Acuity Advisors

New HRA offers small employers an attractive, tax-advantaged health care option

In December, Congress passed the 21st Century Cures Act. The long and complex bill covers a broad range of health care topics, but of particular interest to some businesses should be the Health Reimbursement Arrangement (HRA) provision. Specifically, qualified small employers can now use HRAs to reimburse employees who purchase individual insurance coverage, rather than providing employees with costly group health plans.

The need for HRA relief

Employers can use HRAs to reimburse their workers’ medical expenses, including health insurance premiums, up to a certain amount each year. The reimbursements are excludable from employees’ taxable income, and untapped amounts can be rolled over to future years. HRAs generally have been considered to be group health plans for tax purposes.

But the Affordable Care Act (ACA) prohibits group health plans from imposing annual or lifetime benefits limits and requires such plans to provide certain preventive services without any cost-sharing by employees. And according to previous IRS guidance, “standalone HRAs” — those not tied to an existing group health plan — didn’t comply with these rules, even if the HRAs were used to purchase health insurance coverage that did comply. Businesses that provided the HRAs were subject to fines of $100 per day for each affected employee.

The IRS position was troublesome for smaller businesses that struggled to pay for traditional group health plans or to administer their own self-insurance plans. The changes in the Cures Act give these employers a third option for providing one of the benefits most valued by today’s employees.

The QSEHRA

Under the Cures Act, certain small employers can maintain general purpose, standalone HRAs that aren’t “group health plans” for most purposes under the Internal Revenue Code, Employee Retirement Income Security Act and Public Health Service Act.

More specifically, the legislation allows employers that aren’t “applicable large employers” under the ACA to provide a Qualified Small Employer HRA (QSEHRA) if they don’t offer a group health plan to any of their employees. Annual benefits under a QSEHRA:

Can’t exceed an indexed maximum of $4,950 per year ($10,000 if family members are covered),
Must be employer-funded (no salary reductions), and
Can be used for only IRC Section 213(d) medical care.

QSEHRA benefits must be offered on the same terms to all “eligible employees” (certain individuals can be disregarded) and may be excluded from income only if the recipient has minimum essential coverage. There is a notice requirement and employees’ permitted benefits must be reported on Form W-2.

If you’re interested in exploring the QSEHRA option for your business, contact us for further details.

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Companies Restate Financial Results for a Variety of Reasons

When a company reissues or revises its financial statements, some people automatically assume that management is cooking the books. But there can be legitimate reasons for restatements, beyond management incompetence and fraud. So, before leaping to conclusions, it’s important to understand what went wrong — and find ways to prevent future restatements.

Complex standards

Often, owners and managers are more focused on running the business than staying on top of today’s increasingly complex accounting rules. Inadvertent mistakes and misinterpretations may cause an occasional restatement.

Restatements typically occur when the company’s financial statements are subjected to a higher level of scrutiny. For example, restatements may occur when a company:

Converts from compiled or reviewed financial statements to audited financial statements,
Decides to file for an initial public offering, or
Brings in additional internal (or external) accounting expertise, such as a new controller or audit firm.

The restatement process can be time consuming and costly. Regular communication with lenders and shareholders can help overcome the negative stigma associated with restatements. Management also needs to reassure employees, customers and suppliers that the company is in sound financial shape to ensure their continued support.

Error-prone accounts

Common sources of financial restatements include recognition errors and misclassifications on the financial statements. For example, management might make recognition errors when implementing the new standards on accounting for leases or contract revenues in the near future. Or, you may need to shift cash flows between investing, financing and operating on the statement of cash flows, in accordance with recent guidance issued on reporting cash flow.

Equity transaction errors, such as improper accounting for business combinations and convertible securities, can also be problematic. Other leading causes of restatements are valuation errors related to common stock issuances and preferred stock errors and the complex rules related to acquisitions, investments and tax accounting.

The probability of error increases as the complexity of your transactions increases. Examples of hard-to-report activities include hedging, issuing stock options, using special purpose or variable interest entities, and consolidating financial statements with related parties.

Need help?

Financial reporting can be challenging in today’s complex business environment. The best way to avoid restatements is to get it right the first time around. We can help you implement internal controls to test for errors and omissions, educate in-house accountants on changes to GAAP, audit your financial results and investigate the causes of any anomalies.

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Accounting for Mergers & Acquisitions

Many buyers are uncertain how to report mergers and acquisitions (M&As) under U.S. Generally Accepted Accounting Principles (GAAP). After a deal closes, the buyer’s postdeal balance sheet looks markedly different than it did before the entities combined. Here’s guidance on reporting business combinations to help minimize future write-offs and restatements due to inaccurate purchase price allocations.

Purchase price allocations

Under GAAP, buyers must allocate the purchase price paid in M&As to all acquired assets and liabilities based on their fair values. The process starts by estimating a cash equivalent purchase price.

If a buyer pays 100% cash up front, the purchase price is already at a cash equivalent value. But the cash equivalent price is less clear if a seller accepts noncash terms, such as an earnout that’s contingent on the acquired entity’s future performance or stock in the newly formed entity.

The next step is to identify all tangible and intangible assets and liabilities acquired in the business combination. The seller’s presale balance sheet will report most tangible assets and liabilities, including inventory, equipment and payables. However, intangibles are reported only if they were previously purchased by the seller. But intangibles are usually generated internally, so they’re rarely included on the seller’s balance sheet.

Fair value

Acquired assets and liabilities are then added to the buyer’s postdeal balance sheet, based on their fair values on the acquisition date. The difference between the sum of these fair values and the purchase price is reported as goodwill.

Goodwill and other indefinite-lived intangibles — such as brand names and in-process research and development — usually aren’t amortized for GAAP purposes. Instead, companies generally must test goodwill for impairment each year. Impairment testing also is needed when certain triggering events occur, such as the loss of a key person or an unanticipated increase in competition. If a borrower reports an impairment loss, it could mean that the business combination has failed to achieve management’s expectations.

Rather than test for impairment, private companies may elect to amortize goodwill straight-line, generally over 10 years. Companies that elect this alternate method, however, must still test for impairment when certain triggering events occur.

Bottom line

A business combination is a significant transaction, so it’s important to get the accounting right from the start. We can help buyers identify intangibles, estimate fair value and allocate purchase price even when a deal’s cash-equivalent purchase price isn’t readily apparent.

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2017 Q1 Tax Calendar: Key Deadlines for Businesses and Other Employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 31

File 2016 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
File 2016 Forms 1099-MISC, “Miscellaneous Income,” reporting nonemployee compensation payments in Box 7 with the IRS, and provide copies to recipients.
File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2016. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”
File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2016. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2016 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 28

File 2016 Forms 1099-MISC with the IRS and provide copies to recipients. (Note that Forms 1099-MISC reporting nonemployee compensation in Box 7 must be filed by January 31, beginning with 2016 forms filed in 2017.)

March 15

If a calendar-year partnership or S corporation, file or extend your 2016 tax return. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.

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Close-up on the use of XBRL in financial reporting

The use of eXtensible Business Reporting Language (XBRL) has slowly gained traction since 2009, when the Securities and Exchange Commission (SEC) began requiring public companies to submit regulatory filings tagged in XBRL. Could so-called “inline XBRL” help interactive data finally become more mainstream?

Two-stage process

XBRL is an interactive data format that allows financial statement information to be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software and used within investment models in other software formats. In theory, the SEC hopes the use of standardized interactive data will make financial information easier for investors to analyze and assist in automating regulatory filings and business information processing.

But, in practice, XBRL reporting has so far fallen short of the SEC’s expectations. In addition to submitting “XBRL Instance Documents,” public companies must continue reporting with PDF documents. PDFs are more familiar to financial statement users and, therefore, tend to be regarded as the official version that most analysts and investors use. This two-stage financial reporting process adds significant financial preparation costs and contributes to tagging errors and other data quality problems.

Human-readable alternative

In June 2016, the SEC began allowing companies to voluntarily embed interactive data directly into financial statements. The inline XBRL format helps ensure a filing is accurate, consistent and complete. It also renders a separate PDF filing unnecessary.

So far, about 30 public companies have voluntarily used inline XBRL in the past six months. Voluntary use of inline XBRL expires in March 2020, but the SEC is currently considering making inline XBRL mandatory. If that happens, the effective date of the changes probably won’t be for several years.

Interested in switching over?

In the meantime, the voluntary period of inline XBRL filing gives the SEC time to evaluate its usefulness, consider exceptions, and resolve technological and practical issues before mandating its use — or abandoning the concept. Contact us for more information on XBRL and whether the inline format could help your public company reduce reporting costs and errors.

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