Taxlink by Andy Biebl

Should I Cut My Employee Health Coverage?

Rate hikes in small group health plans--combined with hefty subsidies for those who quality at health care exchanges--encourage small businesses to drop their employer health insurance coverage, CPA Andy Biebl says. (Photo by Eric Norris, CC BY 2.0)

DTN Tax Columnist Andy Biebl is a CPA and principal with the accounting firm of CliftonLarsonAllen LLP in New Ulm and Minneapolis, Minn., and a national authority on agricultural taxation. He'll address how to avoid a tax nightmare at retirement during an Ag Summit workshop in Chicago Dec. 7 www.DTNAgSummit.com. To pose questions for upcoming columns, email AskAndy@dtn.com.

QUESTION:

Last winter you concluded that small business owners who carry group health plans to cover their employees might be better off freeing employees to buy health insurance policies on state exchanges. Could you explain why, or if you have changed your mind?

ANSWER:

First, we need to emphasize that employers with fewer than 50 employees are under no requirement to provide health insurance coverage to their employees; the mandates of the ACA only apply to those with 50 or more full-time and full-time equivalent employees.

If a small employer has been providing group coverage and the group premiums remain affordable for that employer, there is no reason to change. Further, the employer and employee continue to be free to negotiate any split of the premium costs. But the ACA has imposed additional requirements on all health insurance policies, and in many cases that is driving up the premiums. Further, small group underwriting has always been expensive; even before the ACA, many employers with only a handful of employees found group coverage too costly.

The new ACA dynamic beginning in 2014 is that individuals without employer coverage can acquire their insurance through an exchange, and if income is low enough, receive a substantial subsidy toward their premium costs. The subsidy extends up to about $46,000 of income for a one-person household, about $62,000 of income for a two-person household, $78,000 for a household of three, and $94,000 for a four-person household. Even if income is just slightly under those thresholds, the subsidy remains significant. Using average premium costs, a single individual near the top of the $46,000 income ceiling might expect a $2,000 or more subsidy; a family of four approaching the ceiling of $94,000 of income could still receive a $5,000-$6,000 subsidy! So those dynamics, in combination, lead to my observation that many small ag employers, where group policies are very costly, should consider having their employees look at exchange insurance coverage.

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There's another dynamic to consider, as well. Previously, many small employers would assist their employees with their health costs by providing a medical reimbursement plan to assist with out-of-pocket healthcare costs, and/or a direct reimbursement of some of the individual health insurance policy premiums. Payments for these fringe benefits are tax-deductible to the employer and tax-free to the employee. But starting in 2014 under the ACA, those arrangements are considered to violate the ACA "market reforms," and will result in very hefty penalties imposed on the employer. Further, any employer medical reimbursements or premium assistance prevent the employee from taking advantage of the exchange premium subsidies.

So putting all of these changes together, it looks like small ag employers will either provide a group health insurance policy or the employees will be entirely on their own. If it's the latter, those exchange subsidies are generous and the individual ag workers may want to head in that direction for their health insurance. For the 2015 year, the exchange open enrollment period is 11-15-14 through 2-15-15.


QUESTION:

Are there any plans to bring the legislation forward to make the $500,000 Section 179 expense and the 50% bonus depreciation permanent? When I asked my congressman's staff in early September, they said there were only 20 legislative days left in the year. I told him I plan on working another 110 days yet this year, but he didn't think that was funny at all.

ANSWER:

These two depreciation provisions are part of a package of over 30 "extenders" that need congressional attention before year-end. The House earlier this year passed legislation to make these two depreciation provisions permanent, but the Senate has not acted. We expect Congress will address all of the extenders as a package in late-year legislation. The consensus among tax analysts seems to be that we will get an extension of the Section 179 deduction at $500,000 and at least a temporary renewal of the 50% bonus depreciation. But, of course, that is not a certainty. It's unfortunate the politicians do not understand how this uncertainty handicaps the ability of business owners to plan their capital expenditures.


QUESTION:

Back in the 1970s, we had an accountant that would recognize gain on the exchange of farm equipment as a means to convert ordinary income to capital gain. Is it still possible to do this under current tax laws? Here is an example: A used planter is purchased for $12,000. Several years later it is traded for a new planter, and the dealer allows $35,000 for the trade-in against the purchase price of the new planter at a time when the used planter has been depreciated down to $5,000. The accountant would treat the old planter as sold for $35,000 with a gain of $30,000. That gain would be reported as $7,000 of ordinary income depreciation recapture and the remaining $23,000 as capital gain. The new planter was then treated as if it was entirely purchased for cash.

ANSWER:

The transaction you describe was not acceptable even in the 1970s. In a 1961 Revenue Ruling (61-119), the IRS stated that a reciprocal sale and purchase with the same dealer would be recast as a tax-deferred Section 1031 trade. Under the trade approach, no gain is recognized on the disposition of the old property. The old asset's depreciated tax cost carries into the new asset, and is added to any boot paid to arrive at the depreciable basis of the new asset. Without this rule, there is the ability to manipulate how much is allocable as a sale price to the old item, leading to an overstated capital gain that is offset by fresh depreciable basis.

The only way to accomplish a taxable sale is to separately dispose of the old asset with an independent party, and then purchase the new asset from the dealer. But in the economics of the real world, you may find that there's not much of a capital gain on the old equipment. It is unusual to purchase an asset and later sell it for more than its original cost, and that is what is necessary to create a capital gain on equipment; otherwise the gain is all attributable to prior depreciation and comes back as ordinary income. Some states assess sales or use tax on farm equipment; not using the trade-in approach in those states will also create additional state taxes.

(MZT/AG)

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