CONSTRUCTION OUTLOOK 2014 - UHY US LLP... · 7:40AM—8:10AM Legislative Construction Update ... CPA firms double our size ... China Kenya(incl. Hong Kong) India Indonesia Kazakhstan

CONSTRUCTION OUTLOOK 2014

OCTOBER 24 2013

The next level of service


Opening Commentary

Kurt SiebenallerPrincipal UHY LLP


SCHEDULE OF EVENTS

7:30AM—7:40AM Opening Commentary

7:40AM—8:10AM Legislative Construction Update

8:10AM—8:30AM Right To Work

8:30AM—9:10AM Lending and Investments Activity

9:10AM—9:20AM Refreshment Break

9:20AM—9:50AM Health Care Reform

9:50AM—10:20AM Tax Update

10:20AM—10:30AM Interactive Discussion


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Legislative Construction Update

Lance BinoniemiVice President of Government AffairsMichigan Infrastructure & Transportation Association (MITA)

IINTRODUCTION

• HOW ROADS ARE FUNDED

• DECLINING REVENUES

• HOW MICHIGAN’S INVESTEMENT LEVEL COMPARES TO OTHER STATES

• RISING COSTS OF CONSTRUCTION

• CONDITIONS OF OUR ROADS AND BRIDGES

• WHERE WE ARE HEADED

• POTENTIAL SOLUTIONS

• QUESTIONS

Roads and bridges in

Michigan are funded by

user fees− gas taxes and registration

fees.

Roads and bridges in

Michigan are funded by

user fees− gas taxes and registration

fees.

FUNDING

User Fees Federal Gas Tax = 18.4 cents/ gallon State Gas Tax = 19 cents/ gallon in Michigan Registration Fees = Based on value of a vehicle Toll Roads (none in Michigan)

Sales Tax Some states allocate sales tax to transportation investment. Michigan collects 6% sales tax on gasoline purchases, a vast majority of which is not used for transportation purposes.

Our gas tax revenue has

declined steadily since 2005 while the

cost of materials used to rebuild our infrastructure continue to

rise.

Our gas tax revenue has

declined steadily since 2005 while the

cost of materials used to rebuild our infrastructure continue to

rise.

REVENUE

Michigan Gasoline Tax Revenue

Source: Michigan Department of Treasury

Similar to gas tax revenue, our overall

transportation revenue has also declined steadily since

2005.

Similar to gas tax revenue, our overall

transportation revenue has also declined steadily since

2005.

REVENUE

Transportation Revenue

Net Vehicle License/ Registration Fees

State Diesel Fuel Taxes $0.15/ gal

State Gas Taxes $0.19/ gal

REVENUE

Projected MTF revenues for roads with current share contributed by

each source held constant

1997Gas Tax Increased to 19¢ per gal.

Vehicle Registration FeesIncreased 30%

1947Diesel Fuel Tax Enacted at 5¢ per gal.

1967Both Gas and Diesel Tax Increased by 7¢ per gal.


1951Gas Tax Increased to 4.5¢ per gal.


1978Diesel Tax Increased to 9¢ per gal. Gas Tax increased to 11¢ per gal.

1980Diesel Tax Increased to 11¢ per gal.

1983 & 1984Both Gas and Diesel Tax Increased 15¢ per gal. Vehicle Registration Tax Shifted to Value Based Tax

Other MTF Revenues

Registration Tax Revenues

Diesel Tax Revenues

Gas Tax Revenues

Going back in history, revenues allocated for roads have seen many

peaks and valleys.

Going back in history, revenues allocated for roads have seen many

peaks and valleys.

MTF Revenues Allocated for Roads 1945-2010

THO

USA

ND

S

Michigan’s gas tax is

one of the lowest in the Great Lakes

region.

Michigan’s gas tax is

one of the lowest in the Great Lakes

region.

COMPARISONS

* Toll Roads** Local Option for Gas Tax

Source: the American Road and Transportation Builders Association

Michigan’s investment in transportation per capita is the lowest

among neighboring

states.

Michigan’s investment in transportation per capita is the lowest

among neighboring

states.

COMPARISONS

Source: US Census/ Federal Highway Administration

Prices for highway &

bridge construction

outpace inflation

nationwide

Prices for highway &

bridge construction

outpace inflation

nationwide

RISING COSTS

Source: American Road & Transportation Builders Association

RISING COSTS

Significant material and equipment

price increases

erode available resources

Significant material and equipment

price increases

erode available resources

2008 2009 2010 2011 2012

AsphaltPaving

22.3 0.7 4.3 6.1 1.0

Concrete Paving

6.3 2.9 -4.4 -1.3 2.8

Structural Steel

10.3 -2.8 0.0 5.1 1.0

Equipment 2.8 3.2 3.5 3.9 10 - 14

Diesel Fuel -30.0 19.0 14.0 23.0 -2.0

Materials Price Inflation 2008 - 2012Percentage Increase

Source: HIS Global Insight Inc., U.S. Energy Information Administration

Trunkline Pavement Condition has Peaked

$160

$180

$305

$326

$362

$444

$410

$518

$521

$610

$658

$624

$572

$667

$551

$442

$471

$440

64%

67%

69%

73%

71%

75% 75%

78%

82%

86%

89%

92% 92%91%

91%

89%

87%

84%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Perc

ent P

avem

ent i

n G

ood

& F

air C

ondi

tion

Inve

stm

ent L

evel

in M

illio

ns

Investment Condition (percent good and fair)

Actual

Conditions are Getting Worse

Currently, only 19% of

Michigan roads are in

good condition.

Currently, only 19% of

Michigan roads are in

good condition.

CONDITIONS

Source: TAMC 2012 PASER Data Collection

When considering

the local roads, the situation is

even worse.

When considering

the local roads, the situation is

even worse.

CONDITIONS

Source: TAMC 2012 PASER Data Collection

Compared to other Great Lakes States, Michigan has

the highest percentage of

bridges that are rated

structurally deficient.

Compared to other Great Lakes States, Michigan has

the highest percentage of

bridges that are rated

structurally deficient.

CONDITIONS

Source: MDOT April 2013, Figure 2

Under the current

investment strategy, the

future is bleak. By 2023, 65% of Michigan roads will be rated in poor

condition.

Under the current

investment strategy, the

future is bleak. By 2023, 65% of Michigan roads will be rated in poor

condition.

THE DECLINE

Source: A special message by Gov. Rick Snyder; Reinventing Michigan’s Infrastructure: Better roads drive better jobsAnalysis: Anderson Economic Group, LLC (2012)

Future Projections Under The Current Revenue Structure

All Paved Federal-Aid Eligible Roads% Roads in Good/ Fair Condition

ASSET MANAGEMENT

SAVINGS

Source: Michigan Department of Treasury

REPORTS

Transportation Funding Task Force (TF2) – November 2008 If Michigan’s transportation system is to continue to serve the state adequately, our

investment in transportation must increase significantly. Recommended investing an additional $3 billion annually into Michigan’s

transportation system, not limited to maintaining the state’s roads and bridges.

Anderson Economic Group Report – May 2010 Found that the benefits to the state and its residents of increasing our road funding

and improving our roads are very large, and far offset the cost of the higher gas taxes necessary to support that expenditure.

An investment of an additional $2 billion would create a net increase of over 15,000 new jobs.

The Road Information Program (TRIP) – March 2012 Found that the average Michigan driver pays $357 annually in unnecessary repairs to

their vehicles due to poor roads, on average $80 more than surrounding states. We can potentially save 1,000 lives over the next 10 years if we improve the conditions

of our roads and bridges.

REPORTS

Anderson Economic Group Report – June 2012 Studied the economic impact of four possible scenarios that would increase funding for

roads in Michigan by $1.4 billion per year. All four scenarios for increasing road funding in Michigan by $1.4 billion annually result in a

net increase of 11,000 or more jobs in the state.

Michigan House Transportation Committee Report (Representative Rick Olson) – September 2011 and March 2012 Studied the conditions of our roads and bridges to determine how much additional

revenue was needed annually to maintain them. The report does not include any new or widened roads to improve capacity or relieve

congestion nor does it consider any transit issues. Concluded in September 2011that $1.4 billion more revenue per year would be needed

to maintain our roads and bridges. An update to the report in March 2012 showed that the amount of additional investment

needed on an annual basis increased to $1.5 billion.

SOLUTIONS

Gas tax increase• Legislature could increase gas tax to raise revenue• A 29 cent gas tax increase would raise roughly $1.4 B

Registration Fee Increase• Governor Snyder gave as an example in his Infrastructure Message• The average registration fee increase would be $120 to raise $1.4 B

Mixture of both Gas Tax and Registration Fee Increases• Legislature introduced 19 bi-partisan bills in 2012• Raised an additional $1.2 billion annually• Included reforms and efficiencies (some passed)• Failed to act on revenue bills

SOLUTIONS

Making sure all taxes paid at the pump are going to transportation

• Proposal currently gaining most attention

• Move 6% sales tax on fuel to transportation

• Put gas tax on wholesale level

• Raises an additional $1.2 billion for transportation

• Put a 1% sales tax increase on ballot to replace lost revenues to education and local units of government


CONTACT INFORMATION

Lance Binoniemi Vice President of Government AffairsMichigan Infrastructure & Transportation Association (MITA)

lancebinoniemi@mi‐ita.com517 347 8336


Right To Work

Frank MamatShareholder Foster, Swift, Collins & Smith, P.C.


(SEE HANDOUTS)


CONTACT INFORMATION

Frank MamatShareholder Foster, Swift, Collins & Smith, P.C.

[email protected] 538 3619


Lending & Investments Activity

Edward LongvilleVice President Commercial LendingFirstMerit Bank

• Headquarters: Akron, Ohio

• Acquired Citizens Bank in Michigan in 2012

• Founded: 1845

• Employees (FTE): 4,619

• Assets: $23.5bn

• 24th largest US commercial bank

• Loans: $14.2bn

• Deposits: $19.1bn

• Market Capitalization: $3.4bn

• Ticker: FMER (NASDAQ)(1) Figures as of 6/30/13; market capitalization as of 9/5/13

FIRSTMERIT OVERVIEW

• Owner of contracting firm

• Team Leader for Dedicated Contractor Lending Group – LaSalle Bank

• Senior Surety Underwriter for Travelers

• Senior Lender at FirstMerit Bank

BIOGRAPHY

• Macro Environment

• Michigan Market

• Banking Market

• Details

• Actions

OUTLINE

WHERE ARE WE HEADED?

• Government Expenditures

• Employment

• Interest Rates

• Apprehension – Cash on Sidelines vs. Bank Lending

• Underfunding of Infrastructure – Similarity to Automotive

MACRO FACTORS

Municipal‐Municipalities – Financing??‐MDOT – Job Size increase?

Commercial‐ Automotive Related‐ Elder Care‐ Commercial‐ Residential

Design Build/Finance/PPP – Creative Financing

Impacts: Equipment Pricing; Different ways to meet demand; Material Prices

MICHIGAN TRENDS

Retrenchment – GONE

Regulations ‐ Cost‐ Consolidation‐ Clients

Returns‐ Need to Produce‐ Competition

BANKING ENVIRONMENT

Rate of failure

Severity of losses

Lack of Secondary Financing

Lack of knowledge/commitment to Industry

Lack of appropriate monitoring

Inability to “Contribute to Client Success”

WHY DO BANKS PICK ON CONTRACTORS?

HOW MANY PEOPLE HAVE SWITCHED THEIR BANK OR BANK HAS CHANGED IN THE LAST FIVE YEARS?

Old Kent

Franklin Bank

Republic BankSKY Bank

Warren Bank

BANKS OF YESTERDAY

• Flagstar• Talmer• Private • FirstMerit• Level One• Chase• B of A• PNC

Trend: Segregation, Competitiveness

NEW NAMES

• Loan Officer Changes

• Policy changes due to acquisition

• Changes in credit culture

• Reporting – Required by banks

• Effect on Bonding

Other Considerations: Internal Reporting; CPA – extra level

IMPACT ON CONTRACTORS

• Consider Rate Environment –Deploy Capital Prudently

• Create a backup relationship

• Ensure Timely, Accurate Internal/External Reporting

• Importance of Cashflow

STEPS TO CONSIDER


CONTACT INFORMATION

Edward LongvilleVice President Commercial LendingFirstMerit Bank



Insurance & Bonding Issues

Terence J. GriffinAccount ExecutiveGriffin, Smalley & Wilkerson


INSURANCE COVERAGE ISSUES FOR CONTRACTORS

• General Observations• Builders Risk Insurance• Comprehensive General Liability• Professional Liability: Errors & Omissions• Workers Compensation• Risk Transfer• Hold Harmless and Indemnification• Waiver of Subrogation• Additional Insured Status

− With or Without Completed Operations


BONDING 101

• Character, Capacity, Capital

• Surety vs. Insurance/No Expected Losses

• Indemnity Agreement− Idea of No Expected Losses− Providing a Guarantee of Security to the Owner…Not the Contractor− If a Surety Loses; they Look to Get it Back


BONDING 101

Bond File Information• Corporation Financial Statements• Personal Financial Statements• Job Schedules• Bank Relationship• Insurance• Corporate Resume


WHY DO CONTRACTORS FAIL?

Change in Project Size or Type− Volume (too high, too low)

Geographic SpreadChange in Key Personnel or ManagementOverheadReceivables/UnderbillingsOwner/Sub Problems− Verify Owner Financing− Bond Back Subcontractors


CONTACT INFORMATION

Terence J GriffinAccount ExecutiveGriffin Smalley & Wilkerson



REFRESHMENT BREAK

Will reconvene in 10 minutes


Health Care Reform

Todd TiggesPrincipal UHY LLP


“The Health Care Reform Train:Don’t Be Left Standing At the Station”HOPE IS NOT AN EFFECTIVE PLANNING SOLUTION


OVERVIEW

•Brief History of the Act•The Mechanics•Employer Responsibilities•Strategic Considerations•Future Considerations


HISTORY

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act which put in place comprehensive health care reforms to be implemented during the next four years and beyond.

One short week later, on March 30, 2010, the President signed the Health Care and Education Reconciliation Act which amended some of the provisions in the Affordable Care Act as well as released billions for student loans and financial aid to college students.

The combination of these two bills put in place Health Care Reform, which has caused much discussion on both sides of the political spectrum, eventually leading up to the big question of legality that was taken by the United States Supreme Court.


MOST EMPLOYERS PUT THEIR HEAD IN THE SAND…


SUPREME COURT DECISION

On June 28, 2012 the Supreme Court declared the individual mandate to be permissible exercise of Congress’s taxing powers under the Constitution.

The mandate was not a penalty, but a tax and was allowed under Congress’s power to tax under Article 1 of the Constitution.

The government's arguments that the Constitution's Commerce Clause or the Necessary and Proper Clause authorized Congress to enact Health Reform were rejected.

The mandate that requires people to purchase health insurance or make a shared‐responsibility payment does not regulate existing commercial activity, but instead compels individuals to become active in commerce by purchasing a product.


NOW WHAT DO WE DO?


CHANGES EFFECTIVE DURING 2012

2012 W‐2 Reporting: Form W‐2 reporting of health coverage costs for certain employers

SBC Completion: Distribute the Summary of Benefits and Coverage (SBC’s) to enrollees for renewals and newly eligible employees

MLR Reimbursement: Distribute Medical Loss Ratio (MLR) Rebates to group plan participants, if applicable


W‐2 REPORTING OF BENEFITS

Who must report?• Mandatory for Large Employers ‐ Defined as those employers whom

issued more than 250 W‐2s in the immediate proceeding year

What gets reported?• Employers are required to report the total cost of all employer sponsored

health plans for each employee, which includes both the employer and employee contributions, even if the coverage is not taxable to the employee

• Included on Form W‐2 in box 12 with the code DD• Currently this reporting requirement is for informational purposes only

and does not impose taxation on any of the benefits reported to either the employer or employee


SUMMARY OF BENEFITS AND COVERAGE (SBC)

• A four‐page “summary of benefits and coverage” (“SBC”)is required to be provided to applicants and enrollees before enrollment or re‐enrollment

• First SBC must have been distributed by the first open enrollment occurring after September 23, 2012 and for those who enter the plan any other time after September 23, 2012

• The summaries must be presented in a uniform format and cannot be longer than four pages. In addition, the four‐page summaries cannot include print that is smaller than 12‐point font

• The four‐page summaries must be presented in a “culturally and linguistically appropriate manner”

• Can be provided by paper or electronically. A penalty of not more than $1,000 may apply for each willful failure to provide the required SBC


MEDICAL LOSS RATIO (MLR) REBATES

• Insurers are required to make the first round of rebates by August 2012 based on their 2011 MLR

• Insurers must meet Medical Loss Ratio thresholds of 85% for “Large Groups” of 51 or more employee’s and 80% for Individual and “Small Groups” of 50 or fewer employee’s

• Insurers must generally provide rebates for individuals covered by group health plans to the policyholder—typically the employer sponsoring the plan

• Who receives the rebate depends on the plan provisions and who paid the premiums

• For Group Sponsored Plans, a participant “Contribution Holiday” (waiver of paycheck withholding's) is also deemed acceptable



Health Flexible Spending Accounts (FSA’s): The $2,500 limit on annual salary reduction contributions to health FSAs offered under cafeteria plans

Additional Medicare Tax: The employee portion of the hospital insurance tax part of FICA, currently amounting to 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount for tax years beginning after 12/31/2012

Notice of Exchange: Employers are required provide all new hires and current employees with a written notice about the health benefit Exchange and some of the consequences if an employee decides to purchase a qualified health plan through the Exchange in lieu of employer‐sponsored coverage

Excise Taxes: Self‐funded plans required to pay PCORI fee and fully‐insured plans see these fees built into rate increases


HEALTH FLEXIBLE SPENDING ACCOUNTS

• All Health FSAs offered under cafeteria plans must comply and the $2,500

• limit applies on an “EE by EE” and “ER by ER” basis• The limit does not apply to Dependent Care FSAs, HRAs or HSAs. The

current “Use it or Lose” provision is currently under consideration• The $2,500 limit is effective for plan years post 12/31/12 and amount is

indexed for inflation for taxable years beginning after 12/31/13• The $2,500 limit is reduced for short plan years• By its terms, the $2,500 limit applies to health FSA salary reduction

contributions and not to other employer contributions or “Flex Credits”• Plans do not have to be amended until the end of the 2014 plan year


NOTICE OF EXCHANGE

This disclosure requirement was originally effective for employers in a state beginning on March 1, 2013 and then was delayed until October 1, 2013.

ALL employers, covered by the Fair Labor Standards Act, are required to provide a written notice to their employees about the Health Insurance Marketplace (aka the Health Care Exchange), regardless of whether employers currently offer health insurance coverage or not.

The notice should inform employees about 3 major components: • About the Health Insurance Marketplace• That, based upon their income and type of coverage available through the employer, the employee may be able to obtain lower cost health insurance in the Marketplace

• If employees choose to buy insurance through the Marketplace, they may lose any employer contribution to their health benefits


NOTICE OF EXCHANGE

Employers are not required to provide a separate notice to dependents or other individuals who are or may become eligible for coverage under the plan but who are not employees.

A template of an approved Notice of Exchange is available on the Department of Labor website.


EXCISE TAXES

• Patient‐Centered Outcomes Research Institute (PCORI) fee becomes effective for plan years ending after October 1, 2012

• This fee is imposed on both health insurance issuers and employers sponsoring self‐funded group health plans

• Current fees are $1 per covered member, then increase next year to $2 per member per year and is indexed to medical inflation rates in subsequent years to 2019 when this fee is set to sunset

• Reporting is due with the second quarter excise tax form (Form 720) which has a due date of July 31st

• Under IRS rules, third parties may NOT remit or file Form 720 on behalf of self‐funded plans which means those self‐insured employers need to gather the appropriate information and make plans for paying and filing the appropriate form



Waiting Periods. For eligibility to participate in an employer plan.

Transitional Reinsurance Fee. This three year fee is levied on health care insurers and those self‐funded employer group plans.

Individual Mandate. U.S. citizens and legal residents are required to have qualifying health coverage.

Establishment of Exchanges. By January 1, 2014, each state must establish a Health Insurance Marketplace (“ The Exchange”).


EMPLOYER MANDATE UNDER PPACA

Automatic Enrollment Requirement: All Employers with more than 200 Full Time employees, which offer employees enrollment in one or more health benefit plans must automatically enroll new Full Time employees in one of the plans offered. Must provide employees notice of opportunity to enroll and to opt out.

Waiting Periods: A plan must not apply a waiting period to become eligible to participate in the employer sponsored group health plan that exceeds 90 days. This provision does not require offering benefits to part‐time employees, however if an employee goes from part‐time to full‐time status, the 90 day eligibility clock begins on first day of full time employment.

Reinsurance Fees: Health care insurers must pay an additional reinsurance fee in the amount of $63 per covered individual per year. Self‐insured plans will pay this fee directly and those in fully‐insured plans will see this see this fee through increases in their premiums. This fee is set to expire in 2016 and projected to decrease to a mere $40 per covered individual per year.


INDIVIDUAL MANDATE


INDIVIDUAL MANDATE

• Those without coverage pay a tax penalty of the greater of $695 per year up to a maximum of three times that amount ($2,085) per family or 2.5% of household income

• The penalty will be phased‐in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016

• Beginning after 2016, the penalty will be increased annually by the cost‐of‐living adjustment

• After October 1, 2013 , individuals may purchase coverage through the Health Insurance Marketplace at www.healthcare.gov


INDIVIDUAL MANDATE

Exemptions will be granted for:

• Financial hardship, religious objections, American Indians,

• Those without coverage for less than three months,

• Undocumented immigrants, Incarcerated individuals,

• Those for whom the lowest cost plan option exceeds 8% of an individual’s income, and

• Those with incomes below the tax filing threshold (in 2009 the threshold for taxpayers under age 65 was $9,350 for singles and $18,700 for couples)

• Those residing outside of the United States


ESTABLISHMENT OF THE EXCHANGES

• If a state does not establish an Exchange, then the federal government will establish a “Federally Facilitated Exchange” (FFE)

• The Exchanges will perform a variety of functions required by health care reform, including certifying QHPs, determining eligibility for enrollments in QHPs, and for insurance affordability programs (e.g., premium tax credits), and responding to customer requests for assistance

• Insurers can only offer “Qualified Health Plans” on the FFE. Four “Metal Levels” – Bronze(60%), Silver(70%), Gold(80%), Platinum(90%).

• National average exchange prices for the lowest cost (high‐deductible) Silver Level plans are approximately $310 per month. The same plan on Michigan’s exchange is approximately $271 per month.


ESTABLISHMENT OF THE EXCHANGES

• A state may, however, choose to establish a state partnership FFE which permits the state to administer plan management functions and/or consumer‐assistance functions

• In either case, states will continue performing their traditional regulatory role for insurers and health plans—an insurer that offers QHPs through an FFE must meet both applicable state requirements and QHP certification standards

• In general, 17 states plus the District of Columbia have established state‐based exchanges− Michigan, Iowa, Arkansas & Illinois: Have decided to apply for a state‐federal partnership

− Missouri, Nebraska, Kansas & Tennessee: Planning to default to the Federal Exchange



Employer Shared Responsibility. Certain large employers may be subject to penalty taxes for failing to offer health care coverage for all full‐time employees, offering minimum essential coverage that is unaffordable, or offering minimum essential coverage under which the plan's share of the total allowed cost of benefits is less than 60%.

Additional Reporting. Health insurance issuers, including self‐insured employers, and all large employers will be required to file additional forms or returns to report on those individuals receiving health coverage and certain employers will have to report on the type of coverage offered.


EMPLOYER SHARED RESPONSIBILITY

All “large employers with 50 or more ‘full time’ or ‘full time equivalent’ employees• Full time: employees that work at least 30 hours per week• Full time equivalent: number of part time employees (x) the

number of hours worked during the month (/) 120• Does not include “seasonal employees” that work less than

120 days per year• Part‐time or “variable hour” employees must be considered

at the end of each employer’s “standard measurement period” (typically 12 months)


EMPLOYEE SHARED RESPONSIBILITY

What about Control Groups? • One of the most frequently asked questions when dealing

with multi‐entity structures is “Which employees get included into the if the client has more than one entity that employs personnel?”

• The Act refers to the definitions outlined in IRC 414 (b), (c), (m) or (o) which refer to IRC 1563(a) to define control groups. Also within these code sections, the attribution rules of IRC 318(a) apply.

• In most cases, the employees from all related companies will be pulled into the group to make the “Large Employer” determination.


EMPLOYEE SHARED RESPONSIBILITY

All Large Employers must provide its Full Time / Equivalent Employees the opportunity to enroll in a “Minimum Essential Coverage” health care plan. • Minimum Essential Coverage “Acceptable”: An “eligible employer‐

sponsored plan”, various forms of government sponsored health coverage or an individual market plan, which provides “essential health benefits”

• Eligible Employer‐Sponsored Plan: A group health plan or group health insurance coverage offered by an employer to the employee which does not consist of “excepted benefits” (limited dental or vision and most health FSAs and HSAs)

• Essential Health Benefits include: Ambulatory, emergency, hospitalization care, maternity and newborn care, mental health and substance disorder, behavior health, rehabilitation services and devices, preventative and wellness and pediatric care



All Large employers must make the minimum “Affordable”• Affordable Coverage: Employers required to cover enough

cost of a healthcare plan so that a Full‐Time employee does not pay more than 9.5% household income− Single Level: Employers minimum coverage is for the single level

plan which covers at least 60% of medical related expenses. (Bronze Level) Family plans do not have to meet the same 9.5 % threshold

− W‐2 Safe‐harbor: Employers may not know an employees household income therefore may use the employees W‐2 gross wages to determine the 9.5 % threshold



Enforcement & Penalties• Large employers who fail to offer “ affordable and acceptable

coverage” to all “full‐time” or “equivalent” employees and one employee enrolls in a state health care exchange, then employer may be subject penalty

• Tax exempt entities still subject to employer mandates• Every “large employer” gets a 30 person exemption• Penalties are non‐deductible and determined on a monthly basis

− Penalty equals 1/12 of $2,000 x number of full time employees, minus 30, for all months with no coverage

− Penalty equals 1/12 of $3,000 for any applicable month x number of Full Time employees receiving subsidies , minus 30, or 1/12 of $2,000 x Full time employees for any applicable month


PAY OR PLAY



Multiemployer Plans: Multiemployer plans are established by a union to receive contributions from, and provide benefits to, the employees of multiple unrelated employers who are subject to collective bargaining with the union. The terms of these plans are often set by a board of trustees within the union by which the employer has little or no control as to the design of the plan.

The IRS has acknowledged the challenges in complying with the PPACA requirements for these type of plans, and has issued a transition rule that will exempt these qualifying employees from the penalties under IRC 4980H if the following are met:• The Employer is required to make a contribution to a multiemployer plan with

respect to the full‐time employee pursuant to a collectively bargained agreement• Coverage under the multiemployer plan is offered to the full‐time employee• The coverage offered is affordable and provides minimal essential coverage


ADDITIONAL REPORTINGHealth Insurance Issuers and Self‐funded employers: Every person who provides minimum essential coverage to an individual will be required to file and report specific information to the IRS indicating who is covered under which policy and for how long. This information will be used by the IRS to assist in the determination for the individual mandate.

Large Employers: Every applicable large employer subject to the Pay or Play standards will be required to file and report specific information to the IRS indicating a certification that the employer offers an acceptable and affordable, the length of any waiting period, the months the plan was offered, the monthly premium for the lowest cost option for each enrollment categories under the plan, and the employers share of costs provided by the plan. In addition, employers will need to furnish a written statement to each employee detailing information required to be reported by the individual on their personal return.


STRATEGIC CONSIDERATIONS

Reverse Discrimination: Employers may chose to offset some of the additional costs related to offering health insurance coverage by asking higher paid employees to pay more

Break in Service: Employers MAY be able to limit the total number of full‐time employees included in the shared responsibility calculation

Disaggregation: Certain large employers falling into the control group requirement may be able to limit the total amount of penalties health insurance issuers, including self‐insured employers, and all large employers will be required to file additional forms or returns to report on those individuals receiving health coverage and certain employers will have to report on the type of coverage offered


REVERSE DISCRIMINATION

• For some employers that have had a significant increase in the cost of offering health insurance coverage, there may be an opportunity to pass along some of the additional costs to their more highly compensated employees

• Employers have exploited the 9.5% “affordable” test and require ALL employees requesting health coverage to pay 9.5% of the premiums

• Certain preferred or key employees may then be given an increase in pay to compensate those individuals for some of the additional costs they must pay for coverage

• In most cases, the increase in premiums for offering an “affordable” plan is offset by the savings from the employee contributions and increase paid in wages


PROPOSED REGULATIONS

On January 2, 2013, the Department of Treasury issued a set of proposed regulations that attempt to provide additional guidance with respect to the “shared responsibility” for employers regarding employee health coverage. Two important items of note are the following:Break In Service Rules• Newly defined

− Variable hour employees returning to work after termination, or a continuous period with “NO” hours of service, will be considered “NEW” employees and therefore subject to a “NEW” measurement period

• 26 consecutive weeks with no hours of service − Cannot be receiving severance pay or some kind of deferred compensation

• A break of at least four weeks and the break is longer than the assignment before the break− Example: 5 week job assignment followed by a 7 week break of service


PROPOSED REGULATIONS

Disaggregation • The proposed regulations provide, that although large employer status and

30 employee exemption is determined on an aggregated basis, the determination and calculation for any assessable penalty under IRC Sec 4980H is computed and assessed separately for each applicable member of the controlled group

• Does NOT avoid the 50 employee “large employer” threshold determined by aggregating controlled employees – Still subject to the employer responsibility penalties

• Could provide opportunities to create management companies that would employ “key” employees and separate operating companies that may choose NOT to offer coverage and instead face the penalties

• Depending on the nature and make‐up of the controlled groups, MAY limit the amount of penalties assessed depending on the type and quality of employees in the operating entities


FUTURE CONSIDERATIONS

The Harsh Reality• Economy is still trying to recover, can it sustain the tax

increase • Divided Congress… TO FUND OR NOT TO FUND!• Uncertainty as to what employers will do • Approximately half of population has consistently opposed

the law since day one• Health care reform is still grossly underfunded, how is it going

to be paid for


THE LAST RESORT


ADDITIONAL RESOURCES

A few government website links that may help give you more detailed information and also provide updates to implementation deadlines:www.dol.gov/ebda/healthreform/www.healthcare.gov


CONTACT INFORMATION

Todd TiggesPrincipalUHY LLP

ttigges@uhy‐us.com248 204 9433


Tax Update

John GalloSenior ManagerUHY LLP


KEY TAX RATE CHANGES2012 2013 2014

Top income tax rate

35% 39.6% 39.6%

Top long term capital gains rate 15% 20% 20%QualifieddividendsAGI 450k

15% 20% 20%

Section 179 $500,000 $500,000 $25,000Bonus Depreciation

100% 50% None


ADDITIONAL TAX RATE CHANGES

2012 2013/2014ItemizedDeductions

Not phased out Phased out by 3% of excess AGI

Or80% of the itemized

deductions allowable

Estate, gift and GST tax exemptions $5,120,000 $5,250,000Maximum tax rate 35% 40%


HEALTH CARE PROVISIONS

2012 2013/2014

Medicare tax on passive income for individuals with more than $250,000 Joint

NA 3.8%

Additional Medicare tax on wages greater than $250,000 Joint

NA 0.9%


ADDITIONAL MEDICARE TAXES

Beginning in 2013, employees will pay and employers will be required to withhold and additional 0.9% of Medicare tax for any “Highly Compensated” employees.• Defined as gross wages or self‐employed income of

− $200,000 for single filers− $250,000 combined for married joint filers− $125,000 for each spouse for those married filing separate

• Only the employee portion of FICA− Employers do not have to match the additional 0.9%− As with the medicare tax – No maximum wage base− Remitted with the other FICA payments and reported as a separate line item on your payroll tax return


ADDITIONAL MEDICARE TAXES

• Employers may rely upon the $200,000 single filer threshold as a safe‐harbor before commencing with the additional 0.9% withholding to avoid penalties and interest

• Currently is reported and paid in the same manner as the Medicare tax is today

• Employees will be responsible for any deficiencies as calculated when filing their personal income tax returns

• Self‐employed individuals will not be able to deduct the additional Medicare tax


3.8% MEDICARE CONTRIBUTION TAX (MC TAX)

• 3.8% Medicare tax on certain unearned income of individuals, trusts and estates

• For individuals, the tax is calculated by multiplying the 3.8% rate by the lessor of:1) Net investment income for the year; or2) Modified adjusted gross income (MAGI) exceeding the threshold

amount

Filing Status Threshold AmountsMarried filing jointly $ 250,000

Married filing separately $ 125,000Single individual or head‐of‐household $ 200,000



Combined Effect of Tax Rates

2012 2013/2014

Max Rates Max RatesTotal Max Rate including 3.8%

Total Max Rate if subject to .9% FICA rate

Long term cap gains 15% 20% 23.8% NAQualified Div 15% 20% 23.8% NAOrdinaryincome (Inc. investments) 35% 39.6% 43.4% 40.5%



• Taxpayers who have net investment income, but MAGI is below these threshold amounts will NOT be subject to the MC tax

• Individuals with MAGI above these thresholds but without net investment income will not be subject to the tax



Net Investment income includes:

Interest, dividends, capital gainsAnnuities, rents, royaltiesPassive income from a trade or businessNet gain on sale of a principal residence (above exclusion amounts)Net income from “a trade or business trading in financial instruments”Net gain on the disposition of passive activity property

Net investment income does NOT include:

Distributions from qualified plans, IRAs, pension plans or profit sharing plansTax‐exempt income (i.e. municipal bond interest)Income subject to self‐employmentCash surrender value building up inside of a life insurance policyRoyalties from oil and gas


REAL ESTATE PROFESSIONAL

• Unique opportunities for professionals in the construction industry in regards to the real estate professional designation

• Two main tests to be designated a real estate professional− More than one‐half of services are provided by the taxpayer are

performed in real property trades or businesses in which the taxpayer materially participates; and

− Such taxpayer performs more than 750 hours of services during the taxable year in real property trades or business in which the taxpayer materially participates

• The taxpayer must still materially participate in the activity, or the activity is considered passive



• What qualifies as Real Property Trades or Businesses• Penalties are non‐deductible and determined on a monthly

basis − Penalty− Development, construction and reconstruction *− Acquisition and conversion− Rental and leasing− Operation and management− Brokerage



• 750 Hour Test • Do not count hours for 750 hour test unless materially

participate− Each real estate activity is treated separately− Consider aggregation election− Must materially participate in each activity− IRC does not require 750 hours in each activity



• What is Material Participation?• Regular, continuous and substantial• Treasury Regulations provide for seven tests‒ More than 500 hours – favorite‒ Participation is substantially all of the participation in it by all individuals‒ Participates for more than 100 hours and not les than that of any other

individual‒ Any reasonable means ‐ ?‒ Calendars, appointment books, logs‒ Contemporaneous daily logs are not required if other reasonable means exist to

establish material participation‒ Participation as an investor requires day‐to‐day management or operation of the

activity



Aggregation Election

• Each interest in rental real estate is treated as a separate activity – subject to the material participation requirements

• Unless aggregation election is made• Treat ALL rental realty as a single activity• Election makes it easier to meet the material participation

requirement



Schedule E

• Reporting rentals on Schedule E is NOT sufficient to constitute aggregation

• Need formal election and notice



To Elect Or Not To Elect

• Do not make if you have passive income from real estate and passive losses from other activities, because you will want to keep the income passive

• Do not include property to be sold



Election To Aggregate All Rental Real Estate Interests

• Need to include statement with return• Taxpayer X, is a qualifying taxpayer and hereby elects

pursuant to IRC Section 469(c)(7)(A) to treat all interests in rental real estate as one activity



Election Is Irrevocable

• Applies to all future years• Unless a material change in circumstances• Make the election if it results in utilization of losses that

would otherwise be suspended


REPAIR/CAPITALIZATION REGULATIONS

• Beginning in 01/01/14, final regulations from the IRS apply regarding amounts paid to acquire, produce, or improve tangible personal property

• These regulations will affect virtually all taxpayers that acquire, produce, or improve tangible property

• The regulations attempt to clarify whether expenses are deducted currently or capitalized



Materials and supplies—Temp. Reg. §1.162‐3T.This regulation provides a definition of materials and supplies, explains the proper tax year for deduction, allows an election to capitalize materials and supplies, and contains special rules for routable spare parts. These regulations will affect virtually all taxpayers that acquire, produce, or improve tangible property.



De minimis expensing rule—Temp. Reg. §1.263(a)‐2T(g).Taxpayers with an “applicable financial statement,” such as a certified audited financial statement, may claim a current deduction for the cost of acquiring items of relatively low‐cost property, including materials and supplies, if specific requirements are met. The aggregate cost which may be expensed annually under a taxpayer’s expensing policy is subject to a ceiling equal to the greater of .1 percent of gross receipts or 2 percent of total depreciation and amortization reported on the financial statement.



Amounts paid to improve tangible property—Temp. Reg. §1.263(a)‐3T.This is the “main course” of the temporary regulations which provides rules for distinguishing repairs from capital expenditures. Capital expenditures are divided into three categories of improvements: betterments, restorations, and adaptations.



Unit of property defined—Temp. Reg. §1.263(a)‐3T(e).The “unit of property” is a critical concept in determining whether an expenditure is a repair or capital expenditure. An expenditure on a large unit of property is more likely to be considered a repair expense. The regulation contains detailed rules for determining the size of a unit of property in the case of buildings and other types of property.


CONTACT INFORMATION

John GalloSenior ManagerUHY LLP

jgallo@uhy‐us.com248 204 9339


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