Tax Attic: QSEHRA – The new tax bill

Last Friday, Meijer held a ribbon-cutting ceremony at their 10 Mile store. It was an impressive event with the Rockford store being show-cased as the example that future stores will follow. Most of us have wandered around Meijer for these last few months while the reconstruction has taken place. It now looks great! I mention Meijer because they are a tremendous corporate citizen. Last week, the local Shop With A Cop event was held. Needy children in the Rockford area shop with a Rockford City Public Safety employee for Christmas items such as clothing and, since its Christmas, of course a toy or two. Each child is given a total allotted amount to spend but some of that amount has to be spent on a gift for a sibling of the shopper. This is a great event with the Rockford Lions and Leo’s, the Rockford Public Safety, and Meijer sponsoring the show.

Let’s continue with a discussion this week of the tax bill that most certainly will be passed and signed into law early in 2018. But first, I would like to go over a bill that was passed on December 13, 2016 called the 21st Century Cures Act. Since the Affordable Care Act was passed in 2010, it has been essentially illegal for an employer to reimburse employee medical expenses on a pre-tax basis. Previous to the Affordable Care Act, an employer could use a Health Reimbursement Account (HRA) to pay employee medical expenses. Sure, there were hoops to jump through but it was legal. Not only did the HRA become illegal, the penalty became $100 per day for continuing to use the HRA. Believe me when I say that $100 per day was a pretty big and effective hammer. It worked. Businesses quickly quit using HRAs. However, in somewhat of a complete reversal of policy, Congress has brought back the HRA through the 21st Century Cures Act. The HRA is now called the Qualified Small Employer Health Reimbursement Arrangement or QSEHRA. There are again hoops to jump through, of course, but a small employer, one with less than 50 employees, may reimburse employee medical expenses on a non-taxable reimbursement basis under a QSEHRA. Single employees can be reimbursed up to $4,950 and employees with families can be reimbursed up to $10,050. QSEHRAs can still be set up for 2017 and for 2018, of course. The hoops are as follows. 1. The employer cannot provide health care to its employees. 2. The QSEHRA must be solely funded by the employer. 3. The QSEHRA must be equally offered to all eligible employees. 4. The QSEHRA must provide reimbursement to employees after providing proof of the expense. The creation of the QSEHRA is an acknowledgement that small employers have been dropping coverage as costs have increased dramatically over the past several years. Because of the increase, many small employers have eliminated or severely decreased coverage. I can see that the QSEHRA may become popular as more small employers become aware that it is a tool that is available to help employees cover their medical costs.

The new tax bill has many, many tax provisions that will affect almost every taxpayer. Let’s hit a couple more of the highlights. First, the child tax credit will be increased from $1,000 up to either $1,600 or $2,000. The increase above $1,000 will probably not be refundable so most low income taxpayers will not benefit from the higher amount. Second, the earned income tax credit will not be changed. The credit will remain the same. Third, the number of tax rates will be decreased from seven down to four with the lowest rate being 12%, an increase up from the lowest rate now at 10%. The present 25% rate will be tremendously expanded. The highest rate will remain at 39.6%. Fourth, alimony will become not taxable to the recipients and not deductible to the payers. This provision will not affect divorce decrees that were in place before the law is signed. However, and it seems there is always a “however”, if the provisions of the divorce decree are changed, the new rules will apply and none of the alimony will be deductible or taxable. I think there may be a few divorce decrees going back to court. Fifth, 1120C corporations, such as Meijer, will receive a tremendous tax cut. The highest rate is yet to be negotiated but it will be somewhere in the 20-22% rate, down substantially from today’s highest rate of 35%. Most corporations today operate as 1120S corporations. 1120S corporations are pass-through corporations in the 1120S situation; the shareholders pay tax on the income generated by the corporation. 1120C corporations pay tax on their profit and don’t pass that profit on to the shareholders. Since the individual tax rates will become lower, shareholders will receive a tax cut. In either event, corporate income will be taxed at a lower rate in the future. Next week, we will look at a few more ways to save money on the 2017 tax return. This is Jerry Coon signing off.

 

Jerry Coon is an Enrolled Agent.

He owns Action Tax Service on Northland Dr in Rockford.

Contact Jerry at www.actiontaxservice.com