Upcoming Changes in Tax Laws for 2011

Here is more information on the coming changes in tax law:

W-2 Reporting on Value of Health Insurance

Employers are required to report on employee W-2 forms the value of health insurance, starting with W-2 forms for 2011.

Reporting is required whether premiums are paid by the employer, employee, or a combination of both.

What to do now: Make sure that you track health care premiums for the year. If you use a payroll service, this likely will be done for you, but be sure to ask just in case.

Grants for wellness programs

The federal government will make tax-free grants to small businesses that set up Comprehensive Workplace Wellness Programs; $200 million of federal funds has been appropriated for this purpose. The wellness programs can focus on certain aims such as smoking cessation, physical fitness, nutrition, and stress management. The grants run for up to five years. Funds will be appropriated for five years beginning in the government’s fiscal year 2011, which starts October 1, 2010. The grants apply to companies that did not have a wellness program prior to March 23, 2010, and that have fewer than 100 employees who work 25 hours or more per week. The grants will be made by the Department of Health and Human Services.

What to do now: As yet, no application rules have been created for these wellness programs. If you do not yet have a wellness program but may set one up if you can receive financial assistance, then continue to check HealthCare.gov for details. (There’s nothing there yet, but hopefully there will be soon).

Grants for Wellness Programs

The federal government will make tax-free grants to small businesses that set up Comprehensive Workplace Wellness Programs; $200 million of federal funds has been appropriated for this purpose. The wellness programs can focus on certain aims such as smoking cessation, physical fitness, nutrition, and stress management. The grants run for up to five years. Funds will be appropriated for five years beginning in the government’s fiscal year 2011, which starts October 1, 2010. The grants apply to companies that did not have a wellness program prior to March 23, 2010, and that have fewer than 100 employees who work 25 hours or more per week. The grants will be made by the Department of Health and Human Services.

What to do now: As yet, no application rules have been created for these wellness programs. If you do not yet have a wellness program but may set one up if you can receive financial assistance, then continue to check HealthCare.gov for details. (There’s nothing there yet, but hopefully there will be soon).

Changes in Medical Reimbursement Plans

If your company maintains a flexible spending account (FSA), health reimbursement account (HRA), or health savings account (HSA), new rules take effect in 2011. Starting next year, these plans will no longer be able to reimburse over-the-counter medications on a tax-free basis. The only exception: doctor-prescribed over-the-counter medications, such as for Clariton and Prilosec, can continue to be reimbursed tax free.

What to do now: You’ll need to officially revise the terms of your plan and communicate the new terms to employees. Starting next year, the penalty on non-medical reimbursements from HSAs to those who are under age 65 doubles to 20 percent; currently it’s 10 percent.

Advise employees who have these accounts to maximize their withdrawals for over-the-counter medications this year and avoid penalties next year. Reimbursable items are listed in IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

Cafeteria Plans

Cafeteria plans are employee benefit plans that let participants choose from a menu of benefits or cash. Plans cannot discriminate in favor of “highly compensated employees” (e.g., owners or management); complex testing rules are used to determine whether plans are discriminatory. Starting next year, small businesses (those with no more than 100 employees) can set up Simple Cafeteria Plans under which plans are automatically treated as nondiscriminatory (no testing is necessary).

To be a Simple Cafeteria Plan, an employer must make certain contributions:

A uniform percentage of compensation (but not less than 2 percent), or

The lesser of (a) at least 6 percent of compensation or (b) twice the contributions that employees make from their wages on a pre-tax basis.

Note: Despite the changes in the nondiscrimination rule, sole proprietors, members of limited liability companies and partners in a partnership, and more-than-2 percent S corporations shareholders are still barred from participating in a cafeteria plan.

What to do now: Watch for IRS guidance on these plans; as yet, no guidelines have been issued. Meet with a benefits expert to determine whether these plans make sense for your company. If you don’t yet have a plan you may want to set one up, and if you already have a cafeteria plan, you may want to adapt it to Simple Cafeteria Plan rules. If a company adopts a Simple Cafeteria Plan for 2011, be sure to factor into the company’s 2011 budget the cost of employer contributions.