DGC Enewsletter 4-10

The Tax Implications of Health Care Reform
The Health Care and Education Reconciliation Act of 2010 (Reconciliation Act), amends the Patient Protection Act, which President Obama signed on March 23. Combined, the two new laws include more than $400 billion in revenue raisers and new taxes on employers and individuals. This is a massive overhaul of the nation’s health insurance and health delivery systems. Over the coming months, DGC will provide ongoing coverage on this topic. However, the purpose of this article is to simply highlight a few of the anticipated changes that may affect DGC clients.

To briefly outline, the Patient Protection Act, as amended by the Reconciliation Act, will fundamentally alter the health care landscape for individuals and employers. All individuals not covered by Medicare or Medicaid will be required to obtain health care coverage or pay a penalty unless they are exempt from the individual responsibility mandate. Employer-provided coverage will generally satisfy the universal coverage requirement. Lower-income individuals, as well as some middle-income families, may qualify for a premium assistance tax credit, cost-sharing, or a voucher to help pay for health insurance. The health care reform package does not include a public option but provides for state insurance exchanges where individuals can shop for coverage.

IMMEDIATE CHANGES
Many of the key provisions in the health care package take effect in 2010:
• Small business tax credit;
• Temporary high-risk pool for individuals who are uninsured because of a preexisting condition;
• Temporary reinsurance program for early retirees;
• No discrimination against children with pre-existing conditions;
• No lifetime limits on coverage;
• Coverage for young persons until age 26 through parents' insurance; and
• A $250 rebate to Medicare beneficiaries who are affected by the "donut hole."

EMPLOYERS
The health care reform package does not require employers to provide health insurance coverage. However, “large” employers (generally employers with 50 or more full-time employees but with some exceptions) will be subject to “play or pay” rules after 2013. The health care reform package generally
treats employees working 30 or more hours per week as full-time employees.

A nondeductible penalty will be assessed on a large employer that:

(1) Fails to offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan if at least one full-time employee is enrolled
in an insurance exchange and receives a premium assistance tax credit or cost-sharing; or

(2) Offers, for any month, its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan and any full-time employee is enrolled in an insurance exchange and receives a premium assistance tax credit or cost-sharing.

Reporting. Employers and other entities providing minimum essential coverage would be required to file information returns with the IRS identifying the individual, the coverage and the amount of premium, if any, paid by the individual. Penalties would be imposed for failure to file an information return.

SMALL BUSINESES
Beginning in 2010, the health care reform package provides a temporary sliding-scale small employer tax credit to help offset the cost of employer-provided coverage. Generally, a qualified small employer is one with no more than 25 employees and average annual wages of no more than $50,000. The qualified small employer must contribute at least one-half of the cost of health insurance premiums for coverage of its participating employees.

In 2010 through 2013, qualified small employers may qualify for a tax credit for up to 35 percent of their contribution toward the employee’s health insurance premium. After 2013, small employers that purchase coverage
through an insurance exchange may qualify for a credit for two years of up to 50 percent of their contribution. Salary reduction contributions are not counted.

Small employers with 10 or fewer employees and average annual wages of less than $25,000 would be eligible for the full credit. The credit is reduced for small employers with 11 to 25 employees and average annual wages of $26,000 to $50,000. The wage amounts are indexed for inflation.

Cafeteria Plans. The health care reform package relaxes the cafeteria plan rules to encourage more small employers to offer tax-free benefits to employees, including those related to health insurance coverage. It does so by carving out a safe harbor from the nondiscrimination requirements for cafeteria plans for qualified small employers.

ADDITIONAL MEDICARE PAYROLL TAX
Starting in 2013, the health care reform package broadens the Medicare tax base for higher-income taxpayers by:

Imposing an additional Hospital Insurance (HI) tax rate of 0.9 percent on earned income in excess of $200,000 for individuals and $250,000 for married couples filing jointly; and
Imposing a 3.8 percent “unearned income Medicare contributions” tax on higher-income taxpayers. The 3.8 percent unearned income Medicare contributions tax is imposed on the lesser of:
(i) Net investment income or
(ii) The excess of modified adjusted gross income (AGI) over the threshold amount ($200,000 for single individuals or heads of households; $250,000 for married couples filing a joint return and surviving spouses; and $125,000 for married couples filing separate returns).

Net investment income includes interest, dividends, royalties, rents, gain from disposing of property from a passive activity, and income earned from a trade or business that is a passive activity. In determining net investment income, investment income is reduced by deductions properly allowable to that income.

Net investment income does not include distributions from qualified retirement plans, including pensions and certain retirement accounts. For example, income from individual retirement accounts (IRAs), 401(a) money purchase plans, 403(b) and 457(b) plans would be exempt.

Estates and trusts. Estates and trusts will also pay a 3.8 percent unearned income Medicare contribution tax on the lesser of (1) their undistributed net investment income for the tax year or (2) any excess of their adjusted gross income over the dollar amount at which the highest tax bracket for estates and trusts begins for the tax year (currently at $11,200, but subject to inflation adjustment each year). Charitable remainder and other tax-exempt trusts are excluded.

INDIVIDUALS
Starting in 2014, the health care reform package (the Patient Protection Act as amended by the Reconciliation Act) requires most individuals not eligible for Medicaid, Medicare, other government-sponsored coverage or otherwise exempt from the universal coverage requirement to maintain minimum essential coverage. Individuals who fail to maintain minimum essential coverage will be liable for a penalty. The health care package uses a formula to calculate the penalty taking into account the taxpayer’s household income and a flat dollar amount.

The monthly penalty with respect to an adult individual who fails to carry minimum essential coverage is equal to 1/12 of the greater of the:
• Flat dollar amount, or
• Applicable percentage of income.

The flat dollar amount starts at $95 in 2014, rises to $395 in 2015 and increases to $695 in 2016. For calendar years after 2016, the flat dollar amount is indexed for inflation.

FSAs AND HSAs
The health care reform package modifies the definitions of qualified medical expenses for health FSAs, HSAs, and HRAs to conform them to the definition used for the medical expense itemized deduction beginning in 2011. Thus, over-the-counter medicines are excluded unless prescribed by a health care professional. The health care package also caps health FSA contributions at $2,500 per year after 2012, which is indexed annually for inflation after 2013. The health care reform package also increases the additional tax on nonqualified distributions from HSAs from 10 percent to 20 percent and from Archer MSAs from 15 to 20 percent beginning in 2011.

MEDICAL EXPENSE DEDUCTION
The health care reform package raises the threshold for the itemized medical expense deduction from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI for regular income tax purposes effective for tax years beginning after December 31, 2012. However, individuals age 65 and older (and their spouses) will be temporarily exempt from the increase. The exemption for seniors applies to tax years beginning after December 31, 2012 and before January 1, 2017.

ADULT CHILDREN COVERAGE
The health care reform package extends the employer-provided health coverage gross income exclusion to coverage for adult children under age 27 as of the end of the tax year. Self-employed individuals are allowed a deduction for the premiums paid on such dependent coverage.

ADOPTIONS
The health care reform package makes the adoption credit refundable. It also raises the dollar limitation for the credit to $13,170 and extends the credit through 2011. The health care package also enhances the incentives for adopting children with special needs and the adoption assistance exclusion.

INFORMATION REPORTING
The health care reform package imposes new information reporting requirements. Generally, businesses that pay any amount greater than $600 during the year to corporate and non-corporate providers of property and services will be required to file an information report with each provider and with the IRS.

The preceding excerpt was taken from the March 30 CCH Tax Briefing issued by CCH, a Wolters Kluwer business.

Going forward, this legislation will affect your personal and business tax planning. We are here to help. Contact your DGC representative directly with any questions related to your personal circumstances. You can also find helpful links posted on the Resources page on our web site.

A&E Update: Initial findings of annual survey chronicles impact of recession
DGC has released the initial findings from its 2010 Architectural Study. This year’s study is evidence of just how hard the A&E industry has been hit in the past year. New England was hit particularly hard due to the concentration of A&E firms in this region. Over 90% of firms experienced layoffs and/or pay cuts and as a result, average hourly rates for employees were down 5%, indicating a deflation in wages. On average, profitability was a meager 1% of net fee, with half of the firms operating at a loss during 2009.

“It was devastating for many firms, to say the least,” said David M. Sullivan, CPA and Partner in charge of the A&E group at DGC, "This recession has taken its toll on the A&E industry financially and emotionally when you take into account the staggering number of staff cuts that were made. Currently, we are starting to see it level off, which indicates that most firms are ‘right-sized’ for now, but serious management challenges remain. Pricing is very competitive now and many firms are still dealing with a fixed cost structure that remains from a larger firm; returning to consistent profitability will be challenging in 2010. We are encouraging firms to maintain adequate working capital levels and to keep their relationships with banks in good standing.”

The DGC 2010 Architectural Study reports the average utilization of A&E firms dropped by 20%to 58.6%, the lowest chargeability rate on record. At the same time, overhead rates shot up 16% as firms struggled to balance and reduce their fixed costs in the face of declining volume. The direct labor billing multiple hovered at 3.32, which remains strong while the breakeven ratio rose to 3.24, up from 3.01 in 2009. The end result was that the average firm realized profit per direct hour of just under $1.00.

In addition, two trends emerged as a result of the study which may further impact the industry. First, international expansion seems to have slowed as more and more of those clients fall victim to the global economy. Many foreign countries operate under different contract laws, leaving some U.S. firms with little means of recourse for recouping losses in some cases. Second, the combination of professionals leaving the industry and fewer existing opportunities for new talent entering the industry, may create residual staffing issues.

“We believe, the worst is behind us,” said Chad DaGraca, CPA and a Principal in the A&E group at DGC. “It is going to be a slow recovery. Firms will need to evaluate their strategies going forward. They will need to think about their business model, the types of markets they are in, and how they can leverage their talent and resources to give them a competitive edge.”

One glimmer of hope for the industry may be the number of new start ups. As firms shed talent, many entrepreneurs decided it was time to strike out on their own. “While the overall marketplace is challenging, there is a real opportunity for agile, fast moving, entrepreneurial groups to take advantage of new technology, hire available talent, and deliver projects in non-traditional methods,” said Susan Packard, Co-Founder of Packard Design an architecture, interior design and consulting firm founded on 11/30/09. “All this leads to a leaner, more efficient service provider.”

DGC’s annual survey benchmarks financial performance based on input from over 30 prominent firms in the Greater Boston marketplace. The study contains some of the most comprehensive, historical data available for New England firms. Elements of the study will be discussed at DGC’s upcoming A&E Northeast Management Summit in June. For details, visit www.dgccpa.com/aesummit.

DGC Pacesetter Award DGC Receives 2010 Pacesetter Award
On April 16, DGC was recognized, along with the other honorees, at the 2010 Pacesetters Breakfast at Boston’s Westin Copley Place. The firm placed 39th among the 50 fastest-growing companies, which had double digit and, in some cases, triple digit growth. This marked the third year in a row that DGC has made the list.

"This gives us a chance to see how we measure up against other private companies, not just other CPA firms,” said Lenny DiCicco, Managing Partner. "We’re proud to be considered a Pacesetter. It speaks to who we are as a firm and what we hope to accomplish.”

The annual Boston Business Journal Pacesetters list honors the fastest-growing private companies in Massachusetts, based on three years of revenue. The list was determined by survey information gathered and analyzed by the Boston Business Journal.

MA Limited Amnesty Program
The Massachusetts Department of Revenue has announced a limited amnesty program for taxpayers with existing business tax liabilities, beginning on April 1, 2010 and ending on June 1, 2010 to encourage the payment of delinquent tax obligations.

The program applies to tax years ending on or before December 31, 2009 and is limited to taxpayers with existing business tax liabilities for some 20+ different types of state tax categories. However, no income tax categories are included in the program. The Department of Revenue will notify taxpayers of their eligibility to participate. Only notified taxpayers will be eligible. Under the amnesty program, if a notified taxpayer pays the full amount of tax and interest due, all unpaid penalties will be waived. Any eligible taxpayer who fails to make full payment of all tax and interest due under the program may be imposed an additional penalty of up to $500 per tax period.

April 26 Cambridge Chamber – Gov’t Affairs – Michael Capuano
April 27 Turnaround Management Association (TMA) – Asset Based Lending Panel
April 27 Real Estate Finance Association (REFA) – REIT Revival
April 28 Association for Corporate Growth (ACG) – Spring Networking Night
May 1 MitoAction – Derby Day Benefit
May 4 Cambridge Chamber – May Networking Breakfast
May 4 Real Estate Finance Association (REFA) – Federal Receiverships
May 6 Boston Business Journal – Capital Sources After the Fall
May 11 Greater Boston Chamber – Gov’t Affairs Forum – Timothy Cahill
May 11 Real Estate Finance Association – Industry Leaders Series
May 13 Association for Corporate Growth (ACG) – DealMakers Breakfast
May 13-24 Turnaround Management Association (TMA) – Credit & Bankruptcy Symposium