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SSARS 21 and Other Critical Changes

  • Written by Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA

love jerryI am going to give you the highlights of four very critical items which may impact you in 2016 and beyond.

1. ACA 1094 and 1095
2. SSARS 21
3. SSA changes to drop file/suspend and restricted application
4. DOL/FLSA increase in wage base for exempt employees

1. ACA 1094 and 1095

Forms 1094 and 1095 are forms you should become familiar with and understand which clients may be required to file. The Affordable Care Act (ACA) was enacted in March of 2010. It is beginning to include more small employers with filing requirements.

Beginning in January of 2016 these forms are required to be filed with the IRS and given to employees. This is a critical step in implementing the ACA’s reporting requirements, which will enable the government to track compliance with the individual and employer mandates, and to determine eligibility for premium tax credits used to purchase health insurance coverage through a Health Insurance Marketplace.

[This article is course content for the Tax Season 2016 CPE quiz, worth 3 CPE credits! Reach the quiz and additional content HERE.]

Essentially employers who are subject to the ACA employer “shared responsibility” mandate who use the new forms to report health insurance coverage offered under employer-sponsored plans in accordance with Section 6056 of the Internal Revenue Code (IRC) will need to report information on Form 1095 to the employees. Form 1094-C must be used to report to the IRS summary information for each employer and to transmit Forms 1095-C to the IRS.

• Form 1095-A is completed by the Market Place Exchanges to report the coverage of individuals obtaining their insurance through the exchanges. Form 1095-A from the Marketplace will be used to reconcile premium tax credits.

• Form 1095-B is completed by insurance companies for the employers who have group policies through them.

• Form 1095-B is also required if a small employer is a sponsor of a self-insured group health plan. If you are a small employer with no insurance or with a group health insurance plan then the small employer has nothing to file.

• Form 1095-C according to the IRS instructions for the form, “All Applicable Large Employer Members (ALE Members) are required to file Forms 1094-C and 1095-C for 2015. Purpose of the form: Employers with 50 or more full-time employees (including full-time equivalent employees) in the previous year use Forms 1094-C and 1095-C to report the information required under sections 6055 and 6056 about offers of health coverage and enrollment in health coverage for their employees. Form 1094-C must be used to report to the IRS summary information for each employer and to transmit Forms 1095-C to the IRS. Form 1095-C is used to report information about each employee. In addition, Forms 1094-C and 1095-C are used in determining whether an employer owes a payment under the employer shared responsibility provisions under section 4980H. Form 1095-C is also used in determining the eligibility of employees for the premium tax credit. Employers that offer employer-sponsored self-insured coverage also use Form 1095-C to report information to the IRS and to employees about individuals who have minimum essential coverage under the employer plan and therefore are not liable for the individual shared responsibility payment for the months that they are covered under the plan.”

IRS instructions continue: “Who Must File Applicable Large Employers, generally employers with 50 or more fulltime employees (including full-time equivalent employees) in the previous year, must file one or more Forms 1094-C (including a Form 1094-C designated as the Authoritative Transmittal, whether or not filing multiple Forms 1094-C), and must file a Form 1095-C for each employee who was a fulltime employee of the employer for any month of the calendar year. Generally, the employer is required to furnish a copy of the Form 1095-C (or a substitute form) to the employee.”

• Form 1094-C - As noted above, the C Forms consist of a transmittal form and an individualized form. Form 1094-C is the transmittal form, and provides a summary of aggregate, employer-level data to the IRS. For ALEs that are members of a controlled group, separate transmittal forms must be filed for each ALE member that is required to report. Separate transmittal forms for one ALE member may also be filed for different employee groups (e.g., union employees, non-union employees, salaried employees, hourly employees, etc.). However, if there are multiple transmittal forms for ALE employee groups, one form must be designated as the “authoritative” form for the ALE member, which will include aggregate information for the ALE member. Non-authoritative transmittal forms need to include only employer information and the number of individual forms being submitted with that transmittal.

For information related to the Affordable Care Act, visit www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions-Home

2. SSARS 21

SSARS 21 is the biggest change to a CPA firm’s write up practice in 35 years. SSARS 21 creates a new level of service known as “preparation service.” SSARS 21 replaces all the previous SSARS [except compilation of pro-forma financial statements, SSARS 14, which is now currently in exposure draft]*. We still have Compilation and Review service and they are essentially the same. The Compilation services have a new Accountants Compilation Report. There are not any significant changes to the Review services.

SSARS 21 is in effect for any financial statement for a period ending after December 15, 2015. So if you are issuing monthly financial statements for a client, the accounting services you perform for November 30, 2015 would be under the old standards but when you issue the financial statements for the period dated December 31, 2015 it should be in compliance with SSARS 21.

One major change every CPA needs to completely understand is SSARS 21 requires an engagement letter and it MUST be signed by both the CPA and the client.

An essential change with SSARS 21 is the principle that the type of service you are providing is based on what you are “engaged” to perform in your engagement letter. So many have observed that a preparation engagement and a compilation engagement may be very similar and the resulting financial statement may be exactly the same. However, whether you should put a compilation report with the financial statement is based on what you are engaged to perform.

The new concept hinges on what you are engaged to perform vs. the prior concept of “prepare and present.”

A preparation engagement is required to have a disclaimer on each page of the financial statement which indicates “no assurance is provided.” If this disclaimer cannot be on every page, then a short disclaimer report is required. It should be noted that for anyone who has previously issued financial statements under SSARS 8, that concept is now obsolete and in effect been replaced with the preparation engagement. A CPA no longer needs to be concerned about who the recipients of the financial statements will be (i.e. in SSARS 8 it was restricted to management only) but instead now must only come to an agreement with the client as to the service to be provided by the CPA.

SSARS 21 is a very significant change and you must be in compliance as you approach your next peer review.

The AICPA Professional Ethics Committee has announced that a Preparation engagement is a non-attest service.

For information related to SSARS 21, visit http://www.aicpa.org/InterestAreas/FRC/ReviewCompilationPreparation/Pages/resources-for-SSARS21.aspx

3. SSA Changes to Drop File/Suspend and Restricted Application

As reported by Michael Kitces on Wednesday October 28, 2015 in Retirement Planning:

“When Congress passed the Senior Citizens Freedom to Work Act in 2000, it introduced a new concept called “voluntary suspension” of benefits, allowing those who had already started Social Security benefits to stop their payments and earn delayed retirement credits. In the process, however, the new voluntary suspension rules unleashed several additional Social Security claiming strategies, including various “claim now, claim more later” tactics involved File-and Suspend and Restricted Applications for spousal benefits.

Congress has decided to close these perceived “loopholes” in the Social Security rules. By extending the rules for deemed application, it will no longer be possible to file a restricted application for just spousal benefits. And with an extension of the “suspension” rules that stipulate suspending an individual’s benefits will also suspend any benefits to other people based on the same earnings record, Congress has killed off the various “File and Suspend” strategies to allow spousal and dependent benefits to be paid while still earning delayed retirement credits.”

For information related to this issue, visit www.kitces.com/blog/congress-ends-file-and-suspend-restricted-application-andother-voluntary-suspension-social-security-strategies/ or www.reuters.com/article/2015/10/28/us-retirement-congress-fileandsuspend-idUSKCN0SM2UO20151028

4. DOL/FLSA Proposes to Increase the Wage Base for Exempt Employees from $23,660 to $51,000

In March of 2014, President Obama ordered the Department of Labor to revise the federal rules for who must be paid overtime at time and half for working more than 40 hours.

See: http://www.nytimescom/2014/03/14uspolitics/obama-orders-rule-changes-to-expand-overtime-pay.html?_r=0

Here is a link to the President’s remarks at the press conference: https://www.whitehouse.gov/the-press-office/2014/03/13/remarks-president-overtimepay

To develop a good foundation about this change, a good source is: http://www.nolo.com/legal-encyclopedia/overtime-pay-rights-employee-30142.html. This article will help you understand how this change will affect CPA firms and the “professional employee” classification does not exclude you from this change.

Also you can read the proposed rule at this link: http://www.regulations.gov/#!documentDetail;D=WHD-2015-0001-0001

This link is specifically addressing redefining the exemptions for Executive, Administrative, and Professional employees. Another foundation article on the progression of the executive order to implementation is found at: http://abcnews.go.com/Politics/obama-boostwages-millions-overtime-eligibility/story?id=31650687

You will clearly see in this article the proposed threshold is that any employee making less than $51,000 per year will be subject to overtime pay requirements. This is up substantially from the current $23,660.

As of the writing of this article, I cannot find any confirmation that the DOL has issued the final regulations after the comment period. There have been articles indicating DOL has received considerable concern that the wage limit is jumping too high too fast. There is speculation the final regulation may have a wage benchmark higher than the current $23,660 but lower than the proposed $51,000.

This is a topic of great significance to our clients and to CPA firms. Keep this one on the radar to watch in the coming weeks and months.

* correction from James J. Newhard, CPA

Jerry Love is the sole owner of Jerry Love CPA, LLC in Abilene, Texas. He graduated from Abilene Christian University. In addition to being a CPA, he has also earned the designations of PFS, CFP, CVA, ABV, CITP, CFF, and CFFA. In 2006-07, Jerry was the Chairman of the Texas Society of CPAs.

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Will Your Clients Run Afoul of ACA's Largest Penalty?

  • Written by Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA

love jerryFailure to read this article and understand it could cost your client or company a penalty of $100 per day per employee under Code § 4980D. The penalty could be $36,500 per year per employee for employers who do not offer insurance coverage, but instead seek to reimburse their employees for insurance purchased on the individual market. This penalty could put you or your small business clients out of business. This IRS Revenue Ruling went into effect on July 1, 2015.

This is a very serious matter which many professionals have been hoping the IRS would further delay or Congress would fix, however neither has happened. I am finding many small employers think because they have less than 50 employees there is nothing in the Affordable Care Act (ACA) which will impact them. However, this penalty can be assessed to employers with as few as two employees. The IRS is sending a strong and clear message to employers who are sending their employees to a health insurance exchange or the open insurance market with a tax-free contribution to help them pay premiums. Many small employers have used payment arrangements such as reimbursing the employee for premiums or making the payment directly to the insurance company to help employees obtain health coverage without the hassle and expense of furnishing a full-fledged company group health insurance plan. Sometimes employers have done this because they could not obtain an affordable group policy or they may not have enough employees to meet the insurance companies’ criteria. According to the IRS, this penalty can be assessed to employers for simply offering plans which reimburse employees for premiums paid by them for individual health insurance policies. The penalty can also apply to direct employer payments of premiums for employees’ individual health policies.

National Federation of Independent Business (NFIB) reported this summer (June 18, 2015):
“Businesses of all sizes will have to pay a daily $100 penalty if they are reimbursing their employees for individual market health insurance premiums starting July 1, 2015.

Unlike early reports that the Affordable Care Act would only affect larger companies, this penalty applies to any company that reimburses more than one employee. The penalty is $100 per day per employee, up to $500,000.

This penalty is just one of many ACA changes that biz owners have to look out for in the near future.”


The NFIB continued its reporting of this issue on June 29, 2015 in an online article by Jack Mozloom:
An obscure IRS rule takes effect on Wednesday under which small businesses that get caught helping their workers buy insurance or pay medical bills can be fined 18 times more than larger employers that don’t provide coverage at all, warned the National Federation of Independent Business (NFIB) today.

“It’s the biggest penalty that no one is talking about,” said NFIB Policy Director Kevin Kuhlman. “The penalty for compensating employees for healthcarerelated expenses is enough to destroy most small businesses.”

Under the rule, which appears nowhere in the Affordable Care Act, employers who do not offer a group health plan, but give their workers additional pay to compensate for the purchase of health insurance or direct medical expenses can be fined $100 per day, per employee. Over the course of a year that’s $36,500 per employee up to $500,000 in total.

“It’s hard to believe Congress or the President intended to punish employers much more severely for actually helping their workers,” said Kuhlman. “Nevertheless, that’s the consequence and most small businesses don’t know it.”

In fact, according to NFIB research 14% of small businesses that don’t offer group insurance reimburse their workers instead. They think they’re doing a good thing but they’re walking into a minefield.

“Reimbursing employees for the cost of insurance or medical services is a way for small businesses to help their workers without the administrative headache of setting up a costly group plan,” said Kuhlman. “Most small employers don’t have HR departments or benefits specialists, so this is a simpler, easier way to help their employees.” http://www.nfib.com/article/suranc-69940/

This penalty is huge. It is more than 18 times greater than the $2,000 employer- mandate penalty under ACA for not providing qualifying health insurance for employees. It is very important to note employers with fewer than 50 workers are not exempt. The basic issue is how an employer may be paying for an employee’s health insurance. Many small employers will reimburse their employees for premiums on their individual health insurance policies or the employer may pay the premium directly on behalf of the employee. These arrangements have long been popular with small employers who want to offer health insurance but are unwilling or unable to purchase group health coverage.  

Clearly ACA was written with the intention of getting everyone in America health insurance.  Further ACA has a clear mandate to the larger employers (those with over 50 full time employees (FTE)) to provide health insurance which is affordable to all of their full time employees. According to the IRS and Department of Labor (DOL) these individual market policies cannot be integrated to meet the market reform provisions. Specifically, the IRS stated these plans violate the Essential Health Benefits provision of the ACA, as well as the prohibition on spending caps on these mandatory benefits.

The Centers for Medicare & Medicaid Services (http://www.cms.gov/) provides the following information in their Affordable Care Act Implementation FAQs:

“Q. May an HRA used to purchase coverage on the individual market be considered integrated with that individual market coverage and therefore satisfy the requirements of PHS Act section 2711?

"A. No. The Departments intend to issue guidance providing that for purposes of PHS Act section 2711, an employer sponsored HRA cannot be integrated with individual market coverage or with an employer plan that provides coverage through individual policies and therefore will violate PHS Act section 2711."

Section 2711 of the PHS Act, as added by the Affordable Care Act, generally prohibits plans and issuers from imposing lifetime or annual limits on the dollar value of essential health benefits. The preamble to the interim final regulations implementing PHS Act section 2711 (75 FR 37188) addressed the application of section 2711 to health reimbursement arrangements (HRAs) and certain other account-based arrangements. HRAs are group health plans that typically consist of a promise by an employer to reimburse medical expenses (as defined in Code section 213(d)) for a year up to a certain amount, with unused amounts available to reimburse medical expenses in future years. The preamble distinguished between HRAs that are "integrated" with other coverage as part of a group health plan and HRAs that are not so integrated ("stand-alone" HRAs). The preamble stated that "[w]hen HRAs are integrated with other coverage as part of a group health plan and the other coverage alone would comply with the requirements of PHS Act section 2711, the fact that benefits under the HRA by itself are limited does not violate PHS Act section 2711 because the combined benefit satisfies the requirements." (75 FR 37188, at 37190-37191). The corollary to this statement is that an HRA is not considered integrated with primary health coverage offered by the employer unless, under the terms of the HRA, the HRA is available only to employees who are covered by primary group health plan coverage provided by the employer and meeting the requirements of PHS Act section 2711.”

The IRS issued Notice 2013-54 in September 2013 which addressed the issue of an employer providing a pre-tax reimbursement for an employee’s individual health insurance premiums. In this Notice, the IRS clarifies their position that these employer pre-tax payment plans are considered group health plans under ACA. Therefore, the IRS is taking the position these pre-tax arrangements are group health plans (either through a qualified health plan in the Marketplace or outside the Marketplace). Therefore if these arrangements are group health plans then they are subject to the ACA market reforms, including the prohibition on annual limits and the requirement to cover preventive care without cost-sharing. These arrangements cannot be integrated with individual health insurance plans in order to satisfy the market reform requirements.


Further the IRS Notice 2013-54 explains:
“how the Affordable Care Act’s market reforms apply to certain types of group health plans, including health reimbursement arrangements (HRAs), health flexible spending arrangements (health FSAs) and certain other employer healthcare arrangements, including arrangements under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy.”

On February 18, 2015, the IRS issued Notice 2015-17:
“provided temporary relief from the § 4980D excise tax for failure to satisfy the Affordable Care Act market reforms such as the prohibition on annual limits.  Under the notice, small employers with employer payment plans got relief for 2014 and up to July 1, 2015.

... reiterates the conclusion in previous guidance addressing employer payment plans, including Notice 2013-54, that employer payment plans are group health plans that will fail to comply with the market reforms that apply to group health plans under the Affordable Care Act.  Notice 2015-17 also provides transition relief from the assessment of the excise tax under § 4980D for failure to satisfy market reforms in certain circumstances.”

The IRS Notice 2013-54 indicates these employer payment plans are considered to be group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. The notice further clarifies that such arrangements cannot be integrated with individual policies to satisfy the market reforms.

It is very important we take note the heart of this issue is the employer reimbursement or directly paying the premium for the employee’s individual plan. Under IRS Notice 2013-54, such arrangements are described as employer payment plans. Therefore, small businesses (with as few as 2 employees) who reimburse employees for the cost of premiums for individual health insurance policies or pay their health costs directly can be fined up to $36,500 a year per employee under this Internal Revenue Service regulation that took effect July 1, 2015. 

According to the notice, an employer arrangement that reimburses or pays for employee individual health premiums is considered to be a group health plan that is subject to the $100 per-employee per-day penalty. The penalty applies whether the reimbursement is considered a before-tax or after-tax contribution. I will address some options the employer can consider later in this article.

Penalty Exception if Only One Employee

The penalty will not apply if only one employee is reimbursed for individual health insurance and/or other medical expenses. However, be cautious of the potential land mines discussed later.

Shareholders of Sub S Corporation Exception

Per the IRS:

“Notice 2015-17 also clarifies that S corporations may continue to report reimbursements of health insurance of 2% (or greater) shareholders pursuant to Notice 2008-1. Until further guidance is issued, and in any event through the end of 2015, the excise tax under Code § 4980D will not be asserted for any failure to satisfy the market reforms by a 2% shareholder-employee healthcare arrangement.”

In addition to the potential penalty from the IRS there is also a potential liability as a result of additional DOL enforcement of compliance with the market reforms, incorporated into ERISA by the Public Health Service Act (PHSA).  Per the IRS website:

“DOL has issued a notice in substantially identical form to Notice 2013-54, DOL Technical Release 2013-03. On Jan. 24, 2013, DOL and HHS issued FAQs that address the application of the Affordable Care Act to HRAs. On Nov. 6, 2014, DOL issued additional FAQs that address the application of the Affordable Care Act to HRAs and other payment arrangements.”

What options do small employers have?

What can an employer do? To avoid penalties under the Affordable Care Act, consider the following options starting with your health plan year beginning after July 1, 2015:

1. First it is noted companies with only one participating employee will not face the $100 per employee, per day penalty. It should be noted nondiscrimination rules would require that essentially all full-time employees must participate in the plan. So even though there appears to be a technical exception for covering only one employee, a company who believes this exception is applicable to them would be well advised to seek professional advice and analysis.

2. Furthermore Sub-S corporations are exempt from the penalty through December 31, 2015 for those employer payment plans that affect the shareholders who hold 2% or more of the stock.

3. Provide an ACA approved group health plan.  If the employer does not meet the definition of a Large Employer with more than 50 FTE, the employer can pay all or any portion of the premium. The small employers with 50 or fewer FTE can provide a group health plan through the SHOP Marketplace. When an approved group plan is used, a cafeteria plan can be utilized for pretax funding of the employee portion of the premium (saving both income and FICA taxes for the employee, and payroll taxes for the employer).

4. Increase the compensation for some or all employees, withhold the health insurance premiums from their wages, and forward the premiums on an after-tax basis to the insurance companies. This is permissible as long as:
(a) You do not pay any premiums other than those withheld,
(b) Employee participation is voluntary; and
(c) You do not endorse any insurance company and do not receive any cash or non-cash considerations from an insurance company.

5. Because this will be a payroll issue, nondiscrimination rules will not apply and you will not have to treat all employees the same.

6. Integrated HRA – These are HRAs which are coupled with an employer’s group health plan like many employers currently established under high-deductible health plans for reimbursement of copay and deductibles.

As indicated by the NFIB, this may be the biggest penalty in the ACA that nobody is talking about. We as CPAs are at risk of not educating our clients or the companies that employ us.

Jerry Love is the sole owner of Jerry Love CPA, LLC in Abilene, Texas. He graduated from Abilene Christian University. In addition to being a CPA, he has also earned the designations of PFS, CFP, CVA, ABV, CITP, CFF, and CFFA. In 2006-07, Jerry was the Chairman of the Texas Society of CPAs.

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Helping Clients Develop a Household Budget

  • Written by Jerry Love, CPA

love jerry

I am frequently asked by clients to help them develop a household budget. As most CPAs know all too well, that question can be a very difficult one because it depends on many factors and there is not a “one size fits all” budget. However, when clients are asking this question, they generally want some guidance. Therefore, this article is designed to give you some of my thoughts on how to approach this question and some resources that may help you give them some guidance.

The first thing I ask them to do is to summarize what they are currently spending.  I generally want at least three months summarized, but six to twelve months is even better. I tell them they can develop this summary in one of several ways: 1) pencil, paper and adding machine, 2) a spreadsheet such as Excel (there are some templates that might help), or 3) one of several programs like Quicken. The primary purpose of the exercise is to identify where they are currently spending their money. I find very few families have a clue where the money is going and are surprised at the results of this exercise.

Spreadsheet Style

Here are some sources for free templates for spreadsheets:

1.  www.Squawkfox.com Kerry K. Taylor is the creator and lone blogger at Squawkfox.com. She started Squawkfox in 2008 as a financially fun newsletter for friends.  She has a spreadsheet that is very easy to understand, to use and allows the person to add rows for household expenses unique to their spending.  Another thing I like about her spreadsheet is it has a column for each month.

One shortcoming to this spreadsheet is it requires the person to summarize their transactions in some manner to then enter a total in the column for the month.

2.  This spreadsheet could resolve the shortcoming of the Squawkfox template and give your client a spreadsheet that is easy to learn, modify and use.


This template was created by Aman Siddiqi and is posted in the Google Docs Template Gallery.  With this template you can help the client determine the headings for each category and they can post an unlimited number of transactions.  Of course those of us old enough to recall the days of posting expenses on the “13 column green pads” will recognize this as that spreadsheet. I would set the template up with a separate worksheet for each month.

3.  This template was created by Bohdan Rohbock and is posted in the Google Docs Template Gallery. 


With this template you can change the expense category in the column headings and they can post an unlimited number of transactions. However, it is not very easy to add more columns because the existing columns are linked. It does have the twelve months already set up for you.

It is important for the client to summarize their cash expenditures. Ideally, they will be able to put them into categories that have been identified. However, if they are going back over the prior year it is highly unlikely they can classify all their cash expenditures. In which case, I usually set up a category for “cash expenditures.” This is an area where the Generation X and Y far excel over the Baby Boomers. I find that Generation X & Y may not even carry much cash. Instead they are using their debit card, which will show up on their bank statements with the identification of what they are spending. For the Baby Boomers, I usually ask them to carry a small pad and write down all their cash expenditures for a month or two so we can get a handle on where they are spending their cash.


Using Personal Finance Software

Of course, it would be much easier to summarize the client’s expenditures with the use of one of the personal financial software options on the market.

1. The starter edition of Quicken normally retails for $40 and will accomplish the task with very little set-up or training time. This is the option I generally make to clients because our staff knows how to use it and they can help the clients in the set up and answer questions if they are stumped. Quicken is very easy to use and complete.

2. Microsoft Money Plus Sunset is also an option.

3. A quick search for “Personal Finance Software” brings up this site:


This site lists nine different software options (including Quicken) and rates their features. All of these software options are under $60.


Online Options for Personal Finances

What about personal financial sites? For the most part, I agree with Len Penzo who was published by MSN Money on August 17, 2012 in an article titled “A Great Way to Track Expenses.”

“As for keeping tabs on how you spend your money, a panoply of options is available. I realize that many people are initially attracted to sites like Mint.com, and MyBudget-Online because their automation features essentially make the job of tracking your money almost effortless. The trouble is, in the world of personal finance I believe too much automation can be a curse. That's because when money management tools become too user-friendly, a lot of folks have very little incentive to understand the data being made available to them.”

Overall, in the context of an engagement and my request for a simple summary of where they are spending their money, I feel the online options are overkill and for the most part will cost the client more money than the other options.


What to do with this Info?

Almost without exception, when I sit down with the client after the above exercise, as they hand me the summary of their expenses, they will immediately begin to tell me what they have learned about their spending habits. No question, this is an eye-opening exercise for them. But to me the real value is the importance to develop a budget with them based on their priorities and to incorporate things that are important to them.

For example, many people in this part of the country tithe to their church. Yes, I mean they carefully calculate 10% of their income and give that much or more each year. If I used a standardized budget template to build a budget for them it would not be consistent with their core values.

Other factors to consider:

1. Current housing cost. If we determine they are spending too much for their home mortgage or rent, this will take some time and planning to modify.

2. Utilities. Same as the housing costs, if we determine this expense is higher than desired, it will take some time and planning to determine how this can be modified. Some suggestions could be implementing energy efficient modifications, life-style changes or even deciding that this factor may influence item #1.

3. Debt of several sources. It is not uncommon that we conclude that the biggest issue that is disrupting their budget is debt. It may be that they have large student loan debt, large car payments and/or credit card debt. This can be problematic because they cannot just turn the thermostat down and cut their debt. Resolution to this item can take years to resolve.

4. Then we move into identifying what can be the most difficult items. It is not uncommon for one or both spouses to have a hobby that is very expensive. It may be a boat or other recreational type vehicle. It could be hunting, fishing, golfing or shopping. 

As these items are identified it is important as a financial planner that I understand it is not my job to place my judgment into their budget. If one or more of these items is very important to them, then we need to incorporate them into their budget to determine if it gives them the financial balance they desire, and perhaps equally important giving them the ability to fund their goals and dreams.


Designing a Budget

I believe you should first classify the items they are currently spending into three basic groupings: 1) Recurring Expenditures (such as mortgage, utilities, food and other recurring monthly expenses), 2) Financial Goals (such as funding their 401k or IRA, health insurance, college expenditures) and 3) Discretionary Spending (such as item #4 for recreational items and hobbies).

As CPAs we frequently are looking for benchmarks to use as a guideline. Here are some guidelines that I have found over time. However, I offer this warning as you read this section, “one size does not fit all.” I strongly believe you need to listen to your clients and allow them to develop a budget that fulfills their goals and expectations.

1. Housing 30%

2. Utilities 5%

3. Transportation 15%

4. Clothing 5%

5. All other debt 15%

6. Savings 15% to 20%

7. Everything else 10%

Here is another mix with small variations

1. Housing 25% to 30%

2. Utilities max of 10%

3. Personal items and Groceries 15% to 25%

4. Transportation 10% to 15%

5. Everything else 20%

Here is a mix with a bit more detail

1. Housing 25%

2. Utilities 8%

3. Food 14%

4. Clothing 4%

5. Medical/healthcare 6%

6. Charity 4%

7. Savings/Insurance 10%

8. Entertainment/Recreation 5%

9. Transportation 14%

10. Other debt or discretionary 10%

This grouping is based on Dave Ramsey’s program from The Total Money Makeover

• Charity 10% to 15%

• Savings: 5% to 10%

• Housing: 25% to 35%

• Utilities: 5% to 10%

• Food: 5% to 15%

• Transportation: 10% to 15%

• Clothing: 2% to 7%

• Medical/Health: 5% to 10%

• Personal: 5% to 10%

• Recreation: 5% to 10%

• Debts: 5% to 10%

The other factor that I think you need to take into consideration as you work with these ranges for a family budget is their age, family size and total income. Each will influence all of these items. There is no question, as the family’s total income grows many outside forces will begin to compete for an increased portion of the budget.

Taking only the mortgage/rent factor as an example. No doubt when a young couple is first married and establish their first budget as a family they opt for a small inexpensive apartment. At this stage they may be at the lower end of the range for housing. Then as they begin to establish their careers and their income increases or perhaps their family begins to grow, they purchase their first home and move up the scale for how much they are spending for housing. As the family grows and the kids reach their teen years they justify the need for a larger house. Finally the day comes when the nest becomes empty and they decide it is time to downsize their housing. 

All along the way, there are outside influences encouraging them to stretch the budget. The financial institutions may be telling them they can qualify for a larger mortgage. The real estate professionals are encouraging them to buy at the upper end of their budget range and grow into it because after all, you expect the value of the house to go up. Perhaps even family members or their peers are encouraging them to buy in a certain neighborhood. Suffice it to say when it comes to the family budget there is a large variety of factors influencing its development.

In most families, discussing a budget is a difficult matter. It is frequently said, money is one of the most common stresses to a marriage. As a financial planner, it is important we help families deal with this potentially stressful element with compassion and attempt to help them find the common ground as they set financial goals and realign their spending to move toward them.

Jerry Love, CPA is the sole owner of Jerry Love CPA, LLC in Abilene, TX. Contact him at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Employee or Independent Contractor for ACA?

  • Written by Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA

love jerryThe question of when a person can be paid and classified as an independent contractor or must be classified as an employee has received renewed attention. As smaller businesses are faced with the implementation of the Affordable Care Act (ACA) if they have more than 50 full-time equivalent employees, there is a renewed interest in the proper classification of employees. ACA aside, this is an important distinction for both parties. Worker classification affects whether an employer is responsible for withholding federal income tax, social security and Medicare taxes as well as other employer benefits, which may include retirement contributions.

[This article is course content for the Tax Season 2016 CPE quiz, worth 3 CPE credits! Reach the quiz and additional content HERE.]

Over the years this matter has been taken to the courts to provide clarification and interpretation. In prior court cases, many factors have been considered to determine when a person is an independent contractor or an employee. Many of these court cases have focused on aspects of the degree of control the employer has over the person. Reliable resources are Supreme Court cases, Department of Labor, and the IRS. If an employer misclassifies a person as an independent contractor they may have a number of consequences.  If it is determined that the person you classify as an independent contractor meets the legal definition of an employee by either the IRS or DOL, you may be required to: 1) reimburse them for wages you should've paid them under FLSA, including overtime and minimum wage; 2) pay back taxes and penalties for federal and state income taxes, Social Security, Medicare and unemployment; 3) pay any misclassified injured employees workers' compensation benefits; and 4) provide employee benefits, including health insurance, and retirement. The IRS has refined their approach to this classification question as explained in the following. The IRS’ current guidance is in the form of Topic 762 - Independent Contractor vs. Employee: http://www.irs.gov/taxtopics/tc762.html

IRS Guidance

For federal employment tax purposes, the usual common law rules are applicable to determine if a worker is an independent contractor or an employee. Under common law you must examine the relationship between the worker and the business. You should consider all evidence of the degree of control and independence in this relationship. The facts that provide this evidence fall into three categories – Behavioral Control, Financial Control and the Relationship of the Parties.

Behavioral Control covers facts that show if the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training or other means.

Financial Control covers facts that show if the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:

• The extent to which the worker has unreimbursed business expenses,

• The extent of the worker’s investment in the facilities or tools used in performing services,

• The extent to which the worker makes his or her services available to the relevant market,

• How the business pays the worker, and

• The extent to which the worker can realize a profit or incur a loss.

Relationship of the Parties covers facts that show the type of relationship the parties had. This includes:

• Written contracts describing the relationship the parties intended to create:

• Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay,

• The permanency of the relationship, and

• The extent to which services performed by the worker are a key aspect of the regular business of the company.

The IRS has also issued guidance in Publication 15A: To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the business must be examined. In any employee- independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.

Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. These facts are discussed next.

Behavioral Control

Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:

1) Instructions that the business gives to the worker. An employee is generally subject to the business' instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work:

       • When and where to do the work.

       • What tools or equipment to use.

       • What workers to hire or to assist with the work.

       • Where to purchase supplies and services.

       • What work must be performed by a specified individual?

       • What order or sequence to follow.

2) The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right.

3) Training that the business gives to the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

Financial Control

Facts that show whether the business has a right to control the business aspects of the worker's job include:

1) The extent to which the worker has unreimbursed business expenses.  Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their employer.

2) The extent of the worker's investment.  An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.

3) The extent to which the worker makes his or her services available to the relevant market.  An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.

4) How the business pays the worker.  An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is often paid a flat fee or on a time and materials basis for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

5) The extent to which the worker can realize a profit or loss.  An independent contractor can make a profit or loss.

6) Type of relationship.  Facts that show the parties' type of relationship include:

a) Written contracts describing the relationship the parties intended to create.

b) Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.

c) The permanency of the relationship.  If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship.

d) The extent to which services performed by the worker are a key aspect of the regular business of the company.

e) If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

Further, Publications 15-A has numerous illustrations of these elements.  http://www.irs.gov/pub/irs-pdf/p15a.pdf

If you want the IRS to give you a determination of whether a person or position is an employee or independent contractor, you can request for them to give you a determination by completing Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.  They can be submitted by the employer or the individual.  Review of this four page form will give a person an even more detailed list of elements the IRS would consider.

In addition to compliance with the IRS relative to proper classification of employees, an employer also needs to be concerned with the Department of Labor and their audits for compliance with the Fair Labor Standards Act.

From the Fair Labor Standards Act Advisor: http://webapps.dol.gov/elaws/whd/flsa/scope/ee14.asp

The Supreme Court has said that there is no definition that solves all problems relating to the employer-employee relationship under the Fair Labor Standards Act (FLSA). The Court has also said that determination of the relationship cannot be based on isolated factors or upon a single characteristic, but depends upon the circumstances of the whole activity. The goal of the analysis is to determine the underlying economic reality of the situation and whether the individual is economically dependent on the supposed employer. In general, an employee, as distinguished from an independent contractor who is engaged in a business of his own, is one who "follows the usual path of an employee" and is dependent on the business that he serves. The factors that the Supreme Court has considered significant, although no single one is regarded as controlling are:

1. The extent to which the worker's services are an integral part of the employer's business (examples: Does the worker play an integral role in the business by performing the primary type of work that the employer performs for his customers or clients? Does the worker perform a discrete job that is one part of the business' overall process of production? Does the worker supervise any of the company's employees?);

2. The permanency of the relationship (example: How long has the worker worked for the same company?);

3. The amount of the worker's investment in facilities and equipment (examples: Is the worker reimbursed for any purchases or materials, supplies, etc.? Does the worker use his or her own tools or equipment?);

4. The nature and degree of control by the principal (examples: Who decides on what hours to be worked? Who is responsible for quality control? Does the worker work for any other company(s)? Who sets the pay rate?);

5. The worker's opportunities for profit and loss (examples: Did the worker make any investments such as insurance or bonding? Can the worker earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment?); and

6. The level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise (examples: Does the worker perform routine tasks requiring little training? Does the worker advertise independently via yellow pages, business cards, etc.? Does the worker have a separate business site?).

Another resource from the DOL on this topic is - http://www.dol.gov/whd/regs/compliance/whdfs13.pdf

Remember that some employees are exempt from various provisions of the law. To explore the broad categories of these exemptions or to obtain further information about the exemptions, go to http://webapps.dol.gov/elaws/whd/flsa/screen75.asp

Why does it matter? If an employer misclassifies a person as an independent contractor they may have a number of consequences. If it is determined that the person you classify as an independent contractor meets the legal definition of an employee by either the IRS or DOL, you may be required to: 1) reimburse them for wages you should’ve paid them under FLSA, including overtime and minimum wage; 2) pay back taxes and penalties for federal and state income taxes, Social Security, Medicare and unemployment; 3) pay any misclassified injured employees workers’ compensation benefits; and 4) provide employee benefits, including health insurance, and retirement.

There is a “perfect storm” brewing related to worker classification. As the smaller employers with more than 50 FTEs will be required to offer affordable healthcare insurance or pay a penalty and the potential change of the requirements related to payment of overtime, there will be huge incentive for business owners to avoid one or both of these by classifying workers as an independent contractor vs. an employee. I expect this question is one that many CPAs both in CPA firms and those employed in business and industry will be facing. I have made a conscious effort in this article to give you information verbatim from DOL and IRS vs. giving you commentary or opinions.

Jerry Love is the sole owner of Jerry Love CPA, LLC in Abilene, Texas. He graduated from Abilene Christian University. In addition to being a CPA, he has also earned the designations of PFS, CFP, CVA, ABV, CITP, CFF, and CFFA. In 2006-07, Jerry was the Chairman of the Texas Society of CPAs.

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Affordable Care Act - 1040 Reporting Requirements

  • Written by Jerry Love, CPA

love jerry

When Congress passed the Affordable Care Act (ACA) in 2010, the impact on our tax practices seemed far away, and many of us expected the Supreme Court to rule it unconstitutional or for Congress to repeal it. Tax season for 2014 introduced several requirements which must be reported on Form 1040, for all taxpayers of all ages as they report whether they have qualified health insurance for the entire year.  Remember, this requirement to obtain health insurance applies to each person as well as anyone claimed as a dependent on a taxpayer’s return. This is a significant change in what we must do to help our clients comply with tax laws and will certainly result in larger tax fees to the clients.  We must be prepared to gather additional information from our clients in order to properly prepare Form 1040, and clients will have questions about ACA as it now becomes relevant to them. The CPA is a client’s most trusted advisor, and this will be another element for which they will look to us to provide insight and guidance.

The Affordable Care Act was passed in 2010. It was passed with an expectation to overhaul certain aspects of the U.S. healthcare system and affects nearly all taxpayers, many employers, and various elements of the healthcare industry. ACA represents the most significant change to our healthcare laws since the passage of Medicaid and Medicare in 1965.

The fundamentals of ACA are that every U.S. citizen must have health insurance unless an individual meets one of the following exemptions:

• Financial hardship
• Religious objections
• American Indians
• Individuals without coverage for less than 3 months
• Aliens not lawfully present in the United States
• Incarcerated individuals
• Individuals whose lowest cost plan option exceeds 8% of household income
• Individuals with income below the tax filing threshold ($9,750 single; $19,500 married filing joint)

There are many options for obtaining health insurance:
• Job-based coverage
• Private policy
• Medicare or Medicaid
• Health insurance through one of the marketplace exchanges

If an individual cannot afford health insurance, subsidies are given through a premium tax credit (PTC). The PTC is an advanceable, refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace, also known as the Exchange. If a taxpayer chooses to have the credit paid in advance, it will be necessary to reconcile the amount paid in advance with the actual credit computed on their tax return.

Learn more about the Marketplace at https://www.healthcare.gov/

The PTC is based on household size, household income, and where it falls within the federal poverty line (FPL). Subsidies are available up to 400% of the FPL. Up to 133% of the FPL, a family needs to devote 2% of its income toward the premium, with the balance subsidized by the government. The subsidy then decreases as income goes up.

The 2013 amounts for the FPL are used to calculate eligibility for the PTC for 2014. For residents of one of the 48 contiguous states or Washington, D.C., the following illustrates when household income would be between 100 percent and 400 percent of the 2013 FPL:
• $11,490 (100%) up to $45,960 (400%) for one individual.
• $15,510 (100%) up to $62,040 (400%) for a family of two.
• $23,550 (100%) up to $94,200 (400%) for a family of four.

For the 2014 federal poverty line amounts which the PTC for 2015 will be based go to: https://www.healthcare.gov/glossary/federal-poverty-level-FPL/

To measure income for the PTC, take the taxpayer's modified adjusted gross income plus any income received by a qualified dependent who is required to file a federal income tax return. This will require the knowledge of income reported by dependents who file a separate return but are claimed by a different taxpayer. Modified adjusted gross income is the adjusted gross income on their federal income tax return plus any excluded foreign income, nontaxable Social Security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest received or accrued during the taxable year. It does not include Supplemental Security Income (SSI).

A taxpayer is eligible for the PTC if all of the following requirements are met:
• Purchase coverage through the Marketplace
• Have household income that falls within a certain range
• Are not able to get affordable coverage through an eligible employer plan that provides minimum value
• Are not eligible for coverage through a government program, such as Medicaid, Medicare, CHIP, or TRICARE
• Do not file a Married Filing Separately tax return (unless you meet the criteria in section 1.36B-2T(b)(2) of the Temporary Income Tax Regulations, which allows certain victims of domestic abuse and spousal abandonment to claim the premium tax credit using the Married Filing Separately filing status.)
• Cannot be claimed as a dependent by another person

The PTC has two characteristics that make it unique among the refundable income tax credits. First, the PTC may be paid to insurers on a taxpayer’s behalf or, if not, paid to the taxpayer. Second, the PTC may be paid during the year or, if not, at the time taxes are filed. Further, if the amount paid turns out to be wrong (for example, if the taxpayer doesn’t correctly guess his income when applying for the subsidies) the taxpayer will be liable for repaying the excess PTC received to the IRS.

Any taxpayer enrolled in an employer-sponsored plan, including retiree coverage, is not eligible for the PTC even if the plan is unaffordable or fails to provide minimum value. 

Changes in circumstances that can affect the amount of actual premium tax credit include:
• Increases or decreases in your household income
• Marriage
• Divorce
• Birth or adoption of a child
• Other changes to your household composition
• Gaining or losing eligibility for government sponsored or employer sponsored health care coverage

There is no government-run insurance plan or single payer system established under the ACA. The government only runs the exchanges, while the insurance industry submits policies to be offered by the exchanges.

Those who receive the Advance PTC (APTC) must file a federal income tax return for that year.  The tax return will be used to reconcile the difference between the advance credit payments received and the actual amount of the credit the taxpayer is entitled to receive. Also, anyone eligible to receive the PTC will be required to file an income tax return to utilize the PTC.  This filing requirement applies whether or not an individual would otherwise be required to file a return.

Married taxpayers must file as married filing jointly in order to receive the PTC unless the taxpayer meets the criteria in section 1.36B-2T(b)(2) of the Temporary Income Tax Regulations, which allows certain victims of domestic abuse and spousal abandonment to claim the premium tax credit using the Married Filing Separately filing status.  Taxpayers may claim this relief from the joint filing requirement for no more than three consecutive years. As an alternative, determine if the taxpayer is eligible to file as Head of Household. Review the rules which allow a married taxpayer who lives apart from his or her spouse for the last six months of the taxable year to be considered unmarried if he or she files a separate return, maintains as the taxpayer’s home a household that is also the main home of a dependent child for more than half the year, and furnishes over half the cost of the household during the taxable year.

It has been reported that approximately 8 million previously uninsured Americans gained coverage under the ACA during 2013-2014.

It is worthy to note the multiple possibilities of mistakes that could be made primarily by the taxpayer’s dependents who work in 2014. The taxpayer is responsible for ensuring that all dependents reported on their return had minimum coverage. The simplest guidance may be client education. Inform your clients that for this year, do not allow any of their dependents (particularly college students) to file their own return without your assistance or review. Although this guidance may appear self-serving, it is meant to protect clients from their dependents inadvertently costing them literally thousands of dollars in potential health care tax credits.

The short list of new IRS forms and changes to Form 1040 for 2014 includes three new lines related to the ACA health insurance mandate. Based on the IRS 1040 instructions as of January 26, 2015:

• In the section for Taxes and Credits:
Form 1040 Line 46: Excess advance premium tax credit repayment.  Attach Form 8962.

From the Instructions as of October 5, 2014: The premium tax credit helps pay premiums for health insurance purchased from the Health Insurance Marketplace. If advance payments of this credit were made for coverage for you, your spouse, or your dependent, complete Form 8962. If the advance payments were more than the premium tax credit you can claim, enter the amount, if any, from Form 8962, line 29.

If you enrolled someone who is not claimed as a dependent on your return or for more information, see the instructions for Form 8962.

• In the section for Other Taxes:
Form 1040 Line 61: Health care: individual responsibility (see instructions) Full-year coverage check the box.

Beginning in 2014, individuals must have health care coverage, qualify for a health coverage exemption, or make a shared responsibility payment with their tax return.

If you had qualifying health care coverage (called minimum essential coverage) for every month of 2014 for yourself, your spouse (if filing jointly), and anyone you could or did claim as a dependent, check the box on this line and leave the entry space blank.

Otherwise, do not check the box on this line and see the instructions for Form 8965.

Minimum essential coverage.

Most health care coverage that people have is minimum essential coverage.

Minimum essential coverage includes:
• Health care coverage provided by your employer,
• Health insurance coverage purchased through the Health Insurance Marketplace,
• Many types of government-sponsored health coverage including Medicare, most Medicaid coverage, and most health care coverage provided to veterans and active duty service members, and
• Certain types of coverage purchased directly from an insurance company. See the instructions for Form 8965 for more information on what qualifies as minimum essential coverage.

Premium tax credit. If you, your spouse, or a dependent enrolled in health insurance through the Marketplace, you may be able to claim the premium tax credit. See the instructions for line 69 and Form 8962.

• In the section for Payments:
Form 1040 Line 69: Net premium tax credit Attach Form 8962.

You may be eligible to claim the premium tax credit if you, your spouse, or a dependent enrolled in health insurance through the Health Insurance Marketplace. The premium tax credit helps pay for this health insurance. Complete Form 8962 to determine the amount of your premium tax credit, if any. Enter the amount, if any from Form 8962, line 26. See Pub. 974 and the instructions for Form 8962 for more information.

The first item is Form 1095. Almost every taxpayer who has health insurance coverage should be receiving one or more Form 1095s. We must educate our clients about this new form and let them know the importance of getting them to us with their tax information.

Form 1095-A – This is a form taxpayers should be receiving from the Exchange that will be reporting the coverage they have as well as any advanced premium credits the taxpayer received for a subsidized plan.

The IRS instructions with Form 1095-A state: “You received this Form 1095-A, because you or a family member enrolled in health insurance coverage through the Health Insurance Marketplace. This Form 1095-A provides information you need to complete Form 8962, Premium Tax Credit (PTC). You must complete Form 8962 and file it with your tax return if you want to claim the premium tax credit or if you received premium assistance through advance credit payments (whether or not you otherwise are required to file a tax return). The Marketplace has also reported this information to the IRS. If you or your family members enrolled at the Marketplace in more than one qualified health plan policy, you will receive a Form 1095-A for each policy.”

Form 1095-B – This form will be sent to taxpayers who had health insurance coverage “off the Exchange.” This would primarily be that the taxpayer had an ACA compliant health insurance policy for all of 2014. The policy might have been an individual plan purchased directly from an insurance company (off the Exchange) or could include Medicare or Medicaid.

The IRS instructions with Form 1095-B state: “This Form 1095-B provides information needed to report on your income tax return that you, your spouse and individuals you claim as dependents had qualifying health coverage (referred to as “minimum essential coverage”) for some or all months during the year. Individuals who do not have minimum essential coverage and do not qualify for an exemption may be liable for the individual shared responsibility payment. Minimum essential coverage includes government-sponsored programs, eligible employer-sponsored plans, individual market plans and miscellaneous coverage designated by the Department of Health and Human Services. For more information on minimum essential coverage, see Pub. 974, Premium Tax Credit (PTC).”

Form 1095-C - This form will be sent to taxpayers who had health insurance coverage “off the Exchange” which was provided to them by their employer.

The IRS instructions with Form 1095-C state: “This Form 1095-C includes information about the health coverage offered to you by your employer. Form 1095-C, Part II, includes information about the coverage, if any, your employer offered to you and your spouse and dependent(s). If you purchased health insurance coverage through the Health Insurance Marketplace and wish to claim the premium tax credit, this information will assist you in determining whether you are eligible. For more information about the premium tax credit, see Pub. 974, Premium Tax Credit (PTC).”

The Forms 1095 B & C are the easiest to report and deal with because those taxpayers will not be subject to any penalties, premium tax credits or return of exchange subsidies. However, because much of the reporting for 2014 is voluntary, not all taxpayers will receive any of the variations of Form 1095 and then you, as the tax preparer, will have the burden of attempting to assist your clients report the required information.

Information reported on employee’s W-2.  The ACA requires employers to report the cost of coverage under an employer-sponsored group health plan on an employee’s Form W-2, Wage and Tax Statement, in Box 12, using Code DD.  In general, the amount reported should include both the portion paid by the employer and the portion paid by the employee.

Many employers are eligible for transition relief for tax-year 2012 and beyond, until the IRS issues final guidance for this reporting requirement. Certain employers are exempt from the requirement to report the cost of coverage on Forms W-2. The transition exemption applies to the following: 1) employers filing fewer than 250 Forms W-2 for the previous calendar year; 2) multi-employer plans; 3) Health Reimbursement Arrangements; 4) dental and vision plans; 5) self-insured plans of employers not subject to COBRA continuation coverage or similar requirements; 6) employee assistance programs, on-site medical clinics, or wellness programs for which the employer does not charge a premium under COBRA continuation coverage or similar requirements; and 7) employers furnishing Forms W-2 to employees who terminate before the end of a calendar year and request a Form W-2 before the end of that year.

For more Q&A related to W-2 reporting of health insurance coverage go to:

http://www.irs.gov/uac/Employer-Provided-Health-Coverage-Informational-Reporting-Requirements:-Questions-and-Answers and/or

Notice 2012-9  http://www.irs.gov/pub/irs-drop/n-12-09.pdf

Or to read the Instructions for 2014 W-2s


Employer responsibility to offer health insurance.  This article is focused on the individual reporting responsibilities on Form 1040.  It should be noted that 96 percent of employers are not subject to ACA reporting requirements or the employer responsibility provision because they have fewer than 50 employees.  For a discussion of the employer responsibilities go to:

Fact Sheet - http://www.treasury.gov/press-center/press-releases/Pages/jl2310.aspx

Full version of Final Regulations - https://s3.amazonaws.com/public-inspection.federalregister.gov/2014-05050.pdf

Q&A - http://www.irs.gov/uac/Questions-and-Answers-on-Reporting-of-Offers-of-Health-Insurance-Coverage-by-Employers-Section-6056

The amount reported does not affect tax liability of the employee, as the value of the employer excludible contribution to health coverage continues to be excludible from an employee's income, and it is not taxable. This reporting is for informational purposes only and will provide employees useful and comparable consumer information on the cost of their health care coverage.

Form 8962 (Premium Tax Credit) - If the taxpayer purchased health insurance through one of the exchanges (also known as the marketplace), new tax Form 8962 (Premium Tax Credit) must be filed. When the taxpayers obtained their health insurance policy via the exchange, they submitted estimates of their 2014 income, which was used by the exchange to determine their premium. A significant number of these taxpayers were granted a subsidy for their premium via “advanced credits.” The purpose of Form 8962 is to reconcile the correct amount of premium tax credit the taxpayer is entitled based on their actual income reported on Form 1040 for 2014. 

Who must file Form 8962?  You must file Form 8962 with your income tax return (Form 1040, Form 1040A, or Form 1040NR) if any of the following apply to you:
• You are taking the PTC.
• Advanced Premium Tax Credit (APTC) was paid for you or another individual in your tax family.
• APTC was paid for an individual for whom you told the Marketplace you would claim a personal exemption, if no one else claims a personal exemption for that individual.

As you complete Form 8962, it will result in one of the following for the taxpayer: 1) the taxpayer owes additional tax because the advanced credits received by the taxpayer will have been greater than the allowable premium tax credit; 2) the taxpayer will have a refundable tax credit because the advanced credits they receive was in fact less than the allowable premium tax credit; or 3) the taxpayer will have neither because perhaps a premium tax credit was not received and nothing is due, or, in a small percentage of returns, the advanced premium credit allowed matches up with the allowable premium tax credit.

The IRS instructions with Form 8962 state: “Complete Form 8962 only for health insurance coverage in a qualified health plan (described later) purchased through a Health Insurance Marketplace (also known as an exchange). This includes a qualified health plan purchased on www.healthcare.gov.”

As you gather information to prepare the Form 8962, you will need the following information from the taxpayers:
1. Health insurer(s) for the year;
2. Number of months of coverage;
3. Members of your family covered by the above health insurance throughout the year;
4. Taxpayer’s county of residence all year;
5. Signed health insurance information.

To read the full Instructions for Form 8962 (in draft form as of September 18, 2014):


To get more details/facts about the Premium Tax Credit the IRS has published the following Tax Publications:

Publication 5120 –Your Credit, Your Choice – Get it Now or Get it Later  http://www.irs.gov/pub/irs-pdf/p5120.pdf

Publication 5121 –Need help paying for health insurance premiums? http://www.irs.gov/pub/irs-pdf/p5121.pdf

Publication 5152 –Report changes to the Marketplace as they happen http://www.irs.gov/pub/irs-pdf/p5152.pdf

Form 8965- Health Coverage Exemptions and instructions. A state or federal exchange needs to issue Form 8965 for certain types of exemptions (like religious), and for other types of exemptions (such as a short coverage gap) the taxpayer may self-prepare the Form 8965.

Who must file Form 8965?  If you are required to file a tax return and you want to claim a coverage exemption for yourself or another member of your tax household, you must file Form 8965. Attach Form 8965 to your return (Form 1040, Form 1040A, or Form 1040EZ). If you are not required to file a tax return, your tax household is exempt from the shared responsibility payment and you do not need to file a return to claim the coverage exemption. If you are not required to file a tax return but choose to file anyway, claim the coverage exemption on line 7a or 7b. (See the instructions under Part II, later.)

Only one Form 8965 should be filed for each tax household. If you can be claimed as a dependent by another taxpayer, you do not need to file Form 8965 and do not owe a shared responsibility payment. 

Even if you do not need to report or claim a coverage exemption, you will need to use the Shared Responsibility Payment Worksheet included in these instructions to calculate the shared responsibility payment if you or another member of your tax household did not have minimum essential coverage or a coverage exemption for one or more months.

**For 2014, the payment is either $95 per adult and $47.50 per child (up to $285 for a family) or 1% of household income. For 2015, it’s either $325 per adult and $162.50 per child (up to $975 for a family) or 2% of household income. For 2016, it’s either $695 per adult and $347.50 per child (up to $2,085 for a family) or 2.5% of household income. Per the IRS Website, “the individual shared responsibility payment is capped at the cost of the national average premium for the bronze level health plan available through the Marketplace in 2014.” As has been widely publicized, the shared responsibility payment is not enforceable by the IRS. That means the IRS will offset the payment against tax refunds due, but it can’t file liens, levy assets or start collection proceedings for this payment.**

The open enrollment period to purchase health insurance coverage for 2015 through the Health Insurance Marketplace runs from Nov.15, 2014 through Feb. 15, 2015. The Marketplace is where clients can find health insurance coverage. Visit the Marketplace to find information about: 1) health insurance options, 2) how to purchase coverage, and 3) how to get financial assistance with the cost of insurance. Visit the Department of Health and Human Services website at HealthCare.gov to learn more about coverage options, financial assistance and how clients can enroll in coverage through the Marketplace.

The IRS publication that will help you learn about how the Affordable Care Act affects taxes is IRS Publication 5187, Health Care Law: What’s New for Individuals and Families, available at IRS.gov/aca. While the health care law has several parts, this publication breaks down what’s new for the 2014 federal tax returns you will be filing in 2015.”

This publication was released by the IRS on December 18, 2014. It is only 21 pages long and gives you an excellent resource. http://www.irs.gov/pub/irs-pdf/p5187.pdf

For additional information on information related the Affordable Care Act go to IRS.gov

Q&A http://www.irs.gov/uac/Newsroom/Affordable-Care-Act-Tax-Provisions-Questions-and-Answers


The following is a listing of topics covered there:

It’s Not Too Late to Report Changes in Circumstances that May Affect Your Premium Tax Credit
Health Care Tax Tip 2014-22, Oct. 31, 2014

Information for Employers about Their Responsibilities Under the Affordable Care Act
Health Care Tax Tip 2014-21, Oct. 16, 2014

Small Employers Should Check Out the Health Care Tax Credit
Health Care Tax Tip 2014-20, Oct. 8, 2014

New IRS Publication Helps You Find out if You Qualify for a Health Coverage Exemption
Health Care Tax Tip 2014-19, Sept. 23, 2014

The Individual Shared Responsibility Payment
Health Care Tax Tip 2014-18, Sept. 16, 2014

Moving Can Affect Your Premium Tax Credit
Health Care Tax Tip 2014-17, Sept. 12, 2014

Getting Married Can Affect Your Premium Tax Credit
Health Care Tax Tip 2014-16, Aug. 26, 2014

IRS: Now is the Time for a Mid-Year Premium Tax Credit Checkup
Health Care Tax Tip 2014-15, Jul. 18, 2014

IRS.gov has information about the health care law and its effect on your taxes
Health Care Tax Tip 2014-14, Jul. 16, 2014

Find out if You Qualify for a Health Insurance Coverage Exemption
Health Care Tax Tip 2014-13, Apr. 17, 2014

Find Out if Your Health Insurance Coverage is Considered Minimum Essential Coverage Under the Affordable Care Act
Health Care Tax Tip 2014-12, April 10, 2014

Time May be Running Out -- March 31 is an Important Deadline
Health Care Tax Tip 2014-11, March 25, 2014

What do I need to know about the Health Care Law for my 2013 Tax Return?
Health Care Tax Tip 2014-10, March 18, 2014

What You Need to Know about the Amount of Health Insurance Reported on Form W-2
Health Care Tax Tip 2014-09, March 13, 2014

Small Business Health Care Tax Credit
Health Care Tax Tip 2014-08, March 10, 2014

Changes in Circumstances can Affect your Premium Tax Credit
Health Care Tax Tip 2014-07, March 25, 2014

Four Tax Facts about the Health Care Law for Individuals
Health Care Tax Tip 2014-06, March 11, 2014

Three Timely Tips about Taxes and the Health Care Law
Health Care Tax Tip 2014-05, March 6, 2014

The Individual Shared Responsibility Payment - An Overview
Health Care Tax Tip 2014-04, March 20, 2014

The Premium Tax Credit
Health Care Tax Tip 2014-03, February 25, 2014

The Health Insurance Marketplace - Learn about Your Health Insurance Coverage Options
Health Care Tax Tip 2014-02, February 25, 2014

IRS Reminds Individuals of Health Care Choices for 2014
Health Care Tax Tip 2014-01, February 25, 2014

IRS Website Explains Tax Provisions of the Health Care Law; Provides Guide to Online Resources
Health Care Tax Tip 2013-01, August 15, 2013

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