Keeping Up with the Health Care Reform Changes

For all plan years beginning on or after September 23, 2010, employers are required to dole out an array of reform notices to all plan participants. Here are six notices that should be provided to employees:

• Dependent coverage notice. All health plans are required to offer a one-time enrollment opportunity to participants’ children who are under age 26. In addition, participants must have 30 days to enroll their dependents. Participants must be notified of the changes no later than the first day of the plan year beginning on or after September 23, 2010.
• Lifetime limits notice. Under the new law, plans are prohibited from putting lifetime limits on the dollar amount of coverage plan participants receive. Participants who had previously reached the limits of their healthcare coverage must be given a special enrollment notice that lets them know they are once again eligible for coverage.
• Primary care designation and OB/GYN notice. Employers must communicate to employees that they have the right to designate a primary care physician within the plan’s network to coordinate their medical care. Additionally, female employees need to be informed they can obtain OB/GYN care without prior authorization.
• Grandfathered status notice. All participants must be notified as to whether or not their health plan will retain its grandfathered status. If the plan does keep its grandfathered status, participants must be told that the plan is exempt from certain reform law provisions.
• Cancellation of coverage notice. Participants’ healthcare coverage cannot be cancelled or terminated retroactively except in cases of deliberate fraud or similar situations. However, if a plan does cancel a participant’s coverage, the individual must still be given at least 30 days advance notice of the cancellation.
• Claims appeals notice. A notice must be given to all participants who have a claim denied, explaining their right to appeal the denial. It must also outline the plan’s procedures for internal appeals and external reviews of those decisions.

For model language to satisfy these six notice requirements, see http://bit.ly/model384. Health plan providers may also furnish you with the proper notices.

What You Need to Know About Medical Expenses and 2011

The impact of health care reform begins to pick up speed after 2010. While churches received a reprieve on one health care-related issue, other changes are right on schedule even if little information is available to carry out some of the provisions.

The reporting reprieve. Churches were scheduled to report the value of employer-provided health coverage on Form W-2’s for 2011 to be filed in 2012. However, the IRS has now given churches (and other employers) a one-year reprieve (Notice 2010-69). Reporting the value of the health coverage for 2011 is now optional. The IRS has determined that this relief is necessary to provide churches (and employers) the time needed to make changes to payroll systems or procedures in preparation for compliance with the new reporting requirement. So, the information will now be required on Form W-2s for 2012 filed in 2013.

In addition, the IRS announced that it has issued a draft Form W-2 for 2011. When churches report the value of coverage under a church-sponsored group health plan (optional for 2011 Form W-2s/required for 2012), the data must be reflected in Box 12 with a code of DD.

Remember: The cost of church-provided health insurance is not taxable. The new reporting requirement is intended to be informational only and to provide employees with greater transparency into overall health care costs.

A 2011 change that is right on schedule. Over-the-counter drugs and medicines are not eligible for tax-free reimbursement under an employer-sponsored health plan beginning January 1, 2011 (insulin is not a medicine or drug for purposes of this rule).

A few large churches have cafeteria plans and many other churches have health care flexible spending accounts (FSAs). This new limitation imposed by the Patient Protection and Affordable Care Act impacts reimbursements under these plans (OTC drugs and medicines were never deductible as medical expenses on Schedule A.)

It is very important to determine whether a particular OTC item is a medicine or drug because the new rules do not apply to OTC medical supplies and equipment (such as contact lens solutions, bandages, crutches or durable medical equipment or diagnostic devices such as blood sugar test kits.)

The new OTC rules apply to medicines or drugs (other than insulin) incurred on or after January 1, 2011, without regard to the plan year of the plan. Thus, a plan with a fiscal plan year must begin complying with the rules mid-plan year. And, expenses for OTC drugs and medicines incurred during the two-and-a-half-month grace period following the end of a 2010 calendar plan year must be accompanied by a prescription.

What to do. Churches should make the following preparations:

• Form W-2’s for 2012 to be filed in 2013. Even though reporting the value of coverage under a church-sponsored group health plan, it might be a good plan to report the data on Form W-2s for 2012 to get ready for the reporting required for Form W-2s for 2013.
• Establish a flexible spending account. Your church doesn’t have to even be close to megachurch size to have a FSA. The smallest church in the U.S. can set up an FSA at virtually no cost to the church and allow church staff to have amounts reduced from salary and used to reimburse medical expenses tax-free (free of federal income and social security taxes—and often free of state income taxes).
• Amend existing cafeteria and FSA plans. Existing plans must be amended to reflect the new OTC rules. Fortunately, plans may be retroactively amended effective January 1, 2011 so long as the amendment is adopted no later than June 30, 2011.

Health Care Reform Legislation Requires that W-2s Show Value of Health Coverage

Thanks to the health care reform legislation, employers are required to report the value of the health insurance coverage they provide on each employee’s annual Form W-2 beginning in tax year 2011.

This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers, according to the IRS.

There has been considerable confusion generated concerning the reporting of the value of health insurance coverage—with rumors spread that the amount is taxable for income tax purposes. To be clear, the amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee's income and it is not taxable. For more information: http://www.irs.gov/newsroom/article/0,,id=220809,00.html?portlet=6

It might appear that this additional reporting requirement does not impact nonprofits until January 2012 when the 2011 Form W-2s must be filed. However, departing workers can ask for a W-2 within 30 days of the final paycheck or the date the request is made, whichever is later. Even though few people do this, charities will need to be ready in early 2011. The calculation of the health plan’s value is the same as the value used to figure the allowable premium for COBRA coverage.

Preparedness to comply with these new government regulations is the key.

The Hidden Costs to Charities Just Keep Rising

A recent study commissioned by the National Business Travel Association says that travelers pay up to $101 in sales, hotel, rental car and other extra taxes aimed at them on an average three-day domestic trip.

Since many nonprofits have significant travel budgets, taxes that target travelers are understandably concerning.

The study found that a typical business traveler pays $101.27 in taxes on average for hotel, rental car and meals during a three-day, two-night stay in Chicago—more than in any other city. And travelers pay more than $85 in similar taxes during the same length of stay in Seattle, Minneapolis, New York and Boston.

As states and local municipalities continue to struggle to balance budgets, taxes on travelers will undoubtedly continue to rise—impacting nonprofit and other travelers.

Preparing for the Government’s Impact on Flexible Spending Accounts

Many churches and charities provide flexible spending accounts (FSAs). Using an FSA is often good stewardship. The new health care reform law requires certain changes to FSAs:

• In 2011, employees will no longer be able to receive pre-tax reimbursements from their FSA for non-prescribed over-the-counter medications. Thus, the cost of over-the-counter medicine (other than insulin or doctor prescribed medicine) cannot be reimbursed on a tax-free basis through an FSA. FSA plans should be modified to exclude these reimbursements.
  
• In 2013, employee contributions to FSAs will be capped at $2,500 annually, with the cap adjusted annually to the Consumer Price Index. FSA plans should be modified in accordance with the new cap, plus annual adjustments.

Planning opportunity: Most charities do not have a properly established plan to reimburse out-of-pocket medical expenses. Even though FSAs will be capped at $2,500 annually in 2013, the benefit of offering an FSA to all staff members on a salary reduction basis is significant. For example, a staff member with marginal (the tax rate on his or her last dollars of income) state and federal tax rates, including social security, of 40% could save $1,000 if they have $2,500 of out-of-pocket medical expenses that are covered by an FSA.

Like someone once said: “You save $1,000 here and another $1,000 there and after a while you are talking about some real money.”

The Government’s Vanishing Charitable Deduction?

Several states are considering capping charitable deductions—New York is the latest. The Administration proposed capping charitable deductions (and other itemized deductions) to fund health care proposals and has stated an intention to include such a proposal in the 2011 budget.

A bipartisan proposal introduced by Senators Wyden (D-OR) and Gregg (R-NH) bears watching. Under their tax reform bill (S. 3018), standard deductions would soar: $30,000 for those married filing jointly, $15,000 for singles and $22,500 for heads of households. Such a change would effectively eliminate the charitable deduction (and other itemized deductions) for most taxpayers other than high-income individuals.

And, the chorus of those opposed to the charitable deductions is also rising. Just one example is found in Edward Kleinbard’s blog.

What does the future hold for the charitable deduction? While it is unclear, it appears there will be increasing pressure to reduce the value of the deduction or eliminate it all together.

Churches and other Christ-centered nonprofits have always relied on committed givers. The commitment level may be raised in the future—giving without respect to a tax deduction.

In searching the Scriptures, I find no requirement to obtain a tax deduction before we give. No, giving is a spiritual issue of the heart. It is an act of obedient worship.

Fraud … and Lessons in the Lack of Accountability

The August 16, 2010 edition of The Wall Street Journal featured two poignant articles on fraud. While the examples in the articles are from the for-profit world, this is a teachable moment on accountability for the Christian nonprofit arena as well.

There were other issues than money involved in the departure of Mark Hurd as Hewlett-Packard’s CEO. But apparently, it was something as simple as inaccurate expense reporting that tripped him up.

In another story, the founder of Courette Building Systems, Salem, VA, tells how he placed one employee in charge of both receipts and disbursements. Among other fraudulent acts, the employee pocketed over $300,000 he was supposed to send to the IRS to cover payroll taxes.

At Interactive Solutions, Memphis, TN, the founder and CEO took some occasional days off while mourning the death of his brother. His bookkeeper had been referred by an attorney and someone that had sung with her in the church choir. After reading an article about fraud, something clicked with the CEO and he said to himself, “That could happen to me.” He began looking and quickly discovered thefts in the form of bogus bonuses and commissions by the dozens.

In both instances, the guilty parties are serving time in prison but the losses were mostly unrecovered and the fraud nearly devastated the two organizations.

According to the Association of Certified Fraud Examiners, 31 percent of all business frauds nationally were within companies of fewer than 100 employees. Only 21 percent were committed in companies with over 10,000 employees. So most fraud happens in small organizations. It can happen to you!

While it is not practical to illuminate all fraud, it is possible to minimize the risk of fraud. See http://www.ecfa.org/Fraud.aspx.

The challenge is to respond but not over-react when fraud is discovered. Determine where your organization is most at risk and investigate those risks. Modify procedures to reduce risks. But the mission of the nonprofit must go on—and your nonprofit organization can be stronger because of the painful fraud that you experienced.

Your mission is still the main thing. Don’t take your eye off the ball.