The 2014 Tax Act and Professional Employer Organizations (PEOs)

We know that Congress passed, and the President signed, the Tax Increase Prevention Act of 2014 at the end of last year. This is the tax bill that retroactively resurrected certain tax deductions that many taxpayers have become used to, such as deducting sales taxes (rather than state income taxes)  should one live in Tennessee, Florida or Texas or deducting (a certain amount of) tuition payments if one’s child is in college.

There is something else this bill did that was not as well publicized.

It has to do with professional employer organizations, known as PEO’s. These are companies that provide human resource (HR) functions, such as the paperwork involved in hiring, as well as running payroll and depositing payroll taxes and other withholdings.

There has long been a hitch with PEOs and payroll taxes: the IRS considered the underlying employer to still be liable for withholdings if the PEO failed to remit or failed to do so timely. The IRS took the position that an employer could not delegate its responsibility for those withholdings. To phrase it differently, the employer could delegate the task but could not delegate the responsibility.

You can guess what happened next. There were cases of PEO’s diverting withholdings for their own use, then going out of business and leaving their employer-clients in the lurch. If you were one of those employer-clients, the experience proved to be very expensive. You had paid payroll taxes a first time to the PEO and then a second time when the IRS held you responsible.

The answer was to watch over the PEO like a hawk. The IRS encouraged employer-clients to routinely go into the electronic payment system (EFTPS), for example, to be certain that payroll taxes were being deposited.

That unfortunately collided with many an employer’s reason to use a PEO in the first place: to have someone else “take care of it.”

Back to the tax bill. Stuck in with the tax extenders was something called the ABLE Act, which is a Section-529-like-plan, but for disabled individuals rather than for college expenses.

Stuck (in turn) onto the ABLE Act was a brand-new Code section just for PEOs. The provision requires the IRS to establish a PEO certification program by July 1, 2015. There will be a $1,000 annual fee to participate, but – once approved – the IRS will allow the PEO to be solely responsible for the employer-client’s payroll taxes.

You have to admit, this is a marketing bonanza if you own a PEO. It will separate you from a non-PEO who is bidding on the same prospective client.

The PEO will have to post a bond in order to participate in the program. In addition the PEO will have to be audited annually by a CPA. The PEO will have to submit that audited financial statement to the IRS.

I do not know the answer as of this writing, but I have a strong suspicion the AICPA was in the room when that audit requirement was included. Why do I say that? Because only CPAs are allowed to render an opinion that financial statements are “presented fairly in accordance with generally accepted accounting principles.” 

NOTE: That would be CPAs who practice as auditors. There are CPAS who do not. For example, I specialize in taxes.

There is – by the way – risk to the PEO. This is not a one way street. The PEO will be responsible for the payroll taxes, even if the employer-client does not pay the PEO.

What New Paperwork Does An Employer Have Under ObamaCare?

You are an employer. You are a bit unclear on the new paperwork you need to file to comply with the Affordable Care Act (ACA), also known as Obamacare.  As we go into the fourth quarter of 2014, this issue is taking on greater urgency.

You are completely normal. Many companies, including their advisors, are in the same situation. The rules are new, complicated and – and in some cases – repetitively postponed. Are you supposed to do anything different when you send out the 2014 Forms W-2 in early 2015, for example?

The easiest way to make sense of this is to divide employers into three categories. Why? Because each employer category has its own rules.

The first category is an employer with less than 50 employees (technically, “full-time equivalents”). The Government is quick to point out that this encompasses 96% of all employers, although of course it encompasses a much smaller percentage of employees.

If this is you:

·        You do not have to do anything different with your 2014 W-2s.

·        You are not required to provide health insurance coverage to your full-time employees.

·        You are not required to pay an employer penalty.

·        This is true for 2014, 2015 and all years thereafter.

So, if you are an employer in this category you may or may not offer health insurance to your employees, but this remains a business decision. You are not required to do anything – including filing any new paperwork – to be in compliance with the ACA.

Let’s make our second category employers with 100 or more employees. Why? Technically the original ACA divided employers into two groups: under 50 employees and 50 employees and over. There have been numerous regulatory changes to the law, and one change divided employers further into 50-but-99-and-under employees and 100-employees-and-over.

If this is you… you need to get ready to make changes. 

·         You do not have to do anything different with your 2014 W-2s (fortunately). However, see below for your 2015 W-2s, which you will file in 2016.

·        You will have to provide health insurance to your employees starting January 1, 2015.

o   The ACA itself defines what is acceptable insurance, referred to as “minimum essential coverage.”

§  It also has to be “affordable.”

§  These are areas you want to review with your insurance agent or benefits consultant.

o   There is a sub-rule in here that may or may not impact you. The ACA originally required employers to cover 95% of their full-time employees in 2015. That rule has been changed. You are now required to cover 70% of your full-time employees in 2015 and then 95% for 2016 and later years.

·        You will be required to pay an employer penalty if you don’t provide minimum essential and affordable health insurance.

o   Interestingly enough, this penalty will not appear on your business income tax return. The IRS has to wait until your employees have filed their individual tax returns, then match any information provided to the IRS by the health-care exchanges and by you as the employer.

o   This is expected to be in the form of an IRS notice. You will be given time to respond, after which the IRS will issue another notice and demand for payment.

o   You can therefore expect that this notice will not go out until the end of 2016 or more likely in 2017. This is approximately one-year after you paid the underlying payroll itself.

§  We should expect that this penalty will also eventually be required to be paid via estimated tax payments.

·        You will have new paperwork when you file your 2015 year-end payroll tax returns in 2016. These are known as the “Section 6056 rules” and are in place to provide employees the information they need to calculate their ACA penalty, if any, on their individual tax returns.

o   You will file Form 1095-C Employer-Provided Health Insurance Offer and Coverage. A copy of this goes to your employee. It will also go to the IRS with its transmittal – Form 1094-C Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns.

§  It is therefore similar to sending the W-2s with their transmittal Form W-3.

o   By the way, filing Forms 1095-C and 1094-C are optional for 2014 (to be filed in 2015). The IRS has said it would like you to file and consider them a “trial run,” but you do not have to.

o   But they are mandatory for 2015 (to be filed in 2016).

Finally, our third category: employers with 50 to 99 employees.

This category is different because in February, 2014 the IRS segregated what it called “midsized employers” (that is 50 to 99 employees). These employers received a one-year delay before facing ACA penalties – until January 1, 2016.

The “large employers” (100-or-more employees) received no such break and have to comply starting January 1, 2015.

If this is you… you need to get ready to make changes. 

·        You do not have to do anything different with your 2014 W-2s (fortunately). However, see below for your 2015 W-2s, which you will file in 2016.

·        You will have to provide health insurance to your employees starting January 1, 2016 (not 2015).

o   There is an interesting requirement, though.

§  You will have to certify – for 2015 - that…

·        You have not reduced your workforce to qualify for this relief; and

·        You have not materially reduced or eliminated any health coverage.

§  This certification is on Form 1094-C, which you will be filing anyway.

o   Otherwise, the requirements are the same as 100-and-more employers, as discussed above.

·        You will have an employer penalty for not complying, but you do not have to comply until January 1, 2016. That is, you have one additional year to comply (as compared to 100-and-more employers).

o   Otherwise, the requirements are the same as for 100-and-more employers, as discussed above.

·        You will have new paperwork when you file your 2015 year-end payroll tax returns in 2016. These are known as the “Section 6056 rules” and are in place to provide employees the information they need to calculate their ACA penalty, if any, on their personal tax returns.

o   You will file Form 1095-C Employer-Provided Health Insurance Offer and Coverage. A copy of this goes to your employee. It will go to the IRS with its transmittal – Form 1094-C Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns.

§  It is therefore similar to sending the W-2s with their transmittal Form W-3.

o   By the way, filing Forms 1095-C and 1094-C are optional for 2014 (to be filed in 2015). The IRS has said it would like you to file and consider them a “trial run,” but you do not have to.

o   But they are mandatory for 2015 (to be filed in 2016).

You now have a high-altitude view of what you, as an employer, are to do to comply with the ACA filing requirements. Unless you are a less-than-50 employer, you will have additional reporting requirements. Please consider that some of this information is not presently collected as part of your routine accounting process. Both 50-to-99 and more-than-100 employers should review that new procedures will be in place to collect the information needed to complete these new ACA tax forms. Whereas these forms will not be filed until early 2016, they will contain information going back to January, 2015.

Limited Delay In ObamaCare Employer Mandate

Let’s touch again on the latest change to ObamaCare.

You may remember than last July, the IRS postponed the “Section 4980H shared-responsibility penalty” to 2015. Its original effective date was 2014.

CLARIFICATION: The 4980H shared responsibility penalty is the $2,000/$3,000 ObamaCare penalty levied on employers. The penalties apply if (1) you do not offer health insurance or (2) the government does not consider the health insurance you do provide to be adequate.

NOTE: This is a separate penalty from that levied on you personally should you not carry insurance. The way ObamaCare is constructed (at least presently), both the employer and employee can wind up paying penalties.     

OBSERVATION: And these penalties will wind up on someone’s individual or business tax return, which is why we are talking about them in a tax blog.

On February 10, 2014 the IRS further delayed the 4980H penalty for employers having 50 to 99 full-time equivalent employees in 2014. These employers now have an additional year – until 2016 – to offer health insurance to their employees.

I am going to have to put up a chart on my office wall to keep track of all the delays and changes.

Let’s recap the “new” revised rules for employer compliance with the 4980H penalty:

(1)  Employers with less than 50 full-time equivalent employees do not have to pay the penalty or file additional reports with the IRS - ever.

a.     There has been no change for this employer tier.

(2)  Employers with 50 to 99 full-time equivalent employees (FTEs) will have to file reports with the IRS in 2015 but will not have to pay any penalties until 2016.

a.     That is a change.

b.    But … see below.

(3)  Employers with over 100 FTEs have to provide health insurance. They will also have to file reports and possibly pay penalties in 2015.

a.     But the hurdle for the penalties has changed.

b.    The new hurdle is 70% employee coverage for 2015 and 95% coverage in 2016 and later years.

                                                              i.     There is a small break here.

Then there is something odd.

Let’s go back to Tier 2 employers - those with 50 to 99 FTEs.

If this is you, you will have to sign an affidavit that you did not reduce the size of your workforce below 100 to take advantage of the additional one-year delay. The IRS does allow you to explain yourself, though, if you did:

For example, reductions of workforce size or overall hours of service because of business activity such as the sale of a division, changes in the economic marketplace in which the employer operates, terminations of employment for poor performance, or other similar changes unrelated to eligibility for the transition relief provided in this section XV.D.6 are for bona fide business reasons and will not affect eligibility for that transition relief.”

Tier 2 employers will be required to maintain a “comparable” level of health benefits as existed on February 9, 2014 in order to obtain relief.

OBSERVATION: Interestingly, if the Tier 2 employer did not offer health insurance on February 9, 2014, then this requirement is automatically met.

So … you will have to sign a form saying it was not the president’s fault that people lost their jobs.

I suppose it will be the tooth fairy’s fault.