schiff hardin approach - january 2013 · effective this year and in 2014, as well as a recent...
TRANSCRIPT
Dear Clients and Friends:
At the turn of the new year, while pundits and prognosticators took turns forecasting
various fiscal cliff scenarios, our private company clients have remained focused on how
the enforcement of Obamacare and other significant new legislation will affect their
businesses in 2013. In this issue of The Approach, we take a closer look at new rules
under the Patient Protection and Affordable Care Act (“Healthcare Act”) that become
effective this year and in 2014, as well as a recent decision of the National Labor Relations
Board (“NLRB”) that has broad implications for non-union employers. In our first article
dealing with the Healthcare Act, we discuss the applicability of a new surcharge tax on
certain types of income of individuals and trusts and estates. In our second Healthcare
Act story, we discuss several mandates under the Healthcare Act and how they may have
broader implication for companies that are deemed part of a “controlled group” within the
meaning of the Internal Revenue Code. Lastly, we take a look at a recent NLRB case that
calls into question the practice of requiring employees to maintain confidentiality during
company investigations of possible employee misconduct.
Schiff Hardin’s Private Companies Group stands ready to assist you in navigating these
new waters by bringing to bear our knowledge and experience across many specialties
in a collaborative, “right-sized” approach, to help you and your business succeed. Our
attorneys understand our clients’ diverse businesses, their challenges and risks, and their
opportunities. We understand the often intense pressure on their key resources: money,
personnel and time. We help our clients thrive in this environment.
This is the Schiff Hardin Approach.
January 2013
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A new 3.8% surtax in the
The Patient Protection and
Affordable Care Act could
result in some federal tax
rates as high as 43.4%.
Careful planning can
minimize the impact.
Surcharge taxes under Healthcare Act effective January 1, 2013
The Patient Protection and Affordable Care Act (“Healthcare Act”) added a new
3.8% surtax on the unearned income of certain high-income individuals, estates
and trusts. The surtax applies to taxable years beginning after December 31,
2012, and is imposed in addition to other taxes.
When combined with the higher federal income tax rates on capital gains,
dividends, and ordinary income that became effective on January 1, 2013, the
surtax could result in some income being subject to federal income tax rates as
high as 43.4%. With careful planning, however, some taxpayers may be able to
minimize the impact of the surtax.
Application to Individuals
In the case of an individual, the surtax applies to the lesser of:
� The individual’s “net investment income,” or
� The individual’s modified adjusted gross income (“MAGI”) above a threshold amount.
The threshold amount is $250,000 in the case of a married taxpayer filing a joint
return or a surviving spouse, $125,000 in the case of a married taxpayer filing a
separate return, and $200,000 in any other case.
For example, assume that A, a single individual, has MAGI of $190,000 in 2013,
including $50,000 of net investment income. A would not be subject to the
surtax because his MAGI is less than the threshold amount of $200,000 for single
individual. However, if A’s MAGI increases to $220,000 in 2014, including $50,000
of net investment income, A would be liable for $760 in tax (3.8% of $20,000).
Finally, if A’s MAGI increases to $270,000 in 2015, including $50,000 of net
investment income, A would be liable for $1,900 in tax (3.8% of $50,000).
Application to Estates and Trusts
As noted above, estates and trusts (other than grantor trusts, the income of which
is treated as if it was realized directly by the grantor) also are subject to the
surtax. In the case of an estate or a trust, the tax is imposed on the lesser of:
� Undistributed net investment income, or
� The amount of adjusted gross income in excess of the dollar amount at which the highest tax bracket begins for an estate or a trust.
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Calculating the amount of trust income subject to the surtax can become
complicated, however, depending on the kind of trust at issue, and subject to
uncertainty.
Net Investment Income
As the preceding paragraphs suggest, the definition of “net investment income” is
a crucial concept in calculating the 3.8% surtax. Generally, net investment income
includes the following items:
� Gross income from an activity that is a passive activity (as defined in the Internal Revenue Code) with respect to the taxpayer;
� Portfolio income (unless derived in an active trade or business);
� Gross income from a trade or business of trading in financial instruments or commodities;
� Net taxable gain from the disposition of property held in a passive activity;
� Net taxable gain from the disposition of portfolio assets; and
� Net taxable gain from the disposition of assets held in a trade or business of trading in financial instruments or commodities.
Whether a trade or business is active or passive with respect to a particular
taxpayer depends upon the identity of the taxpayer, the form in which the business
is carried on, and the nature of the business. When an individual engages in a
business (other than a business of trading in financial instruments or commodities)
as a sole proprietor, for example, the determination of whether income from the
business is active or passive is made based upon the individual’s level of activity
in the business. Although the determination can be straightforward, it can also
become quite complex, particularly when a business is carried on by or through a
partnership or trust. Moreover, it is possible for the same business income to be
active with respect to some owners and passive with respect to others—meaning
that certain owners will be subject to the 3.8% surtax while others will not. This
may complicate the manner in which “tax distributions” are calculated and paid to
the owners of S corporations and LLCs.
Conclusion
The new 3.8% surtax on net investment income, coupled with the higher rates of
tax on capital gains, dividends, and ordinary income, makes 2013 an excellent time
for taxpayers to reexamine their business activities and investments. Although
the tax may be unavoidable for certain high-income taxpayers, with appropriate
planning many taxpayers will be able to limit the impact of the 3.8% surtax.
(continued)
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For further information: Robert R. Pluth, Jr., Tax 312.258.5535, [email protected]
Ivan Golden, Tax 312.258.5708, [email protected]
...Health Reform Mandates Apply to Related Companies
Significant requirements under the Healthcare Act become applicable to employers
commencing at the start of next year which may prove particularly costly and
complicated for companies that have common ownership. These “controlled
groups” of companies are already grouped together and combined for purposes of
discrimination tests that apply to their 401(k) plans and other IRS-qualified employee
retirement plans. Under the Healthcare Act, those companies also must be combined
(and their employees treated as if employed by one employer) for purposes of the
“employer mandate”, automatic enrollment requirement and non-discrimination rules.
Employer Mandate
Effective January 1, 2014, employers with 50 or more full-time employees (or
full-time equivalents) have the choice of offering full-time employees affordable
health coverage or pay a fine of up to $2,000/year for each employee in excess of
30 employees. Employers who are members of a controlled group will have their
employees added together in determining if the 50 employee threshold has been
attained and, if that is the case, then each employer in the controlled group will
be subject to the employer mandate even if the particular employer has far less
than 50 employees.
Automatic Enrollment
Effective following issuance of regulations by the Department of Labor (not
expected until 2014), employers with 200 or more full-time employees will be
required automatically to enroll new full-time employees in the employer’s health
insurance or plan. As with the employer mandate, the automatic enrollment
requirement will apply to each employer in a controlled group that has at least
200 full-time employees in the aggregate.
Non-Discrimination Rules
Also effective following issuance of new regulations (which would be effective
January 1, 2014 at the earliest), insured health plans offered throughout the
Owners of multiple
companies and
employers included
within control
groups of companies
should review the
newly applicable
health insurance
requirements under
the Healthcare Act.
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entire controlled group of companies which provide more favorable benefits to, or
otherwise discriminate in favor of, “highly compensated employees” will subject
one or more of the employers to penalties. Note that these non-discrimination
rules already apply to self-insured plans.
In very general terms, a “parent-subsidiary” controlled group of companies exists
where a parent organization owns 80% or more of the stock in another company,
and a “brother-sister” controlled group exists wherever the same five or fewer
persons collectively own 80% or more of the stock in two companies. To illustrate
how the controlled group rules come into play under the Healthcare Act, if three
entrepreneurs own 80% of the stock of a small manufacturing company that has
45 full-time employees and the entrepreneurs also own 100% of three
dry cleaning stores that have a total of 30 employees, then the manufacturing
company and the stores would be a brother-sister controlled group having
75 employees. Therefore, the manufacturing company and the stores would
be subject to the employer mandate effective January 1, 2014 and the non-
discrimination rules when issued, but not the automatic enrollment requirement.
Owners of multiple companies and employers who are included within controlled
groups of companies should consider how their health insurance policies and plans
will be impacted by these Healthcare Act mandates.
For further information: Edward Spacapan, Jr., Employee Benefits and Executive Compensation 312.258.5788, [email protected]
...
Employer Mandated Confidentiality Regarding Employee
Misconduct Investigations Called into Question
Over the past few years, the National Labor Relations Board (“NLRB”) has
increasingly targeted non-union workplaces in actions enforcing the National Labor
Relations Act (“NLRA” or “Act”), which applies to most private sector employers.
As the NLRB states on its website, the Act gives employees at both union and
non-union workplaces “the right to help each other by sharing information” and
to engage in “protected, concerted activities” in order to address or improve
working conditions, among other reasons. Recently, the NLRB has aggressively
taken action against non-union employers, alleging that certain commonly held
workplace policies unlawfully “chill” the exercise of these rights.
Current NLRB expanded
enforcement efforts
create a challenging
environment for non-
union employees.
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ApproachPrivate Companies Group
For example, when employers are called upon to investigate an allegation of
employee misconduct, it is not uncommon for them to ask the employees involved
in the investigation to keep the matter confidential until the investigation has
concluded. Many employers believe maintaining confidentiality is the best way
to protect both the integrity of the investigation and the employees who are
involved. But in July 2012, a divided NLRB ruled in Banner Health System,
358 NLRB 1 (2012), that a blanket policy of making such requests violated the
Act. According to the NLRB, the employer’s practice of requesting confidentiality
unlawfully intruded on its employees’ protected right to discuss disciplinary
investigations, a right that trumped the employer’s “generalized concern with
protecting the integrity of its investigations.” The NLRB allowed that a request
for confidentiality might be lawful under some circumstances, such as when the
employer determines that witnesses need protection, evidence is in danger of
being destroyed, testimony is in danger of being fabricated, or there is a need to
prevent a cover-up. But unless an investigation poses those types of dangers, an
employer cannot require or even request confidentiality from its employees during
a disciplinary investigation.
Confidentiality requests are not the only common workplace policy or practice
that has run afoul of the current NLRB. Other examples include a non-union
employer’s mandatory arbitration program and social media policies that restrict
the release of “confidential guest, employee or company information,” prohibit
employees from making “offensive, demeaning, abusive or inappropriate remarks,”
or prevent them from commenting on legal matters (including pending litigation)
involving the employer. The NLRB deems such policies unlawfully “overbroad,”
because they have the potential to interfere with employees exercising their rights
under the Act. An employer found to have violated the Act may be required
to compensate an employee who has been discriminated against, comply with
a cease and desist order or mandatory injunction, and/or post a notice of the
violation in the workplace.
The current NLRB’s expanded enforcement efforts create a challenging
environment for non-union employers. Schiff Hardin’s Private Companies Group
attorneys stand ready to provide you with advice and training and to review your
workplace policies in order to help you minimize NLRB-related risk.
For further information: Matthew D. Lahey, Labor and Employment 312.258.5674, [email protected]
Lisa Carey-Davis, Labor and Employment 312.258.5576, [email protected]
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Private Companies Group
© 2013 Schiff Hardin LLP All rights reserved. This publication has been prepared for the general information of clients and friends of the firm. It is not intended to provide legal advice with respect to any specific matter. Under rules applicable to the professional conduct of attorneys in various jurisdictions, it may be considered advertising material. Tax Matters: The advice contained in this memorandum is not intended or written to be used, and cannot be used by a taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under law.
Steve DragichChicago
Matt GaloChicago
Nicole FinitzoLake Forest847.295.4308
Philippe ManteauNew York
Bill NeumanSan Francisco415.901.8620
Todd EskelsenWashington202.778.6420
www.schiffhardin.com
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