Tag: Tax

A Look Ahead: Top 5 Health Law Issues for 2014

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From Affordable Care Act implementation to the continued transition to quality and evidence-based medicine, we expect to see a host of new regulatory and industry changes in 2014. Moreover, federal and state governments will continue to ramp up detection and enforcement of fraud, abuse, and other laws. These changes provide ample opportunities for lawyers to represent and counsel health care industry clients.

In addition to health lawyers, these changes and new opportunities will also affect lawyers who practice in other areas, including business, antitrust, technology, employee benefits, and elder law. Below is an overview of five hot issues in health care law that practitioners – new and seasoned – should monitor in 2014.

1. Affordable Care Act Implementation

Exchanges and the Individual Market. As millions of Americans obtain insurance on the individual market through Exchanges (a.k.a. the “Marketplace”), the ACA individual mandate and the individual insurance market will create a host of issues for health lawyers in 2014. Beginning early in the year, health lawyers will be called on to address coverage, enrollment, and compliance issues. Attorneys and firms looking to expand their ACA practice should consider employee benefits regulations and related legal issues as ACA implementation continues and employers look for help understanding and complying with coverage requirements and pay or play rules.

Medicaid. The ACA’s expansion of Medicaid will also bring increased attention to the Medicaid program in 2014. Attorneys should be prepared to see increased scrutiny of program integrity in the coming year, including inspector general attention at the state and federal levels (e.g., program audits). Attorneys may be called upon to address these and other Medicaid issues in 2014, including issues with eligibility, covered benefits, and movement between Exchanges and Medicaid.

Tax Exemption. Section 501(r) of the Internal Revenue Code, introduced as part of the ACA, requires, among other things, that tax-exempt hospitals conduct a community health needs assessment and adopt a written financial assistance policy. Hospitals that do not meet the 501(r) requirements risk an excise tax, taxing of hospital revenue, and revocation of exempt status. Proposed regulations outlining the 501(r) requirements were released in 2013, and final rules are expected in 2014.

2. Health Information Privacy and Security

This year is shaping up to be another big year for health information privacy and security and the Health Insurance Portability and Accountability Act (HIPAA), as providers, payers, and businesses that support the health care industry (including lawyers) adapt to new compliance requirements and increased liability under the Omnibus Rule regulatory scheme.

This is an area that will be important for health lawyers, as the Omnibus Rule outlines clear compliance requirements for lawyers providing legal services to providers and payers. (For more information on lawyers as business associates, see “Casting a Wider Net: Health Information Privacy is Not Just For Health Lawyers” in the September 2013 Wisconsin Lawyer).

Health lawyers are also awaiting the 2014 release of another major HIPAA rule – expected to outline requirements for tracking uses and disclosures of health information – as well as legislative changes in Wisconsin dealing with confidentiality of mental health records (an in-depth Wisconsin Lawyer article on this is forthcoming).

Lawyers that deal with health information should be familiar with HIPAA and other federal and state laws protecting the confidentiality of health information to address an increased emphasis on HIPAA audits, security, and technology issues in 2014.

3. Provider Reimbursement and Emphasis on Quality Care

Medicare Billing and Payment. As of this writing, Congress is still debating options for repealing the sustainable growth rate (SGR), which is part of a reimbursement formula used to calculate Medicare physician payments. For years, the SGR has resulted in cuts to physician payments. However, Congress has always used SGR “doc fixes” to extend and delay the cuts (most recently, on Dec. 18, 2013, a 23.7 percent cut set to take effect Jan. 1, 2014, was delayed until March).

However, bipartisan efforts in Congress may make 2014 the year of the SGR repeal. Health care attorneys should take note because the SGR repeal will mean significant changes in how Medicare physician reimbursement is calculated, and the wide-spread effect will touch any number of contractual arrangements that use Medicare reimbursement to set compensation terms.

Quality-based Reimbursement. We have seen a steady change from productivity-based compensation models, which pay for volume, to quality-based reimbursement models, and 2014 will continue this progression. Attorneys that represent physicians and physician practices should be prepared for the introduction (or addition) of quality metrics in physician compensation arrangements, as well as an increase in co-management arrangements and opportunities, which engage physicians in hospital management to better align physicians and hospitals.

Narrow Networks. With additional products available in the individual insurance market in 2014 and an increased focus on performance-based contracting, payers are tying rate increases to quality metrics and tightening provider networks. Attorneys representing physician groups may see an increase in narrow network products and, as a result, their clients’ exclusion from networks.

Changing reimbursement concepts are not new but some methodologies will affect physician behavior, require more patient engagement, and influence efficiency as the industry demands accountable care and continues to introduce quality-based incentives.

4. Increased Joint Venture Activity and Market Consolidation

We expect to see increased joint venture activity and market consolidation in 2014. Increasing market share and patient population allows providers and payers to introduce and monitor their quality care initiatives to a broader base of patients and standardize care with the hope of better outcomes and efficiency. Attorneys representing parties in these transactions should be mindful of fair market value and other fraud and abuse requirements, leasing and construction considerations, and potential antitrust implications.

5. Government Enforcement

The health care industry has seen increased government scrutiny, including emphasis on payment, program integrity, and compliance. From Medicare and Medicaid compliance audits, Strike Teams, increased HIPAA penalties, overpayment recoupment, to fraud and abuse self-disclosures and intervening in whistleblower suits, the federal government is improving its enforcement mechanisms used against hospitals and providers. The federal agencies and their contractors have increased their damages and penalty recoveries over the last few years, and we expect this to continue in 2014.

The primary goal of the U.S. Department of Health and Human Services Office of Inspector General’s (OIG) strategic plan for 2014 to 2018 is fighting fraud, waste, and abuse. In order to achieve its goal, the OIG intends to build upon existing enforcement models, refine self-disclosure protocols, and use all appropriate means (including exclusions and debarments) to maximize recovery.

If you are new to health care, or if you want to expand your practice into health law, these areas of strict liability and increased enforcement will be fundamental to your practice in 2014. Understanding the complex regulations and strict liability statutes is fundamental to providing sound legal and business advice to health care clients.

Honorable Mentions

Retail health clinics and on-site health services, changes in medical malpractice standards, increased emphasis on post-acute care, non-physician health care professionals, and the corporate practice of medicine will also be hot topics in 2014.

This article was first published in WisBar Inside Track, Vol. 6, No. 1, a State Bar of Wisconsin publication.

Article by:

Meghan C. O’Connor

Of:

von Briesen & Roper, S.C.

2014 Update for California Employers

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While 2013 was marked by some novel and interesting judicial and administrative decisions, including Quicken Loans (in which the National Labor Relations Board invalidated certain common employee handbook policies), Vance v. Ball State University (in which the U.S. Supreme Court established the parameters of who could be deemed a “supervisor” for employment discrimination purposes), Nelson v. Knight (in which the Iowa Supreme Court opined that an attractive female employee could be terminated because she was “too distracting” to the small business owner), and Purton v. Marriott (in which the California Court of Appeal addressed an employer’s liability for accidents caused by alcohol consumption at its holiday party), the California Legislature also enacted a number of new bills that become effective in 2014.

Among the most significant of these are the following:

Minimum Wage Increase and Resulting Salary Increase to Maintain Exempt-Employee Status (AB 10)

The California minimum wage will increase to $9.00 per hour, effective July 1, 2014, and to $10.00 per hour effective January 1, 2016. A less-advertised consequence of this increase, however, is the impact it will have on the salary test for preserving an employee’s exempt status. Under California law, a supervisor classified as exempt must be paid a monthly salary that is no less than two times the wages paid to a full-time minimum wage employee. After July 1, 2014, the minimum monthly salary to preserve exempt status under California Labor Code section 515, will rise to $3,120 per month, annualized to $37,440. As this change is scheduled to occur mid-year, employers are advised to make their adjustments early, if needed, to avoid this potential pitfall. In addition, under AB 442 the penalties available for minimum wage violations will now include “liquidated damages.”

Wage Rate Increases for Computer Software Employees and Physicians

Labor Code sections 515.5 and 515.6 provide exemptions for overtime for certain computer software employees and licensed physicians who earn a set minimum wage that is adjusted annually by the Division of Labor Standards Enforcement. Effective January 1, 2014, the minimum hourly rate increased to $40.38 (from $39.90) for computer professionals and to $73.57 (from $72.70) for physicians, reflecting a 1.2 percent increase in the California Consumer Price Index. Affected employers should adjust their rates accordingly.

Meal Periods, Rest Breaks, And Now “Recovery Periods” (SB 435)

For several years, the California Code of Regulations has required employers of outdoor-working employees to allow their outdoor workers the opportunity to “take a cool-down rest in the shade for a period of no less than five minutes when they feel the need to do so to protect themselves from overheating.” (Cal. Code. Regs., tit. 8, § 3395, subd. (d)(3).) Previously, an employer who failed to provide these cool-down recovery periods was subject to a citation issued by the California Division of Safety and Health. But now, effective January 1, 2014, SB 435 provides employees with a right, under California Labor Code § 226.7, to seek recovery of statutory damages each workday that an employer fails to provide an employee with these cool-down recovery periods. Employers with outdoor-working employees should review their current policies and practices to ensure that meal periods, rest breaks, and recovery periods are addressed and afforded. 

Making It Harder For Prevailing Employers To Obtain Attorney’s Fees And Costs In Wage Cases (SB 462)

California Labor Code Section 218.5 allows the “prevailing party” to recover attorney’s fees and costs in any action brought for the nonpayment of wages (e.g., minimum or overtime wages), fringe benefits, or health and welfare or pension fund contributions. SB 462 amends Labor Code Section 218.5 to make it more difficult for employers to obtain attorney’s fees and costs under this section. Indeed, effective January 1, 2014, to obtain attorney’s fees and costs under Labor Code Section 218.5, an employer must not only be the “prevailing party” in such an action, but the court must also find that the “employee brought the court action in bad faith.” On the other hand, due to the enactment of AB 1386, which amends Section 98.2 of the Labor Code, a final order of the Division of Labor Standards Enforcement can create a lien on the employer’s real property to secure amounts due to a prevailing employee-claimant. Unless the lien is satisfied or released, it will continue for 10 years after the date of its creation.

The IRS To Begin Enforcing Its Rule That Automatic Gratuities Are Wages, Not Tips

Restaurants often add automatic gratuities on the bill of large parties (for example, a 20% automatic gratuity for parties of eight or more). Previously, for IRS purposes, these automatic gratuities were considered part of an employee’s “tips,” and thus the employee could pocket their share of automatic gratuities, and it was up to the employee to report them to their employer and on their tax return. Starting in 2014, however, the IRS will treat an employee’s portion of automatic gratuities as the employee’s regular wages and, as such, they will be subject to tax withholdings by the employer. Thus, employees will now receive their portion of automatic gratuities as part of their normal paychecks, and employers will be tasked with the responsibility of actively monitoring these wages, performing the necessary tax withholdings, and correctly reporting these wages to the IRS. Notably, because automatic gratuities will now be considered part of an employee’s regular wages for IRS purposes, employers should analyze whether they are required to account for these automatic gratuities when computing an employee’s overtime rate.

Wage Withholdings (SB 390)

Under Labor Code Section 227, it is unlawful for an employer to willfully, or with the intent to defraud, fail to make agreed-upon payments to health and welfare funds, pension funds or vacation plans, or other various benefit plans. SB 390 amends this provision so that it is now also unlawful for an employer to fail to remit withholdings from an employee’s wages that were made pursuant to state, local, or federal law, such as taxes. SB 390 further provides that in criminal proceedings under this section, any withholdings that are recovered from an employer shall be forwarded to the appropriate fund or plan and, if restitution is imposed, the court shall direct to which agency, entity, or person it shall be paid. 

Criminal History Inquiries (SB 530)

On October 10, 2013, Governor Jerry Brown approved SB 530, which amends California Labor Code Section 432.7 to include additional prohibitions for employers related to pre-employment inquiries into an individual’s prior criminal history. California law already prohibits employers from asking applicants to disclose, or from using, arrest records. Effective January 1, 2014, employers are prohibited from asking job applicants to disclose, or from utilizing as a factor in determining any condition of employment, information concerning a conviction that has been judicially dismissed or ordered sealed. SB 530 exempts employers from the above requirements in the following circumstances: (1) the employer is required by law to obtain such information; (2) the applicant would be required to possess or use a firearm during the course of the employment; (3) an individual who has been convicted of a crime is prohibited from holding the position sought by the applicant, regardless of whether that conviction has been expunged, judicially ordered se
aled, statutorily eradicated, or judicially dismissed following probation; and (4) the employer is prohibited by law from hiring an applicant who has been convicted of a crime.

As with the existing version of Section 432.7, SB 530 allows an applicant to recover from an employer the greater of actual damages or two hundred dollars ($200), plus costs and reasonable attorneys’ fees, for a violation of the statute and the greater of treble actual damages or five hundred dollars ($500), plus costs and reasonable attorneys’ fees, for an intentional violation of the statute. An intentional violation of the statute is a misdemeanor punishable by a fine not to exceed five hundred dollars ($500).

This expanded protection for applicants with criminal conviction records supplements the federal government’s recent efforts on this topic. The U.S. Equal Employment Opportunity Commission has published an Enforcement Guidance on the consideration of conviction records in employment decisions. In order to avoid claims of disparate treatment or impact, the EEOC recommends that employers develop narrow policies that determine the specific criminal offenses that may demonstrate unfitness for particular jobs. The EEOC recommends individualized assessments as opposed to blanket policies. Employers should carefully review their job application form to ensure compliance with these new requirements.

Domestic Worker Bill of Rights (AB 241)

Another wage-and-hour change comes from the Domestic Worker Bill of Rights, which took effect January 1, 2014. The new legislation establishes, among other things, overtime compensation at a rate of one and one-half times the regular rate of pay to caregivers who work more than nine hours a day or more than 45 hours a week. Covered caregivers include those who provide one-on-one care for 80 percent or more of their duties, such as nannies and in-home caregivers of the elderly or disabled. It does not cover babysitters, family members who provide babysitting services, or caregivers of low-income individuals through California’s In Home Supportive Service. Caregivers who work at facilities that provide lodging or boarding are also excluded.

Victims’ Rights to Time Off From Work (SB 288)

Employers may not retaliate or discriminate against employees who are victims of certain felony crimes, domestic violence or sexual assault for taking time off from work to appear in court or to obtain prescribed relief. A new addition to California Labor Code — Section 230.5 — now will also prohibit an employer from terminating or discriminating against an employee who is a victim of certain additional specified criminal offenses from taking time off to appear in court. These specified offenses include vehicular manslaughter while intoxicated, felony child abuse, felony stalking and many other “serious felonies.” The employee-victim may take such time off from work to appear in court to be heard at any proceeding involving a postarrest release decision, plea, sentencing, postconviction release decision, or any proceeding in which a right of the victim is at issue. Employers should include a policy addressing this leave of absence right in their employee handbooks.

Victims of Stalking (SB 400)

Sections 230 and 230.1 of the California Labor Code set forth various protections for victims of domestic violence or sexual assault. SB 400 expands these protections to victims of stalking and also requires employers to provide “reasonable accommodations” to such victims. The bill defines reasonable accommodations to include a transfer, reassignment, modified schedule, changed work telephone, changed work station, installed lock, an implemented safety procedure, or another adjustment to a job structure, workplace facility, or work requirement in response to domestic violence, sexual assault, or stalking, or referral to a victim assistance organization. As with reasonable accommodations for disabilities, employers must engage in a timely, good faith, and “interactive process” with the affected employee to determine effective reasonable accommodations. Again, language should be added to an employee handbook to address this new right.

Family Temporary Disability Insurance Program (SB 770)

Beginning on July 1, 2014, the scope of the family temporary disability program will be expanded to include time off to care for a seriously ill grandparent, grandchild, sibling or parent-in-law. The employee’s certification required to qualify to take such leave to care for a family member must include a number of items, including a statement that the serious health condition warrants the participation of the employee to care for the family member. “Warrants the participation of the employee” includes providing psychological comfort as well as arranging third party care for the family member.

Sexual Harassment Definition Clarified (SB 292)

SB 292 amends the definition of harassment under California law to clarify that sexually harassing conduct does not need to be motivated by sexual desire. This law is intended to overturn the decision in Kelley v. Conoco Companies which had affirmed summary judgment against the plaintiff in a same-sex harassment case on the grounds that the plaintiff had failed to prove that the alleged harasser harbored sexual desire for the plaintiff. This legislation may signal an interest by Sacramento in passing broader “anti-bullying” protections for California employees.

Expansion of Employee Whistleblower Protections (SB 496)

On October 12, 2013, California Governor Jerry Brown signed into law SB 496, which amends Section 1102.5 of the California Labor Code to provide greater whistleblower protections to employees who disclose information related to their employer’s alleged violations of or failure to comply with the law. Specifically, SB 496 now provides that an employee’s disclosure of information to a government or law enforcement agency regarding their employer’s violation of local rules or regulations is a legally protected disclosure. Formerly, employees were only protected if they disclosed information regarding their employer’s noncompliance with state and federal laws. Employees now enjoy complete whistleblower protection for disclosing information if the employee has reasonable cause to believe that the information shows a violation of a state or federal statute, or a violation of or noncompliance with a local, state, or federal rule or regulation. Also, disclosures made to a supervisor of another employee who has the authority to investigate, discover and correct the alleged legal violation is a significant expansion of the protection under SB 496. Interestingly, the statute’s expansion now also includes the circumstance where the employer merely “believes the employee disclosed or may disclose information.” Employers are subject to steep civil penalties, up to $10,000 per violation, if they prevent or retaliate against an employee for an employee’s disclosure of information related to their employer’s violation of the law or refusal to participate in any activity which would result in a violation of local, state, or federal law.

Unfair Immigration-Related Practices (AB 263, SB 666)

AB 263 amends several sections of the California Labor Code, all with the goal of providing greater employee protections for making complaints regarding unsafe, unfair and illegal work practices. First, AB 263 amends Section 98.6 of the Labor Code to include an employee’s written or oral complaint of unpaid wages as a legally protected activity. Employers may not discharge or in any manner discriminate, retaliate or take any adverse action against an employee for making such a complaint regarding unpaid wages owed to them. Under AB 263, employers are now at risk of facing a civil penalty of up to $10,000 per employee for each violation for failing to comply with Section 98.6.

AB 263 further amends the Labor Code by adding protections for immigrant
employees. Under the new Unfair Immigration-Related Practices section of the Labor Code (sections 1019 et seq.), employers may not engage in any unfair immigration-related practice, as defined under the statute, against any employee for the purpose or intent of retaliating against employees for the exercise of any right afforded to them under the law. The term “unfair immigration-related practice” is defined to include: (i) requesting more or different documents than are required under federal immigration law, (ii) refusing to honor immigration-related documents that on their face reasonably appear to be genuine; (iii) using the federal E-Verify system to check the employment authorization status of a person at a time or in a manner not required by federal law, (iv) threatening to file or the filing of a false police report, and (v) threatening to contact immigration authorities. Now, without the threat of reprise from their employer regarding their immigration status, employees are allowed to (1) make a good-faith complaint or disclosure of an employer’s violation of or noncompliance with any federal, state or local law; (2) seek information regarding their employer’s compliance with federal, state or local laws; or (3) inform and assist other employees of their rights or remedies under the law. Employers are subject to heavy sanctions for any unlawful threat, attempt, or actual use of an employee’s immigration status to retaliate against an employee for engaging in legally protected workplace activities. Sanctions may include, but are not limited to, up to a 90-day suspension of the employer’s business licenses and a host of other civil damages.

Another legislative enactment, SB 666, provides that businesses licensed under the Business and Professions Code (including lawyers, accountants, engineers, and contractors) are subject to suspension, revocation, or disbarment if they are determined to have reported or threatened to report an employee’s, former employee’s, or prospective employee’s citizenship or immigration status, or the citizenship or immigration status of a family member of the same, to a federal, state, or local agency because the employee, former employee, or prospective employee exercises a right under the provisions of the Labor Code, the Government Code, or the Civil Code. In addition to any other remedies available, the bill provides for a civil penalty, not to exceed $10,000 per employee for each violation, to be imposed against a corporate or limited liability company employer. The bill contains an important exception, stating that an employer is not subject to suspension or revocation for requiring a prospective or current employee to submit, within three business days of the first day of work for pay, an I-9 Employment Eligibility Verification form. (Beginning not later than January 1, 2015, the DMV will be required to issue driver’s licenses to certain non U.S. citizens, although this particular form of driver’s license may not be used to verify employment eligibility for purposes of a Form I-9.)

Finally, certain unfair immigration-related practices are also a crime. For example, Penal Code section 518 defines “extortion” as the obtaining of property from another, with his/her consent, or the obtaining of an official act of a public officer, induced by a wrongful use of force or fear. Extortion is punishable as a felony by up to four years in jail. AB 524, which amends the Penal Code, provides that “wrongful use of force or fear” now includes the threat to report an individual or their family’s immigration status or suspected immigration status.

Expansion of Leaves of Absence for Emergency Duty (AB 11)

Existing California law requires employers to provide temporary leaves of absence for volunteer firefighters so that they could attend required fire or law enforcement trainings. AB 11 expands the protected leave rights for volunteer firefighters, reserve peace officers, and emergency rescue personnel, and allows for leave for emergency rescue training in addition to fire or law enforcement training. The law applies only to employers with 50 or more employees. Under the law, employees that are fired, threatened with being fired, demoted, suspended, or otherwise discriminated against because they took time off for qualifying training are entitled to reinstatement and reimbursement for lost wages and benefits. Employee handbooks should be revised to comply with this expanded law.

Military and Veteran Status Is Now a Protected Category Under the FEHA (AB 556)

AB 556 broadens the scope of “protected categories” under the California Fair Employment and Housing Act to include “military and veteran status.” Under the law, an employee with “military and veteran status” is defined as a member or veteran of the United States Armed Forces, United States Armed Forces Reserve, the United States National Guard, and the California National Guard. The law provides an exemption in circumstances where an employer makes an inquiry into an employee’s military status to afford the employee preferential treatment in hiring. All equal employment opportunity policies should now include this additional protected category.

Family Friendly Workplace Ordinance

San Francisco’s Family Friendly Workplace Ordinance (“FFWO”) became effective on January 1, 2014. As currently written, the ordinance applies to employers with 20 or more employees, although an amendment is expected to pass early in the year which will clarify that the ordinance applies regardless of where the 20 employees are based. The ordinance provides employees who are employed within San Francisco, who have been employed for six months or more, and who work at least eight hours per week with the right to request flexible work arrangements to assist with caregiving responsibilities. Such requests may include but are not limited to modified work schedule, changes in start and/or end times for work, part-time employment, job sharing arrangements, working from home, telecommuting, reduction or change in work duties, and predictability in the work schedule. The employee may request the flexible or predictable working arrangement to assist with care for a child or children under the age of eighteen, a person or persons with a serious health condition in a family relationship with the employee, or a parent (age 65 or older) of the employee. Within 21 days of an employee’s request for a flexible or predictable working arrangement, an employer must meet with the employee regarding the request. The employer must respond to an employee’s request within 21 days of that meeting. An employer who denies a request must explain the denial in a written response that sets out a bona fide business reason for the denial and provides the employee with notice of the right to request reconsideration. The ordinance also has posting and recordkeeping obligations and prohibits retaliation for exercising rights protected by the ordinance. Employers with any San Francisco based employees (whether they telecommute or otherwise) should consider revisions to employee handbooks, comply with posting obligations (in English, Spanish, Chinese and any language spoken by at least 5% of the employees the workplace or job site), and establish a procedure to timely handle written requests for flexible work arrangements under the FFWO.

Employers throughout California (whether in San Francisco or not) should also be aware of possible discrimination against workers with caregiving responsibilities, as this might constitute employment discrimination based on sex, disability or other protected characteristics. Some of these issues are summarized in the EEOC’s guidance entitled “Employer Best Practices for Workers With Caregiving Responsibilities.” 

Article by:

Of:

Allen Matkins Leck Gamble Mallory & Natsis LLP

Treasury and IRS Provide Thanksgiving Surprise: Proposed 501(c)(4) Political Activity Rules

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As most of America travelled over the river and through the woods to Grandma’s house before the Thanksgiving holiday, the Treasury Department and the IRS delivered their own holiday gift.  On Tuesday, November 26, they released proposed guidance aimed at clarifying which conduct by tax-exempt social welfare organizations – 501(c)(4) entities – qualifies as political campaign activity.

Under existing IRS regulations, the promotion of social welfare does not include direct or indirect participation in political campaigns on behalf of or in opposition to any candidate.  Over the years, the IRS has used a wide-ranging facts and circumstances test to determine whether an organization is engaged in an impermissible level of political campaign activity.  In the aftermath of the recent IRS scandal regarding the review of 501(c)(4) applications, Treasury and the IRS believe that more definitive political activity rules would reduce the need to conduct fact-intensive inquiries when applying the rules for qualification as a social welfare organization.

To accomplish this objective, Treasury and the IRS have coined a new term, “candidate-related political activity.”  This term encompasses existing definitions of political campaign activity from federal tax and campaign finance laws, and includes the following:

  • Express advocacy communications;
  • Public communications made within 60 days before a general election or 30 days before a primary election that clearly identify a candidate for public office, as well as any other communications that have to be reported to the FEC (including independent expenditures and electioneering communications);
  • Monetary and in-kind contributions to or the solicitation of contributions on behalf of campaign, party and other political committees, and other tax-exempt organizations that engage in political activity; and
  • Other election related activities such as voter registration and get-out-the-vote drives, distribution of candidate or political committee materials, and the preparation and distribution of voter guides.

The proposed rules raise many serious concerns.  For example, candidate-related political activity could include conducting nonpartisan voter registration drives and distributing nonpartisan voter guides.  Moreover, the proposed rules attribute to 501(c)(4) organizations, among other things, political activities conducted by their officers, directors or employees acting in that capacity.

Unfortunately, the draft rules do not elaborate on the possible differences between conduct taken in an official capacity and personal political conduct by an officer, director or employee.  Finally, many contributions from a 501(c)(4) to another tax-exempt organization would appear to qualify as candidate-related activity unless the contributor receives a written confirmation that the recipient does not engage in such activity and the contributor restricts the use of the contribution.

The proposed political activity rules also leave many important issues unaddressed.  Under existing rules, 501(c)(4) entities must be “primarily” engaged in activities that promote the common good or social welfare.  The proposed rules provide no guidance on what proportion of an organization’s activities must be dedicated to this purpose to qualify under section 501(c)(4).   The proposed regulations also do not apply to entities that qualify under Section 501(c)(3) (charitable organizations),  Section 501(c)(5) (labor unions),  Section 501(c)(6) (trade associations), or Section 527 (political organizations).  Treasury and the IRS are, however, accepting comments on the advisability of making changes in each of these areas.  Interested persons may submit comments to the IRS by February 27, 2014.

Article by:

Of:

Womble Carlyle Sandridge & Rice, PLLC

IRS Announces Modification to “Use-It-Or-Lose-It” Rule for Health Care Flexible Spending Accounts

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On October 31, 2013, the Internal Revenue Service (“IRS”) announced a modification to the “use-it-or-lose-it” rule that applies to health care Flexible Spending Arrangements (“FSAs”) under a cafeteria plan. Under the use-it-or-lose-it rule, unused amounts in a participant’s health care FSA for a plan year not used to pay eligible medical expenses incurred during the plan year were required to be forfeited to the employer, unless the employer adopted the 2 1/2 month grace period. The grace period rules permit participants to use amounts remaining from the prior year to pay eligible medical expenses incurred during the first two months and 15 days immediately following the end of the plan year (March 15 for a calendar year plan).

The New Carryover Provision

Under the new rule, an employer, at its option, may permit a participant to carryover to the immediately following plan year up to $500 in unused amounts from a health care FSA. This carryover may be used to pay or reimburse medical expenses under a health care FSA incurred during the entire plan year to which it is carried over. The rule also provides that:

  • The carryover does not count against or otherwise affect the maximum payroll reduction limit for the plan year ($2,500 for 2014).
  • Although the maximum unused amount allowed to be carried over to any plan year is $500, the plan may specify a lower amount.
  • If a plan permits a carryover, the same dollar limit must apply to all plan participants.
  • A plan that adopts the carryover provision is not permitted to provide the FSA grace period.
  • The use of the carryover option does not affect the plan’s ability to provide for the payment of expenses incurred in one plan year during a permitted “run-out” period at the beginning of the following year.
  • A plan is not permitted to allow unused amounts related to an FSA to be cashed out to the participant or used for any other taxable or non-taxable benefit.
  • A plan is permitted to treat reimbursements of all claims that are incurred in the current plan year as reimbursed first from unused amounts credited for the current plan year and, only after exhausting these amounts, as then reimbursed from unused amounts carried over from the previous year.
  • Any carryover amount used to pay for eligible medical expenses in the current plan year will reduce the amounts available to pay claims during the run-out period from the prior plan year.

For example, Jane Smith participates in her employer’s FSA with a calendar plan year, a run-out period from January 1 to March 31, an open enrollment in November for making salary reductions for the following year and the $500 carryover.

In November 2014, Jane elects a salary reduction of $2,500 for 2015. By December 31, 2014, she has $800 remaining from 2014. The plan may treat $500 of the unused $800 as available to pay 2015 expenses. Jane now has a total of $3,000 to spend in 2015. She is reimbursed for a $2,700 claim incurred in July 2015. The plan treats the first $2,500 as reimbursed with 2015 contributions, and the remaining $200 of the claim as reimbursed with unused 2014 contributions (leaving $300 for any further 2015 expenses). If she submits no further claims in 2015, the remaining $300 is carried over to 2016.

Assume these same facts, except that Jane’s $2,700 expense is incurred and submitted in January 2015 (during the 2014 run-out period). Jane is reimbursed for the claim first from 2015 contributions ($2,500) and then from 2014 contributions ($200). Since this claim was incurred during the run-out period, the 2014 run-out amount is reduced to $600 ($800-$200). If on February 1, 2015 Jane receives a medical bill from 2014 for $700 and submits the expense, the plan may only reimburse her for $600 of the total $700 claim. Jane continues to have $300 available for any 2015 expense, which may be carried over to 2016.

Next Steps

An employer that wants to implement the new carryover option must amend its cafeteria plan on or before the last day of the plan year from which amounts may be carried over and the amendment can be made effective retroactively to the first day of that plan year. For example, an employer can amend a calendar year plan on or before December 31, 2013 and have the carryover rule apply for 2013. The employer must notify participants of the new rule.

This increased flexibility will reduce a key barrier for many potential FSA users and may increase enrollment in FSA programs. Participants will no longer have to perfectly predict normally unpredictable health expenses a year in advance. Even though the carryover is limited to $500, the majority of forfeitures under the use-it-or-lose-it rule were less than $500.

Employers should carefully consider whether their employees would benefit from adopting the carryover rule instead of the grace period rule. The carryover rule is limited to $500 but permits the $500 to be used to pay for eligible expenses during the entire year into which it was carried over. In contrast, the grace period rule permits the entire amount of unused dollars in a health care FSA to be used but only to pay expenses incurred during the first 2 1/2 months of the next year.

Employers seeking to modify a 2013 plan that currently has a grace period should also carefully consider the ERISA implications of eliminating the availability of the grace period for 2013 contributions.

Article by:

Eric W. Gregory

Of:

Dickinson Wright PLLC

2013 Year-End Planning for Lesbian, Gay, Bisexual and Transgender (LGBT) Taxpayers

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2013 has been a year of historic change for the LGBT community. The landmark Supreme Court decision in U. S. v. Windsor, decided on June 26, 2013, held that Section 3 of the Defense of Marriage Act (DOMA) (defining marriage for federal purposes as being between a man and a woman) violates the equal protection clause of the Constitution and is therefore unconstitutional.

For married same-sex couples living in one of the 14 states (as of this writing) or District of Columbia which recognize same-sex marriages, their marriages are now recognized for both federal and state purposes. Married same-sex couples living in a state that does not recognize same-sex marriages are left with many questions.

Place of Celebration

On August 29, 2013 the IRS released Revenue Ruling 2013-17 clarifying that where a couple was married (place of celebration) rather than where a couple resides (place of domicile) determines a same-sex couple’s marital status for federal tax purposes. A tremendous benefit of this decision is that married same-sex couples can now travel freely across state lines and be considered married in each state for federal tax purposes. This ruling applies to same-sex marriages legally entered into in a US state, the District of Columbia, a US territory or foreign country. The ruling does not apply to civil unions, registered domestic partnerships or similar relationships that might be recognized under state law but do not necessarily guarantee the same protection as marriage.

Impact on Gift and Estate Taxes

Before the Windsor decision, transfers between same-sex married couples could result in significant gift and estate taxes. Now transfers between same-sex spouses can generally be made with no tax consequences. In addition, certain estate provisions such as portability, the marital deduction and qualified terminable interest property (QTIP) trusts are now available to same-sex married couples. Other commonly used estate and gift planning tools for married couples, such as gift splitting and spousal rollover IRA’s, are also now available to a same sex married couple.

If you die in a state that does not recognize same-sex marriage, your spouse will not automatically inherit under state spousal rights statutes. Therefore, if the couple intends to inherit from each other, a will or living trust is still needed.

Planning tip: An important part of 2013 year-end planning is to review and update wills and estate documents to make sure to take advantage of the new rules and to properly designate beneficiaries.

Impact on Income Taxes

Many married couples have a lower joint tax liability because of netting income and deductions, eligibility for certain tax credits and income exclusions, or have an increased tax liability due to the marriage penalty tax or because of limitations on deductions based on their combined adjusted gross income. For 2013, LGBT couples considered married under the state of celebration rule will have to file their federal tax return as married filing joint or married filing separate, which may cause a shift in tax planning.

Planning tips: As part of 2013 year-end planning, same-sex couples should work with their tax advisors to determine if original or amended returns, using married filing joint or married filing separate status, should be filed for years open under the statute of limitations. The statute for a refund claim is open for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. Projections should be run to compare the potential benefit or cost of a married-joint filing versus separate-single or head of household filing, as there may be a better tax result to leave the returns as filed and not amend.

In addition, same-sex couples should consider credits that might not have been available as single filers, or consider the traditional year-end planning ideas for married couples mentioned in other sections of this guide.

Impact on Benefits

Before the fall of DOMA, benefits provided to the non-employee same-sex spouse, such as employer provided health insurance, flexible spending plans, etc. were paid with after-tax dollars and the benefit was included in the employee’s taxable income. Now, same-sex couples can pay for these benefits with pre-tax dollars and the coverage will not be included in their taxable income. Employees can file amended returns (for years prior to 2013) excluding those benefits from taxable income and request refunds. Also, employers who paid payroll taxes based on previously taxed health insurance and fringe benefits can also file amended returns (Notice 2013-61 provides guidance to employers for correcting overpayments of employment taxes (FICA) for 2013).

On August 9, 2013, the US Department of Labor (DOL) announced that the Family and Medical Leave Act (FMLA) extends only to same-sex marriage couples who reside in states that recognize same-sex marriage.

On September 18, 2013 the DOL announced (in Technical Release 2013-04) that same-sex couples legally married in a jurisdiction that recognizes their marriage will be treated as married for purposes of the Employee Retirement Income Security Act of 1975 (ERISA) and the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The DOL recognizes the marriage regardless of where the legally married couple currently resides. This announcement covers pensions, 401K’s, and health plans.

The Social Security Administration (SSA) also announced that it will process and pay out spousal retirement claims for same-sex spouses. The SSA urges people who believe they are eligible for benefits to apply as soon as possible in order to establish a protective filing date, which is used to determine the start of potential benefits. Under the SSA’s “Windsor instructions”, claims can be filed when the holder of a social security number was married in a state that permits same-sex marriages and resides in a state that recognizes same-sex marriage at the time of application. Once benefits are approved, the recipient can move to any state without disqualification. Applications that don’t meet these criteria are being held for later processing when further guidance is issued.

Planning tips for employees: Employees in a same-sex marriage should consider amending their tax returns if they were paying for employer-provided benefits to their spouse. Employees in a same sex-marriage should also review the benefits their employer offers to married couples to make sure they are taking full advantage of all benefits. Also, same-sex married couples should provide their Human Resource Department with a copy of their marriage license and confirm that the spouse’s insurance coverage is no longer being included in taxable income and/or that an appropriate adjustment will be made for the 2013 calendar year.

Planning tips for employers: Employers should ensure that their benefits packages are in compliance with the new laws. See Rev. Rul. 2013-61 for guidance on how to correct overpayments of employment taxes for 2013 by either adjusting 4th QTR 2013 Form 941, (correcting the 1st -3rd Quarterly filings) or by filing Form 941-X (correcting all quarters of 2013).

Pre- and Post-Nuptial Agreements

Consider agreements for same-sex couples to avoid disagreements and litigation expenses for future possible divorce. State uncertainty remains.The majority of states currently do not recognize same-sex marriages. There are prominent court cases challenging these state laws, and the resulting impacts on tax and estate planning for same-sex married couples are as yet unknown.

Article by:

Janis Cowhey McDonagh

Of:

Marcum LLP

 

The Gift of Education Re: Estate Planning

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Many grandparents want to enrich the lives of their grandkids, but are not sure the best way to accomplish this with their estate plan. I encourage clients to consider helping their grandchildren with the future costs of education. The proper planning can help grandkids avoid hefty loans and be tax-efficient for the donor.

A grandparent may currently gift up to $14,000 per grandchild (or to anyone) per year tax free ($28,000 if a married couple gift-splits). Any gift over that amount requires the filing of a gift tax return.

However, if you pay for a grandchild’s education expenses directly to the provider (i.e., educational institution), the gift is excluded from your annual exclusion amount. For purposes of this exclusion, the term “educational institution” covers a broad range of schooling, such as primary, preparatory, vocational or university institutions. This kind of payment is also exempt from the generation-skipping tax (which is too complicated to explain herein, but can significantly reduce a grandparent’s gifting amount). In short, if you pay $40,000 to cover your grandchild’s tuition directly to the school, you can still gift up to $14,000 tax free to him or her in the same year. Some institutions may even allow a donor to pay upfront the applicable years of education at a locked-in tuition rate, so as to avoid rate hikes.

Another option to consider is a 529 college-savings plan. One of the biggest benefits of this plan is that it can continue operation when the grandparent is no longer around to write checks to an institution. A grandparent can gift up to the annual exclusion per year tax free, or make up to five years’ worth of the annual exclusion gift ($70,000 per single donor or $140,000 per couple) in one year to benefit a single individual. However, this has its drawbacks. If you gift the five year maximum amount in one year, any other annual exclusion gifts to that beneficiary for the next five years will incur gift tax consequences. Further, if you die within five years of the date of the gift, a prorated portion of the gift will be included in the estate tax calculation.

Article by:

Terri R. Stallard

Of:

McBrayer, McGinnis, Leslie and Kirkland, PLLC

Business and Economic Incentives Primer

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Competition among jurisdictions to recruit and retain companies is intense. To attract business to their communities, both state and local governmental authorities will often offer discretionary economic incentives for projects that generate substantial tax revenues or create significant employment opportunities. Companies requiring new or larger facilities or facing lease expirations for their existing operations should assess whether they might qualify for an “incentives package” from the various jurisdictions they are considering for their projects. The potential benefits will typically vary depending upon the project’s key capital expenditures, job creation potential and the company’s corresponding wage parameters and associated commitments. Companies with potentially qualifying projects should evaluate how to best leverage their unique strengths to negotiate all available incentive benefits and to maximize those benefits once they are secured.

Business and economic incentives are the tax, cash and in-kind benefits offered by state and local governments to induce a company to relocate to a new community or remain in its existing jurisdiction primarily to create or retain jobs and increase tax revenue. Incentives help businesses mitigate upfront capital and ongoing operating costs for its required projects. Tax incentives include a variety of income and sales/use tax credits, exemptions, reductions and abatements. These can also include other tax-related investment incentives, such as investment and tax credits, research and development tax incentives, and accelerated depreciation of industrial equipment. The Enterprise Zone (EZ), a special kind of tax incentive program (also known as Empowerment Zones and Empowerment Communities), has been used by the federal government and even more widely by many states.

Cash incentives include monetary grants, reimbursements of transportation or infrastructure costs and other financial incentives including alternative financing subsidies. One of the most common benefits in this category is the Industrial Development Bond (IDB) that is used by jurisdictions to offer low-interest loans to firms. A variation on the IDB is the Tax Increment Financing (TIF) districts that are used by many states. A TIF allows governments to float bonds to help companies based on their anticipated future tax impact. In-kind incentives include expedited permitting by the state, county and local municipality and customized worker training programs. Some jurisdictions also offer other in-kind benefits such as watered-down environmental regulations and “right to work” laws that inhibit union organizing. Some states also have federal grant monies they are empowered to allocate towards different programs and projects depending on a project’s possible “public” infrastructure needs and other specific criteria.

In offering incentives, cities and counties are typically driven more by investments that increase the tax base while states focus more on jobs that pay above average wages. Some jurisdictions will provide incentives only for manufacturing projects or for specific statutory lists of facilities such as manufacturing, distribution facilities, air cargo hubs, multimodal facilities, headquarters facilities and data centers. Other states will not provide incentives for retail or hospitality facilities. In general, cities and counties have more flexibility than states in the kinds of projects for which they will provide incentives. Some states have wage tests and require that health care insurance and benefits be provided at the employer’s cost or that at least a portion of the cost be subsidized.

Whether for a corporate expansion or relocation, it is critical for a company to initiate its incentive identification and negotiation efforts early in the site-selection process for its project. Specifically, to achieve the greatest negotiating leverage, a company should begin the pursuit of economic incentives at the same time it is are undertaking its site selection efforts, since it is at this point in the process that competition readily exists between the cities, counties and/or states interested in enticing the company to relocate or remain in their jurisdictions. Since the success of this process is, in part, dependent upon “competing” the relevant state and local jurisdictions, it is important for a company to make it clear to all who are acting for the company that no decision or no public announcement may be made about the company’s plans until the company has evaluated all relevant factors.

To begin the process, a company should form a project team that will work with various economic development representatives from the relevant jurisdictions to achieve the optimal incentives package. The project team should develop a formal incentives negotiation strategy that would include some if not all of the following components:

  • Identifying and analyzing all incentive opportunities available for the project.
  • Determining the company’s short and long term capital and operating costs as well as job creation estimates.
  • Preparing a preliminary “incentives” pro forma.
  • Outlining the plan for securing the incentives and evaluating the related commitments that will be necessary from the company.
  • Identifying and integrating important components of the company’s corporate culture into the negotiation requests and strategy.
  • Determining the essential needs of the project to be included as the non-negotiable points of the company’s business case.
  • Defining the “business case” for why a jurisdiction would benefit from the company’s relocation to that state/county, such as tax (income and sales) revenues to be generated and the jobs to be created by the company.
  • Identifying how to formulate the most productive partnership between the company and the community.
  • Determining how to work creatively within the state and local framework.
  • Considering the use of a third party economic impact study to create an effective business case showing the jurisdiction how to fund the incentives.

A company that is well positioned to benefit from business and economic incentives should engage a seasoned professional who has a successful track record in achieving incentive benefits from the jurisdictions relevant to its business. Working in coordination with the governmental authorities, the right advisor can assist the company in establishing timelines for critical dates, administering applications to secure the incentives, and obtaining formal jurisdictional approvals to ensure compliance is implemented and negotiated incentives are realized. The advisor will also participate, as requested, in presentations for internal and governmental board approval and provide ongoing information and updates to the company during key phases of the incentive pursuit process.

After the final incentives package has been negotiated, the company and the jurisdiction will prepare and negotiate the required incentives agreements and then pursue the formal final governmental approvals. Public relations personnel for the company and the governmental authority are typically involved at this stage to prepare supporting media releases and project announcements. Once all necessary approvals are obtained, the company must establish internal documentation and processes to satisfy the compliance requirements to realize the negotiated incentives, which typically takes the form of a compliance manual.

Business and economic incentives can be valuable tools for a company to reduce costs, increase savings and manage risks as they pursue a signature lease transaction, building acquisition or facility development. To achieve the optimal result, the incentives process must be carefully managed from inception to completion, toward the ultimate goal of creating a meaningful partnership between the company and the community in which the company will conduct its business.

This article originally was published in the August 2013 edition of “Focus on WMACCA,” the newsletter of the Washington Metropolitan Area Corporate Counsel Association. 

This article was written with Scott R. Hoffman with Cushman & Wakefield.

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Government Shutdown Now Over – But What About Sequestration?

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The government may be back up and running and funded under a short-term continuing resolution (CR), but the battle is far from over as Congress heads toward new deadlines to address budgetary matters.  There has been some confusion about what the current budget agreement means in terms of sequestration’s annual cuts to discretionary and mandatory programs instituted in 2012.  The law signed by the President to address the short-term continuing resolution and temporarily raise the debt ceiling does not provide federal agencies flexibility to administer new sequestration cuts at this time.  With the government spending levels remaining at FY 2013 levels for the duration of the CR, a new round of sequester cuts are not set to kick in until January 2014.

The law established a short-term budget conference committee, with a set deadline of Dec. 13, 2013 to outline recommended spending levels and program cuts.  Of note is that the committee deadline is set in advance of when the second year of the sequester will begin.  The deadline provides a window of opportunity for the new budget conferees to address how the sequester cuts are applied in FY 2014.   The conferees may contemplate making other adjustments to entitlement programs (Medicare and Medicaid) to address health care spending issues that will be negotiated during their deliberations.  In addition, Medicare payments to physicians are set to be cut by approximately 25 percent if Congress does not address the cut by December 31, 2013 and offset the cut with a payfor that would likely include cuts to other health care entities. Any of these negotiations and decisions, if ultimately accepted by Congress, could impact the size of the Medicare sequester cuts in January FY 2014.

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A Tip For Dealing with Automatic Gratuities in 2014

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A new Internal Revenue Service (“IRS“) rule, set to take effect in January 1, 2014, may eliminate a common practice in the restaurant industry. Often, an automatic gratuity, normally 18%, is added to the bill of large parties. Automatic gratuities were adopted by restaurant employers as a means for ensuring that servers do not get stiffed on expensive bills. Servers heavily rely on tips to supplement a salary that is often times lower than the federal minimum wage.

Traditionally, automatically-added gratuities have been classified as employee tips. As such, it is up to the employees to report the money as income. Starting in January, automatic gratuities will be categorized as “service charges” – making them regular wages and subject to payroll tax withholdings. Employers will have to track and report any automatic tips and will be required to include the “service charge” payments in employees’ W-2 wages. Further, employers will no longer be able to count these tips as a credit to reduce their minimum wage obligation. It is a lose-lose situation because servers will not see their automatic gratuity money until payday; making it more difficult to survive on a small salary.

Many major chains, like Olive Garden and Red Lobster, have eliminated automatic gratuities in response to the approaching deadline. For restaurants that opt to keep the automatic gratuity system, payroll accounting will become much more complicated. Tips from automatic gratuities will have to be factored into hourly pay rates, which means hourly rates could vary based on how many large parties are served in any given hour.

It would be wise for smaller restaurants to follow the chain restaurants’ lead by eliminating automatic gratuities altogether. Doing so will not only to lessen compliance requirements and tax burdens, but will also keep employees happy by ensuring that the tips they earn can immediately be pocketed.

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IRS Guidance on Employment and Income Tax Refunds on Same-Sex Spouse Benefits

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Employers extending benefit coverage to employees’ same-sex spouses and partners should review their payroll procedures to ensure that such coverages are properly taxed for federal income and FICA tax purposes.  Employers also should review the options in Notice 2013-61 and consider filing claims for refunds or adjustments of FICA overpayments.

Employers that provided health and other welfare plan benefits to employees’ same-sex spouses prior to the Supreme Court of the United States’ June 2013 ruling in U.S. v. Windsor may be interested in filing claims for refunds or adjustments of overpayments in federal employment taxes on such benefits.  To reduce some of the administrative complexity of filing such claims, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) recently issued Notice 2013-61, which outlines several optional procedures that employers can use for overpayments in 2013 and prior years.

String of pearls and champagne glass with wedding rings

In Windsor, the Supreme Court ruled Section 3 of the Defense of Marriage Act (DOMA) unconstitutional.  Section 3 of DOMA had provided that, for purposes of all federal laws, the word “marriage” means “only a legal union between one man and one woman as husband and wife,” and the word “spouse” refers “only to a person of the opposite-sex who is a husband or wife.”

Federal Taxation of Same-Sex Spouse Benefits

The Windsor ruling thus extends favorable federal tax treatment of spousal benefit coverage to same-sex spouses.  The IRS issued guidance in July clarifying that this tax treatment would extend to all same-sex couples legally married in any jurisdiction with laws authorizing same-sex marriage, regardless of whether the couple resides in a state where same-sex marriage is recognized.  This IRS approach recognizing same-sex marriages based on the “state of celebration” took effect September 16, 2013.

Prior to the ruling, an employer that provided coverage such as medical, dental or vision to an employee’s same-sex spouse was required to impute the fair market value of the coverage as income to the employee that was subject to federal income tax (unless the same-sex spouse qualified as the employee’s “dependent” as defined by the Internal Revenue Code).  The employer was required to withhold federal payroll taxes from the imputed amount, including federal income and the employee’s Social Security and Medicare (collectively FICA) taxes.  In addition, employers paid their own share of FICA taxes on the imputed amount, as well as unemployment (FUTA).

As a result of the ruling, an employee enrolling a same-sex spouse for benefit coverage under an employer-sponsored health plan no longer has imputed income for federal income tax purposes; may pay for the spouse’s coverage using pre-tax contributions under cafeteria plans; and may take tax-free reimbursements from flexible spending accounts (FSAs), health reimbursement accounts (HRAs) and health savings accounts (HSAs) to pay for the same-sex spouse’s qualifying medical expenses.  This same favorable federal tax treatment does not extend to employer-provided benefits for an unmarried same-sex partner, unless the same-sex partner qualifies as the employee’s dependent.

Overpayments of Employment Taxes in 2013

Employers that overpaid both federal income and FICA tax in 2013 as a result of income imputed to employees for benefit coverage for a same-sex spouse may use the following optional administrative procedures for the year:

  • Employers may use the fourth quarter 2013 Form 941 (Employer’s Quarterly Federal Tax Return) to correct overpayments of employment taxes for the first three quarters of 2013.  This option is available only if employees have been repaid or reimbursed for over-collection of FICA and federal income taxes by December 31, 2013.

Alternatively, employers may follow regular IRS procedures to correct an overpayment in FICA taxes by filing a separate Form 941-X for each quarter in 2013.  Notice 2013-61 provides detailed instructions for each of the alternative options, including how to complete the Form 941, as well as Form 941-X, which requires “WINDSOR” in dark, bold letters across the top margin of page one.

Overpayments of FICA Taxes in Prior Years

Employers that overpaid FICA taxes in prior years as a result of imputed income for same-sex spousal benefit coverage may make a claim or adjustment for all four calendar quarters of a calendar year on one Form 941-X filed for the fourth quarter of such year if the period of limitations on such refunds has not expired and, in the case of adjustments, the period of limitations will not expire within 90 days of filing the adjusted return.  Alternatively, employers may use regular procedures to make such claims or adjustments.  The regular procedures require filing a Form 941-X for each calendar quarter for which a refund claim or adjustment is made.  Note that under the alternative procedure provided by Notice 2013-61 or under the regular procedure, filing of a Form 941-X requires either employee consents, or repayment or reimbursements, as well as amended Form W-2s to reflect the correct amount of taxable wages.

Employee Overpayments of Federal Income Taxes

Employers who provided benefits to employees’ same-sex spouses in 2013 may adjust the amount of reported federally taxable income on each employee’s Form W-2 (Wage and Tax Statement) to exclude any income imputed on the fair market value of the coverage and to permit the employee to pay for the coverage on a pre-tax basis.

Employees who overpaid federal income taxes in prior years as a result of same-sex spouse benefit coverage may claim a refund by filing an amended federal tax return for any open tax year.  Refunds are available for overpayments resulting from income imputed on the fair market value of the coverage and from premiums paid on an after-tax basis for the coverage.  An amended tax return generally may be filed from the later of three years from the date the return was filed or two years from the date the tax was paid.

Employers that file Form 941-X are required to file Form W-2c (Corrected Wage and Tax Statement) to show the correct—in this case reduced—wages.  Employers that do not file Form 941-X may want to begin preparing for employee requests for a Form W-2c for each open tax year in which benefit coverage was offered to employees’ same-sex spouses.

Next Steps

Employers extending benefit coverage to employees’ same-sex spouses and partners should carefully review their payroll processes and procedures to ensure that such coverages are now properly taxed for federal income and FICA tax purposes.  In addition, employers should review the options in Notice 2013-61, and consider filing claims for refunds or adjustments of overpayments of FICA taxes for any prior open tax years and issuing Form W-2c to allow employees to claim refunds of federal income tax.  Most importantly, by acting promptly, employers can correct the 2013 over-withholdings for both FICA and federal income tax and overpayment of the employer portion of FICA tax, without the necessity and burden of filing a Form 941-X.

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