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by Cynthia Polley
We’re in the midst of seminar season, and WAA has plenty of education options to satisfy your CPE requirements. It’s not too late to attend the upcoming Individual 1040 Update 16-Hours (in Auburn or Spokane) or get your EA ethics hours in at the same locations. In addition to the live Gear Up seminars, there is a great menu of online options that offer a variety of topics.
Please see below for our list of educational opportunities.
Or go to our website www.waa.org.
2014 Live Seminar Schedule
Gear Up 1040- Auburn December 1-2, 2014
Gear Up EA Ethics – Auburn December 1, 2014
Gear Up 1040 – Spokane December 8-9, 2014
Gear Up EA Ethics – Spokane December 8, 2014
WAA is happy to announce that two of our most popular education providers, Montana’s Western CPE and Bob Jennings of TaxSpeaker have each provided us with exclusive articles available only to our WAA newsletter readers.
Read through Dr. Ray Thompson’s summary of the significant changes required for proper reporting of revenue as a result of the issuance of Accounting Standards Update (ASU ) 2014-09.
Then take a read through Bob Jennings analysis of IRS Notice 2013-54 and discover just how much your clients’ are affected in the health care fringe benefit arena. There is still time to take corrective action before the year end.
For more information and to access our members’ discounts for both vendors, please visit our website at waa.org and click on our online education links. Tell ‘em WAA sent you.
ASU 2014-09: It’s Much More than an Accounting Change
By Dr. Ray Thompson, CMA, CFM, CBA
Reporting revenue will likely change significantly as a result of the new FASB and IASB converged standard on revenue recognition—Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). While it’s hard to predict the ultimate result of the new standard, businesses must begin to work out how the standard will affect their reporting methods. To the extent their business models don’t match ASU 2014-09, companies will need to make their own judgments, but most agree the “devil will be in the details.”
Read on for a summary of how ASU 2014-09 will soon affect nearly every revenue-generating entity.
1. The new standard provides a single source for almost all revenue guidance. It covers all companies, in all industries, thereby removing much of the previous transaction-specific or industry-based guidance found throughout FASB’s Accounting Standards Codification (ASC).
2. The terminology we’re familiar with (e.g., “percent of completion,” “standalone value,” “multiple deliverables”) is replaced by such concepts as “performance obligations” and “delivery over time.” Analysts caution that there isn’t a one-on-one correspondence between old and new terminology; therefore, careful analysis is needed to understand how these differences could impact accounting results.
3. The new standard is much briefer, setting out broad principles and providing close to 100 examples of how the principles should be applied to specific fact patterns. There are no “bright-line rules”; rather, accountants are expected to apply FASB’s model for themselves, using their own professional judgment.
4. The new standard is expected to have a minimal effect on most small companies that have relatively straightforward transactions. Those with complex business models (e.g., licensing of intellectual property) will face difficulties, especially when they previously have used industry-specific rules.
5. All entities need to plan for significantly enhanced disclosures and be ready to explain and justify why they recognized revenue the way they did—simply asserting they’ve “followed the rules and gotten it right” won’t be sufficient.
Implementing ASU 2014-09 may alter a company’s reported revenue, one of the most important numbers on any financial statement, and some companies may even experience lost revenue as they transition to the new standard. ASU 2014-09 is much more than an accounting change. Implementing the standard will bring about significant internal changes, including:
• Accounting and reporting systems and changes in such key performance metrics as gross margins, EBITDA, and operating cash flow. Companies involved in long-term contracting may face issues with covenant compliance.
• Business operations, such as contracting procedures and documentation where contracts are driven by regulatory requirements, may be affected. It may prove difficult to match the new standard to current compliance procedures.
• Systems and controls may need to be altered to match with transaction accounting. IT systems for data accumulation and the general ledger will need upgrades to track information in accordance with the new standard (e.g., multiple deliverables and residual value).
• Controls over disclosures, for example, will need to address the increasingly qualitative nature of the estimation process. Documenting the wider range of judgments will create challenges for the reporting system as a whole.
• The impact of ASU 2014-09 on taxes is by no means clear. It’s possible the IRS may alter the Tax Code in response to the new standard, and some suggest there may be more book-to-tax differences under ASU 2014-09. The standard also could require changes in transfer pricing policies or provide opportunities for tax planning strategies.
For public entities, ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2016, including interim periods therein. Nonpublic entities will be required to apply the standard for annual periods beginning after December 15, 2017, and for interim and annual reporting periods thereafter.
You’ll get complete guidance from Dr. Ray Thomson and William Engelbret when you participate in their outstanding webcast Complete, Hands-On Guide to the New Revenue Recognition Rules. Register via WAA today and begin preparing for the implementation of ASU 2014-09.
For decades small business owners have deducted employee health insurance in a variety of ways. Internal Revenue Code Section 106 states that an employer may provide tax-free employee benefits in the form of payments for health or accident plans. Code Section 105(b) allows an employer to provide tax-free employee reimbursements for medical costs including insurance, as an HRA. Revenue Ruling 61-146 allowed an employer to reimburse an employee for some or all of the premiums for an individual health insurance policy, or even pay some or all of the premiums directly to the insurer.
In late 2013 the IRS issued Notice 2013-54 which essentially voided many of these small business health care benefits, effective January 1, 2014. In layman’s terms, Notice 2013-54, combined with a previous notice, 2011-1 has made the following changes, and has backed up the changes by imposing a $100 per employee, per day penalty ($36,500 annually) for non-compliance.
1. An employer may no longer reimburse or directly pay in a tax-free manner individual health insurance premiums as allowed in prior years. Unless the employee meets one of the “excepted benefits” discussed below the reimbursement or direct payment of insurance premiums beginning 1/1/2014 is considered a non-compliant group health plan under ACA and subject to the above penalties.
2. An employer may no longer reimburse or directly pay in a tax-free manner other individual employee health care costs, including co-pays, deductibles, prescription drugs, etc. as allowed under the HRA rules in prior years. Unless the employee meets one of the “excepted benefits” discussed below the reimbursement or direct payment of these costs beginning 1/1/2014 is considered a non-compliant group health plan under ACA and subject to the above penalties.
This means that employers that have been violating these new rules since the beginning of 2014 have a potential penalty problem of $36,500 per employee under Notice 2011-1. The good news is that the penalty will not be enforced by the IRS until they issue final Regulations on the topic, and no final regulations have been issued. The bad news is that a similar penalty is provided for under ERISA guidelines enforced by the Department of Labor and those penalties are enforced, so yes, we have a problem.
What are the “excepted benefits” that a small business employer may still provide? There are 4 exceptions discussed throughout Notice 2013-54 as follows:
1. Benefits provided by an employer that only has one eligible “participant”. (The clear guidance in the Notice actually says “less than two”, sarcasm intended). (Notice 2013-54, page 3, part 1, Market Reforms) Because an eligible participant does not include part-timers, seasonal employees, employees with less than 3 years of service, employees under age 25, union employees or nonresident aliens (105(h)(3)(B)) an employer may actually have more than 1 employee, as long as the other employees are in this non-eligible group.
2. Benefits provided for accident, disability, dental, vision or long-term care coverage. (Notice 2013-54, as above).
3. Benefits provided through an HRA that has been integrated with an employer sponsored group health plan. (Notice 2013-54, page 4, Paragraph 1).
4. Benefits provided to retirees. (Notice 2013-54 as above)
Presuming that every employer wants to go back to the beginning of the year and fix any 2014 errors that have occurred (or pay the $36,500 penalty if they don’t!), here is what we believe needs to be done for 2014 errors, followed by options for small employers going into the future.
If an employer has been providing tax-free payments for insurance, reimbursements or direct payments of health care costs for employees in 2014 this is no longer allowed and subject to the penalty upon examination. The employer has two options: either get the employee to pay back the payments that have already occurred, or go back to the beginning of the year and make the payments a taxable wage by grossing them up for FICA and Medicare. This means that there will be some additional payroll tax due, and that 941’s will have to be dealt with.
Looking into the future we see that a small business employer has these options:
• Discontinuing any and all health care related fringe benefits. Many of our small business clients are throwing their hands up in the air with confusion and anger because of ever-changing guidelines, requirements, penalties and filing rules that seem to change without notice and with incredible penalties attached. They are dropping any and all employer sponsored health care related fringe benefits out of fear of making some horrible mistake.
• Sponsoring a group health insurance policy in a non-discriminatory manner and paying some or all of the premiums. If an employee chooses not to participate, have them sign an “elect out” clause and all employer payments are deductible. The employees can pay their portion, if any, through a secondary pre-tax 125 cafeteria plan. This second option does come at a cost in that the employer now has to pay for a 125 plan and for compliance with health care disclosure rules from other Federal agencies such as we saw in 2013 with the HHS rules on employee notification. In our office this has not been popular among clients because of the same fear of making a bankruptcy-inducing mistake.
• Provide any health related fringe benefits the employer desires to any employee desired, but add the full cost to the employee’s wages for both regular and payroll tax purposes. This removes the tax-free element of Notice 2013-54 and allows the employer to do whatever they wish. Sadly this option means that the employee will face additional 7.65% payroll tax, as well as income tax, and that the employer will pay matching FICA as well as FUTA, SUTA and worker’s compensation insurance, so this has also not been a popular option among our small business clients.
In summary IRS Notice 2013-54 which became effective 1/1/2014 has made sweeping changes to small business health care fringe benefits that changes everything for small business. At TaxSpeaker we are concerned that many advisors, insurance agents and other tax professionals are unaware of these changes and that our clients will follow incorrect advice, so we are having clients sign a statement with the engagement letter addressing the issue. The engagement letters and statement, as well as dozens of other letters, checklists and worksheets, are available from our website via WAA in Word/Excel form.
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