Monthly Archives: August 2012

Health Care Rebates

Michael Blitstein

Donald J. Schaffer

by Michael Blitstein, CPA, and Donald J. Schaffer, CPA/ABV, CVA, CFF

Insurance companies have begun to issue rebates to policyholders on premiums resulting from final rules on the calculation and payment of medical loss ratio.

As a quick summary, workers are entitled to the same share of the rebate as they pay for their health insurance. If an employer pays 80 percent and the worker pays 20 percent, then the rebate should be split 80/20, respectively.  The rebates may be paid back to the workers in cash or applied to reduce premiums.  The workers receiving the benefit can be either the actual workers who paid the premiums in 2011 or can be those who are currently employed in 2012.

The tax treatment of the rebate or credit has lots of variables.  Treatment will differ depending on whether the plan is a pre-tax or an after-tax plan.  It further varies depending on whether it is paid to current employees or to 2011 employees.  Finally, it may depend on whether or not the employee deducted the payment on a 2011 return.

In a pre-tax plan, the employee would have to pay income taxes and possibly, but not always, employment taxes on any rebates they receive.  In an after-tax plan the employee would not have to pay tax on the rebate unless the employee deducted premiums and received a tax benefit for the deduction.  The employee may not receive any money if the employer decides to use it to lower future premiums or add benefits, but the “pre-tax” employee would have an increase in taxable wages and perhaps a larger fringe benefit reduction for the amount of refund applied to premiums.

The rebates are not taxable if received from or applied to premiums in an “after tax” (unless deducted) plan, but the rebates reduce current year medical expenses for the purpose of itemized deductions if paid to the employees participating in 2011, but perhaps not if distributed based on 2012 employment. Treatment of the rebate is extremely fact specific, and is discussed in detail at: http://www.irs.gov/newsroom/article/0,,id=256167,00.html

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail Michael Blitstein at michael@cjbs.com or Don Schaffer at numbersman@cjbs.com if you have any questions about this posting or if we may be of assistance in any way.

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Payroll Tax Services – Who is Responsible to the IRS?

by Larry Goldsmith, C.P.A., J.D., C.F.F.A.

As a Forensic CPA, I often hear stories about clients or their partners, employees, or spouses who have stolen or have hidden assets. But there’s one scam which you don’t hear about very often and which should scare every business owner: what happens when your trusted payroll service fails to make your tax payments to the IRS?

Just today a small business owner confessed to me that his payroll service stole $7 million from him and other businesses. The payroll service collected tax monies from their clients, and instead of making the payments to the IRS, the owners of the service simply pocketed the money. The trusting small business owner was required to pay the IRS nearly $40,000; in effect paying the payroll tax obligation twice.

Who is responsible?

More and more we hear about trusted people and businesses stealing from their clients and associates. Violation of fiduciary responsibility inevitably escalates during periods of economic hardship, but the potential to be a victim of ‘white collar crime’ is always present. As a business owner, it is important to continually verify that employees and business partners are doing what is expected of them.

Who is responsible in the case of non-payment of payroll taxes when a payroll service has been engaged? The Internal Revenue Service regulations state quite clearly:

  • The employer is ultimately responsible for the deposit of Federal tax liabilities.
  • The employer is liable even if a third party payer fails to make the payroll tax deposits in a timely manner.
  • It is the employer, not the payroll service, who is liable for unpaid taxes, penalties and interest.
  • The employer has a duty to review their EFTPS account to verify that the third party payer actually paid the taxes.

An ounce of prevention is always worth the proverbial pound of cure.  To avoid the headaches and financial distress of misplaced trust, CJBS recommends that business owners follow this Five Step Anti-Swindle procedure:

  1. Examine checks clearing the bank accounts monthly.
  2. Have someone verify payroll tax deposit credits on-line.
  3. Examine customer credit memos regularly.
  4. Examine delinquent accounts receivable.
  5. Spot check cash payments.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at larry@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.