Determining Full-Time Status under Affordable Care Act

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The Affordable Care Act, imposes a penalty on an “applicable large employer” that either fails to offer its full-time employees and their dependents the opportunity to enroll in certain minimum essential and/or affordable care coverage.  The ACA defines an applicable large employer, with respect to any calendar year, as an employer that employed an average of at least 50 full-time employees on business days during the preceding calendar year. For this purpose, the term “full-time employees” means the sum of the employer's full-time employees and full-time equivalent employees.  The IRS has now issued Notice 2012-58 which provides guidance on the determination of full-time status.

Existing Employees:  In a prior Notice, the IRS both described a possible approach to determining whether existing employees were full-time.  This approach would permit employers to use an optional “look-back safe harbor period” to determine whether ongoing (rather than newly hired) employees are full-time.  Practitioners responded favorably to this approach, and the IRS issued Notice 2012-58 which essentially adopts this approach.  Under the look-back method, an employer determines each ongoing employee's full-time status by looking back at a standard measurement period (3 to 12 consecutive months) chosen by the employer. The employer gets to determine the months in which the standard measurement period starts and ends, subject to a requirement that it be uniform and consistent for all employees in the same job category.  If the employer determines that an employee averaged at least 30 hours per week during the standard measurement period, then the employer would be required to treat the employee as a full-time employee during a subsequent “stability period”  without regard to the employee's number of hours of service during such stability period. The stability period would be a period of at least 6 months that is no shorter than the standard measurement period, and that begins after the standard measurement period.

Recognizing that employers may need time between the standard measurement period and the stability period to determine which ongoing employees are eligible for coverage and to notify and enroll those employees, Notice 2012-58 provides an optional administrative period safe harbor. This administrative period following the standard measurement period and may last up to 90 days. However, the administrative period between the standard measurement period and the stability period may neither reduce nor lengthen the measurement period or the stability period.

New Employees:  In a prior Notice the IRS had also described a possible approach to determining the full-time status of new employees working variable hours.   A variable hour employee is an employee where, based on the facts and circumstances on the date the employee starts work, it cannot be determined if the employee will work an average of at least 30 hours per week.  Under the possible approach described in the prior Notice, employers would be given 3 months (or 6 months in some cases), to determine whether a variable hour new employee is a full-time employee, without incurring a penalty under the ACA.  After considering this possible approach, many practitioners requested that employers be allowed to use a look-back measurement period of up to 12 months.   In response, the IRS expanded the proposed approach in a manner similar to that available for existing employees (by use of a 3 to 12 month look-back measurement period, a stability period, and the use of an administrative period).  The same rules would also apply to seasonal employees.  But once a new employee is employed for an entire measurement period, the employee must be retested for full-time status beginning with that standard measurement period at the same time and under the same conditions as other existing employees.

Reliance on the Notice:  Employers may rely on the safe harbors contained in Notice 2012-58 for compliance with the ACA at  least through the end of 2014.

If you have questions on how to determine full-time status of your employees for purposes of the ACA, or otherwise how to comply with the ACA, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.    We all face the prospect of a darker tax climate in 2013 for investment income and gains. Under current law, higher-income taxpayers will face a 3.8% surtax on their investment income and gains. Additionally, if the "tax break" sunsets go into effect, all taxpayers will face higher taxes on investment income and gains, and the vast majority of taxpayers also will face higher rates on their ordinary income. Plus, the tax break sunsets will increase estate and gift taxes. As a result, year-end gifts to family members can yield even greater overall family tax savings than in prior years.  Give me a call if you want to discuss gifting property or investments to your children or grand-children.  Jsenney@pselaw.com or 937-223-1130.

False Claims Act

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The False Claims Act is a federal law that imposes liability on contractors who defraud governmental programs. The law includes a provision that allows people who are not affiliated with the government to file legal actions on behalf of the government.  These whistleblowers are eligible to receive a portion (15–25%) of any damages recovered. Claims made under the law often involve health care, military and other government spending programs.  The federal government  has recovered tens of billions of dollars under the False Claims Act since 1987.

Under the Act, a person is liable when he or she improperly receives payment from, or avoids payment to, the federal government. The Act prohibits:

• Knowingly presenting, or causing to be presented a false claim for payment or approval;
• Knowingly making, using, or causing to be made or used, a false record or statement material to a false or fraudulent claim;
• Conspiring to commit any violation of the False Claims Act;
• Falsely certifying the type or amount of property to be used by the government;
• Certifying receipt of property on a document without completely knowing that the information is true;
• Knowingly buying government property from an unauthorized officer of the government, and;
• Knowingly making, using, or causing to be made or used a false record to avoid, or decrease an obligation to pay or transmit property to the government.

The most frequent claims involve situations where someone overcharged the federal government for goods or services. Other typical claims involve failure to test a product as required by government specifications or selling defective products.

Certain claims are not actionable, including: (a) certain actions against armed forces members, members of Congress, members of the judiciary, or senior executive branch officials; and (b) claims, records, or statements made under the Internal Revenue Code including tax fraud.

There are rather unique procedural requirements in False Claims Act cases. For example: (i) complaints under the False Claims Act must be filed under seal; (ii) complaints must be served on the government but must not be served on the defendant; and (iii) complaints must be supported by a detailed memorandum, not be filed in court, but be served on the government detailing the factual support for the complaint.

If you are a contractor dealing with the federal government, you need to be very careful when delivering or billing for services or products to avoid inadvertently violating the Federal Claims Act.    If you would like to know more about the Federal Claims Act please call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING. Under the federal income tax code, “S” corporations are not permitted to be owned by corporate shareholders. So “S” corporations cannot be part of a parent-subsidiary consolidated group of corporations. One way around this limitation is to use qualified “S” subsidiaries commonly referred to as “QSSS”. Call or email me if you have a question about QSSS. Jsenney@pselaw.com or 937-223-1130.

Sunsetting Tax Provisions: What to Do?

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Congress is headed towards a battle over sunsetting tax rules, already expired tax breaks, and soon-to-expire tax breaks.  It appears that this fight won’t end until late this year. A reasonable alternative would be for Congress to give itself some time to work out a comprehensive tax reform plan by deferring the expiring tax provisions for another year. But in today's partisan political environment, a reasonable, albeit temporary, solution may not prevail. It therefore seems wise to consider and plan for both the best and worst scenarios, so you are ready to make a move when the legislative picture becomes clearer.

Below is a summary of some of the more important sunsetting tax law changes that you should consider.  You should discuss these items with your tax advisor and get prepared.

Tax rates will go up for most everyone.  The 10% bracket will disappear.  The lowest bracket will be 15%.  The top four brackets will rise from 25%, 28%, 33% and 35%  to  28%, 31%, 36% and 39.6%.
Long-term capital gain will be taxed at a maximum rate of 20% (18% for assets held more than five years).  Dividends paid to individuals will be no longer qualify for capital gain treatment and will be taxed at the same rates that apply to ordinary income.

The exclusion for employer-provided educational assistance will end after 2012.  The deduction for student loan interest will phase out over lower modified adjusted gross income (AGI) ranges and will only apply to interest paid during the first 60 months.

The standard deduction will be lower.  Most itemized deductions of higher-income taxpayers will be reduced by 3% of AGI above an inflation-adjusted figure.   Higher-income taxpayer's personal exemptions will be phased out when AGI exceeds an inflation-adjusted threshold.

The accumulated earnings tax rate and the personal holding company tax rate will rise from 15% to 39.6%.
The estate tax rules will change dramatically.  The top rate will be 55%.  A 5% surtax on the wealthiest of estates will phase out the benefit of graduated rates.  The unified credit exemption equivalent will be only $1 million, but the family-owned business deduction will be reinstated.  The generation skipping tax will be reinstated, with a top rate of 55% and a GST exemption amount of $1 million.  The gift tax rate will also increase to 55%.

If you would like to discuss any of the sunsetting tax law provisions, please give me a call or email 937-223-1130 or jsenney@pselaw.com.

AND ONE MORE THING. Thinking about selling your business? Do you know how to determine the value of your business? Are you getting paid cash at closing or over time in installments? Are you selling stock or assets? Is the buyer requiring you to make a 338 election?  Is the buyer assuming any liabilities? Are you staying on as an employee or consultant to help transition the business? Is the buyer keeping your employees? Do you know what the tax consequences of the sale will be? There are a lot of things to consider when selling a business. Call or email me if you want to talk about it. Jsenney@pselaw.com or 937-223-1130.

Filing an Affidavit of Non-Ohio Residency

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In a recent Blog I listed numerous steps that a current Ohio resident should take if they want to become a resident of Florida (or some state other than Ohio) for tax purposes.  As pointed out in that Blog, the primary consideration is the length of time you spend in Florida versus Ohio.   But there are many other factors to consider.  To view all the relevant factors, check out my prior Blog post here.

Not discussed my prior Blog was the Affidavit of Non-Ohio Residency.  Under Ohio law, you can create an irrebutable presumption of being a non-Ohio resident if you satisfy the following 5 requirements: (1) during the entire year you had at least one abode outside Ohio; (2) during the year you spent no more that 182 "contact days" in Ohio; (3) you were not a part-year resident of Ohio; (4) by June 1st of the prior year you file an Affidavit of Non-Ohio Residency; and (5) the Affidavit of Non-Ohio Residency does not contain any false statements.

If you can't satisfy all of the above requirements, there is no reason to file the Affidavit (or take the position you are not an Ohio resident).  Even if you do satisfy all the requirements, you may choose not to file the Affidavit.  Filing the Affidavit may act like a red-flag and invite unwanted audit attention.  In addition, filing the Affidavit of Non-Ohio Residency has certain non-tax ramifications.   Other state agencies such as the Ohio Board of Regents, the Ohio Bureau of Motor Vehicles, and the Ohio Elections Division will likely not recognize you as a resident of Ohio.

On the other hand, Florida has an Affidavit of Residency that can be signed and filed with the Florida County Recorder's Office to help establish you as a Florida resident.  More about that in a future Blog.
AND ONE MORE THING.   On July 3, 2012, significant revisions to Ohio’s Consumer Sales Practices Act took effect.  For years, Ohio’s Consumer Sales Practices Act has proved to be both a trap for the unwary and a sword for consumers.  Among the attention getting provisions of the Act were the potential for suppliers to be liable for three times a consumer’s damages and their reasonable attorney fees, a rather unique remedy in Ohio.  However, on July 3, 2012, Ohio entered an era where it becomes one of a growing number of states that provides an opportunity for a supplier to “cure” any claimed violation.  If you are interested in learning more about how to cure a claimed violation of the Consumer Sales Practice Act, see Michael Sander's article at www.pselaw.com or contact Michael at at 937-223-1130 or MSander@pselaw.com.

Severance Payments Not Subject to FICA

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The Court of Appeals for the Sixth Circuit, has recently held in US v. Quality Stores Inc. that severance payments are not subject to FICA taxes.  Accordingly, it allowed a refund of over $1 million in employer and employee FICA taxes paid on the severance payments.   The Sixth Circuit determined that the severance payments at issue qualified as supplemental unemployment compensation benefits under Code Sec. 3402(o) and were not taxable wages for income tax purposes.

Downsizing is rather common in today’s business environment and often results in severance payments to terminated workers. The Court’s decision gives companies who made such payments to terminated workers, and the workers themselves, an opportunity to recover FICA taxes paid on the severance payments.   Future severance payments also may escape FICA taxes under the authority of this Court case.  Employers and terminated employees in the Sixth Circuit, which includes Ohio, Michigan, Kentucky and Tennessee, should carefully consider filing a refund claim.

Some caution is advised however.  The Federal Circuit has reached a contrary result on similar facts.  In view of these conflicting decisions and given the potential amount of revenue involved, the IRS may well appeal the current Court case to the Supreme Court.

If you paid FICA tax with respect to severance payments to terminated employees in the last few years, and you are interested in filing for a refund or finding out more about the court case, please call or email me at 937-223-1130 or jsenney@pselaw.com.

AND ONE MORE THING.  The Small Business Jobs Act of 2010 removed cell phones from the list of items for which detailed substantiation record keeping was required.   To provide guidance concerning how to handle reimbursements and stipends paid to employees who use cellphones, the IRS released Notice 2011-72.   The Notice states that when an employer provides an employee with a cell phone primarily for non-compensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee.  And the IRS will not require the employee to maintain detailed records of business use in order to receive this tax-free treatment.    Please call or email me at 937-223-1130 or jsenney@pselaw.com with any questions.

Want to Be a Florida Resident?

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Some of my older and not-so-old clients have asked about what is required to become a Florida resident for tax purposes.   While there are many relevant factors that determine where someone resides for tax purposes, the most important factor is where you spend most of your time.   Generally, a person is considered as resident of whichever state he or she spends more than half the year.
But many people travel on business and pleasure and may not spend half the year in any one place.  In these situations, the state of residency is determined by looking at where you spend the most time and by examining other factors.  To support your Florida residency you and your spouse should do the following:

1.  Complete and file a Florida Residency Declaration.

2.  Apply for a Florida driver’s license.

3.  Register to vote in Florida.

4.  Become a member of a church in Florida.

5.  Join the Rotary club, Lions Club, Elks club or similar organization in Florida

6.  Join a gym or YMCA or golf club in Florida.

7.  Get a library card from the local Florida library.

8.  Get a land line phone for your Florida house.

9.  Get a new cellphone with a Florida area code number

10.  Register your cars in Florida and get Florida license plates

11.  Change the billing address on all your credit cards to your Florida address

12.  Establish personal banks account in Florida

13.  If you are operating a Florida management company or other business that will provide services to a non-Florida operating company, set up a Florida bank account for the Florida management company.

14.  Set-up a website for the Florida management company and advertise it as providing sales and management consulting services.

15.  Do small Yellow Pages ad for the Florida management company and its business.

16.  Get some Florida management company business cards and stationary printed up.

17.  Develop a relationship with a Florida doctor and dentist

18.  Use credit cards to pay for everything so you have a record of all the days you are in Florida

19.  Consider having someone house sit your non-Florida house while you are in Florida (this is actually a good idea just for protection of the property, but it also makes it more credible that the non-Florida house is your vacation house and the Florida house is your principal residence).

20.   Consider putting the non-Florida house in a trust or family LLC to get it out of your name (this would negate the principal residence gain exclusion on sale of this house so need to think about this one).

Give me a cal if you are interested in moving to Florida and becoming a Florida resident.  We can help you with any questions you may have about the process.

AND ONE MORE THING.    It is that time of year when we need to be thinking about taxes.  Deferring income to next year or accelerating expenses to this year obviously reduces your taxes this year.  But depending on what happens in the upcoming election, you may end up paying tax at a higher tax rate in future years.  Year-end tax planning doesn't occur in a vacuum, and has to take account of your particular situation and goals.  Let me know if you have any questions on year-end tax planning in general or any particular issues.  Jsenney@pselaw.com or 937-223-1130.