I.R.C. imposes 40% excise tax on certain high cost employer-sponsored health care plans

My friend April sent me an email about the Title IX: Revenue Provisions in the Health Care Bill that was passed. I was surprised at what she referred to so I went to the website, http://thomas.gov and searched for HR 3590 summary.

What I wanted was on pages 21-22 of the summary. I bet you’ll be as surprised as I was. Here is a summary of the summary.

Subtitle A: Revenue Offset Provisions – (Sec. 9001, as modified by section 10901) Amends the Internal Revenue Code to impose an excise tax of 40% of the excess benefit from certain high cost employer-sponsored health coverage. Any amount which exceeds payment of $8,500 for an employee self-only coverage plan and $23,000 for employees with other than self-only coverage (family plans) as an excess benefit. Increases such amounts for certain retirees and employees who are engaged in high-risk professions (e.g., law enforcement officers, emergency medical first responders, or longshore workers). Imposes a penalty on employers and coverage providers for failure to calculate the proper amount of an excess benefit.

As I understand this, if you are in a company plan and the company pays over $8,500 for a single individual employee that employee will be paying tax on the amount over $8,500 at 40%. Example: Company pays $10,000 for individual employee health coverage. Deduct $8,500 leaving $1,500 excess. Employee will have to pay $600 excise tax on the $1,500 calculated at 40%.

The employee that insures a family will have to pay the excise tax on the amount over $23,000 that the company pays. Example: Company pays $30,000 for a family plan. Deduct $23,000 leaving $7,000 excess. Employee will have to pay $2,800 excise tax on the $7,000 calculated at 40%.

(Sec.9002) Requires employers to include in the W-2 form the aggregate cost of applicable employer-sponsored group health coverage that is excludable from the employee’s gross income (excluding the value of contributions to flexible spending arrangements).

I don’t know if these plans apply to the average employee or to high earning executives. I guess we’ll find out when W-2s come out in 2011.

There are some other sections that relate to health savings account, Archer medical savings account, limits of annual salary reduction contributions under a cafeteria plan, etc.

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SandraCherry, June 1st 2010 | Tags: , ,
Posted in Insurance, Tax Planning

TAX Planning Strategies: Tax Free vs. Tax Deferred vs. Taxable

Today I had to clean off my desk. I need room to maneuver and there are piles of papers everywhere.

I came across an article from Research Magazine, November2009 edition, by Moshe A. Milevsky, PHD titled Back To Basics? Since I had ripped the article out of the magazine some time ago I thought I’d read it.

It’s too long to give you the whole article so I’ll give you my take on it. Milevsky is an academic and did a comparison of a $100 investment that he calculated out in three generic income tax structures at a rate of 7.29% return net of fees each year.

Structure #1 is No Tax Ever. Structure #2 is High-rate, tax deferred and Structure #3 ia Low-rate, continuously taxed.

In the No Tax Ever structure, the entire gain is never taxed. In 10 years, the initial $100 investment grows to approximately $202 and after 30 years it grows to $826. You can confirm this by multiplying $100 times 7.29% times the number of years. You need to use a financial calculator to do the computation.

In the high-rate, tax-deferred structure, your gains are tax-deferred while the money is invested. Once cashed in or the funds are withdrawn you pay income taxes on all the gains at your personal income tax rate. Using a 35% tax rate this leads to after-tax account values of about $166 in year 10 and $572 in year 30.

In the low-rate, continuous-tax structure, you pay capital gains taxes on all investment gains as they occur, but at a relatively low rate of 20%. When you eventually withdraw the funds, no additional income taxes are due. The value of your portfolio in year 10 is approximately $176 and $548 in year 30.

The end result of all of this is that after 35 years Structure #1 has value of 1,173.70, Structure #2 has value of $797.90 and Structure #3 of $727.10.

Comparing the after-tax results at different points in time I understand that the No Tax Ever structure always leads to the highest portfolio value. The gap between this and the other two structures widens as the holding period lengthens.

In Structure #2, the tax-deferred structure, the portfolio value is lower compared to Structure #3 for the first 25 years—the disadvantage disappears in year 25. In year 25 the after-tax value of both structures is equal.

The conclusion we both came to is that if you are investing for the short term it makes sense to use Strategy #1 or Strategy #3 and pay the capital gains tax annually. If you are investing for the long term Strategy #1 or Strategy #2 using a tax-deferred annuity makes sense. You incur the higher tax, assuming a 35% tax rate when you withdraw your gain from the annuity (Strategy #2). There’s a calculator at www.qwema.ca where you can compute the break-even point for any combination of time horizons, tax structures and tax rates.

I disagree with Milevsky when he says you have to die to avoid the ‘no tax ever’ investment plan. Putting your money into a Roth IRA gives you ‘no tax ever’. After five years in a Roth IRA you can withdraw funds tax free.

I’d like to hear your opinions and if you would like a copy of the article from Research Magazine with the Chart I can email it to you.

You can reach me by phone at 818 706-3745 or by email: Sandra@Insurance-California.com.

Sandra Cherry, PFP CA Insurance License #0B45111

SandraCherryFinancialPlanner.com

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SandraCherry, February 2nd 2010 | Tags: , ,
Posted in Tax Planning

6 IDEAS FOR WHO MIGHT BE GOOD IRA CONVERSION CANDIDATES

1. A young person is an excellent candidate to do an IRA to Roth conversion due to the length of time they have to recover from the tax hit. Remember, the income tax has to be paid within two years of the conversion.

2. If someone is in the early years of their retirement, they expect to live a long time and won’t need to access the IRA assets for at least five years, a conversion may well be worth it. It comes down to how long it will take to recoup the income tax hit.

3. If already retired and receiving Social Security (SS) converting to a Roth could reduce the tax owed on the SS income. The conversion might bump up the amount of SS that is taxed in the conversion year and reduce the amount of taxes owed on SS in future years. Roth distributions don’t factor into the calculation used to calculate which SS benefits will be taxed.

4. People who have made nondeductible IRA contributions are good candidates. The gain on the account is all that is taxable.

5. Someone who has a large estate should look at the IRA conversion. Two things to consider:

Roth IRAs do not require a mandatory distribution allowing assets to compound and increasing the amount that may be passed to heir’s tax free.

The overall assets passed to heirs will be smaller since some assets are used to pay the income tax on the conversion. It could reduce estate-tax liability if there is any. As of this writing there is an exemption of $3,500,000 per person before the estate tax kicks in.

6. For those that are unemployed or who have income that is appreciably lower than usual, it might be advantageous to convert provided there is cash available to pay the tax. The tax will be lower if you are in a lower income tax bracket.

Always consult with your tax advisor.

Next time I’ll discuss who should not be considering a conversion. Until then………..

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SandraCherry, November 20th 2009 | Tags: , ,
Posted in Financial Planning, Tax Planning