  So, an HSA lowers your taxable income, account earnings are tax-free and distributions for medical expenses are not included in income.  An HSA owner now may consider whether to stick with their current HDHP or find one in a government exchange.  That analysis will depend on the level of taxpayer subsidies that can be obtained by getting an exchange-based HDHP, among other considerations.  However, in many states, Obamacare is having the effect of increasing average premiums for individuals purchasing policies from the exchanges.  The Department of Health and Human Services issued a report on February 4, 2014, noting that the average deductible for a bronze plan in the states with a federal exchange is $5,095 per year for an individual and the average catastrophic plan has an annual deductible of $6,346.  It is likely that most people will do better not buying their insurance through an exchange, even with the taxpayer subsidies.        

As for Obamacare in general, a new report by the non-partisan Congressional Budget office (CBO) indicates that it will cost the economy nearly 3 million jobs.  On the heels of that report, the White House made another unilateral change to the law.  This time (it’s about the 30th time the White House has changed the law without congressional approval), employers with 51 to 99 employees do not have to offer health insurance or pay a fine until 2016.  That’s another year beyond the deadline which had already been moved to January 1, 2015.  That should largely get the issue out of the media until after the 2014 elections. 

Economic Issues

The condition of the general economy is important to keep an eye on for purposes of advising clients with their tax and financial situations.  There are parallels between the stock market collapse in 1929 and the present stock market trends.  Take a look at the following chart of the Dow Jones Industrial Average that compares the time leading up to the 1929 crash and the last 18 months.  The parallels are worrisome:

I am not sure what you want to do with that information, but at least be aware of it.  Clearly, Fed policy has resulted in an overvalued market and a correction is due.  Just how big the correction will be is the key question.  Another question is how any significant correction would impact your client’s business and planning options.

On the jobs front, the February jobs report was dismal.  While the economy added 113,000 new jobs, that’s less than one-half of the number needed every month for another 3 years for the economy to return to its pre-2009 status.  The labor force participation rate hovers around 60 percent, a level so low that it hasn’t been seen since the late 1970s.  So, while the unemployment rate dropped to 6.6 percent, it did so not because the economy grew, it did so because the labor force continues to shrink.  Additional taxes on work and new incentives to not work won’t help that number.

Federal Estate Tax

Installment payment of federal estate tax. Earlier this month we posted an article on whether a business restructuring will cause unpaid installment payments of federal estate tax to be accelerated.  The IRS recently issued a Private Letter Ruling on the matter and our article discusses that ruling and numerous other IRS pronouncement on the issue.  Essentially, a business can be restructured and as long as it continues and outside funds are not used, the transaction is simply viewed as a mere change in form and the unpaid installments are not accelerated.
Portability election. In late January we posted an annotation on Rev. Proc. 2014-18 involving the IRS's provision of a simplified method for particular estates to get an extended time to make the portability election in the first spouse's estate.  The relief for making a late portability election applies if the decedent died in 2011, 2012 or 2013 and was a U.S. citizen or resident at the time of death.  Also, the decedent' estate must not have been required to file a federal estate tax return and did not file such a return within the nine month deadline (or within an extended timeframe if an extension was involved).  If those requirements are satisfied, the Form 706 can be filed to make the portability election by the end of 2014 and the Rev. Proc. should be noted at the top of the form.


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