US Health Care – A Canadian wake up call

Posted by Sibyl Bogardus, HUB International

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sibylEd note: Houston-based Sibyl Bogardus is the Chief Compliance officer with HUB International, Canada’s largest cross border insurance brokerage. In advance of her Canadian seminar series this week we asked her to highlight the major pitfalls and uncertainties faced by Canadians and Canadian companies doing business in the US.

Q:        What would you say are the top 3 mis-conceptions Canadian companies have regarding compliance with the new US Health Care reforms?

1)   The law only applies to employers based in the U.S.  Actually, it applies to U.S. employers, even if the company headquarters or parent company is based in Canada or elsewhere.

2)   U.S. subsidiaries under 50 full-time employees are exempt.  Actually, all full-time employees in U.S. entities will be counted together to see if the employer groups taken together as a whole are over 50 full-time employees. This may even be true if the Canadian company owns less than 100% of the U.S. operations.

3)   Canadians working in the U.S. don’t need to have coverage that meets U.S. health reform standards and their U.S.-based employers don’t need to offer them health plan coverage.  Actually, Canadian citizens with coverage in their home country, even if it is very comprehensive, are not exempt from the U.S. requirement to have coverage.  Their personal obligations will depend in large part on how long they are in the U.S.

Q:        What role does the IRS play in these regulations?

The IRS (Internal Revenue Service) enforces the requirements for employers to offer coverage, and for individuals to elect coverage.  The penalties are imposed by the IRS as “excise,” or penalty taxes.  The process often will be a demand letter sent to employers, which may follow an audit /review by IRS government agents, or the IRS may send the demand letter simply because the employer’s or the individual’s tax filing reveals a health plan coverage failure. The IRS approach usually puts employers and individuals back into a defensive mode, where they have to prove to the IRS that they really don’t owe the penalty…not a good position to be in.

 Q:       Who is defined as an “employer” under this system?

The employer is the organization controlling the worker…how he does his work, where he does it, and when.  The employer includes all employers in the same “controlled group” for IRS tax purposes.  A controlled group is based on common ownership, either 80% of more of two or more employers is owned by a single parent company.  Or, if 5 or fewer individuals own 80% or more of two or more companies, the companies might be considered related after the IRS applies some other standards.  This last rule really tends to catch entrepreneurs by surprise.  

Q:        If a Canadian company has multiple divisions, or subsidiaries – are they treated as separate companies?

No, they typically will be treated as a single company in the U.S.  The Canadian parent is not required to comply for its Canadian-based employees, of course, but the U.S. divisions or subsidiaries are all treated as one for purposes of determining size.  If over the required number of full-time employees, under the new rules then all the divisions or subsidiaries must comply by offering a plan that satisfies minimum standards of that law and that is affordable to employees.

Q:        What should Canadian companies NOT DO prior to these regulations coming into effect?

A major red flag in the eyes of the IRS and the U.S. Department of Labor will be terminating employees who would be eligible for coverage when the law takes effect in early 2015.

Also, don’t wait to address the so-called Cadillac tax that penalizes employers for having plans that are too generous.  Those rules start affecting plans in 2018; don’t be caught by surprise.  Instead, have a progressive plan strategy in place well before the date your plan is affected. Also, an employer should not offer to pay for any individual policies…the federal government wants an employer of any size to offer a group health plan of its own.  Similarly, trying to move employees onto Medicare (a government program for the elderly, disabled, and people with kidney failure) is very risky under older rules that slip the attention of many employers.  Finally, beware of any schemes that urge savings through reduction of payroll taxes; many of these are viewed as tax avoidance by the IRS.  

Q;        What is the most interesting loophole you’ve seen so far?

The law only requires an employer to offer something cryptically called a “minimum essential coverage” plan.  There is a major glitch in the law because Congress defines this type of program as just about any employer-sponsored plan.  Very circular definition!  So, by offering a health plan with preventive visits, such as annual physical examinations, but no coverage for anything else means an employer can avoid the worst penalty under the law.  (Generally, $2,000 times the number of full-time employees, minus 30 employees.).

So, even with a plan that offers no coverage for x-rays, surgery, cancer treatment, hospitalization, doctor visits, or drugs, the employer can avoid the worst of the new law.  IRS insiders in Washington say the law as passed by Congress creates this loophole, and the IRS can’t close it because they don’t have the power to override Congress.

CEOs, CFOs and business owners take note. Will this issue affect you or your company? If you would like to attend one of Sibyl’s complimentary seminars in Winnipeg, Calgary, Edmonton or Vancouver CLICK HERE to register.

Seminar Dates

  1. Calgary – Monday, September 29th, 3-6 pm – Hotel Arts, 119 12th Avenue SW
  2. Edmonton – Tuesday, September 30th, 3-6 pm – Fairmont Hotel Macdonald, 10065 100th Street
  3. Winnipeg – Wednesday, October 1st, 3-6 pm – Manitoba Club, 194 Broadway
  4. Vancouver – Thursday, October 2nd, 3-6 pm – Ter minal City Club, 837 West Hastings Street