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Written by: Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA

Published: 22 September 2016

This is a question on many people’s minds. A few years ago consumers were trained to monitor their credit report. However, now consumers are seeing commercials asking, “Do you know your credit score?”

So what is a credit score? Who creates this score? And what does it mean to the consumer? There are 19 major versions of credit scoring models in use today. However, there are two major credit scoring systems. The most commonly known is the FICO Score and the other is VantageScore.

MyFICO.com gives us the background and foundation for the FICO Score:

“90% of top lenders use FICO Scores to help them make billions of credit-related decisions every year. FICO Scores are calculated based solely on information in consumer credit reports maintained at the credit reporting agencies.

“By comparing this information to the patterns in hundreds of thousands of past credit reports, FICO Scores estimate your level of future credit risk.”

Bankrate.com elaborates more on the FICO Score:

“Technically, it’s a predictive analytics company founded in 1956. But, generally, when people hear “FICO,” they’re thinking of the scores it gives -- three-digit numbers introduced in 1989 that essentially determine “the likelihood that you will pay all of your (debt) obligations on time for the foreseeable future,” says Barry Paperno, former consumer affairs manager for FICO who now runs the blog SpeakingOfCredit.com.

“The first FICO scores, and their descendants, predicted the likelihood a consumer will become 90 days behind on payments over the next 24 months on different debt types. Over the years, the score has been poked, prodded and tweaked from its original formula to account for changes in consumer behavior and the lending landscape, says Frederic Huynh, senior principal scientist at FICO.”

Credit.com gives us an excellent overview of VantageScore:

“VantageScore first exploded on the credit score scene in 2006 as a joint venture of the big three credit bureaus – Experian, Equifax and TransUnion.

“Like other credit scores, VantageScore consists of calculations relying entirely on credit bureau information – not income, bank accounts or other assets – to predict how likely you are to pay your credit obligations on time each month. With an emphasis on paying on time, keeping balances low, and avoiding new credit obligations, the simplicity and common-sensibility of credit scores are often marred by the all-too-frequent credit reporting errors that can lead to credit scoring errors, and that can require active management of your credit – much like managing your health.”

CreditKarma.com gives us some context on the evolution of the credit scoring system:

“Prior to the creation of standardized credit scores, lenders and loan officers would often develop their own “score card” to assess the risk of lending to a particular borrower. This score card could vary drastically from one lender to the next. The major issue with this original method was that it was based on a loan officer’s ability to judge risk, rather than a common set of rules and specific calculations.

“So, in the 1980’s, the Fair Isaac Corporation set up the first general purpose credit scoring system based on credit bureau information in order to help remove the inherent inconsistencies that arose from having each lender perform their own credit diagnostics.”

Bankrate.com explains this for us:

“Your credit score is a three-digit number generated by a mathematical algorithm using information in your credit report. It’s designed to predict risk, specifically, the likelihood that you will become seriously delinquent on your credit obligations in the 24 months after scoring.

The Consumer Financial Protection Bureau indicates the most common factors used for the credit score are 1) your most recent credit activity, 2) how long you have had your accounts open and 3) whether you had any debts referred for collection, foreclosure or bankruptcy. However, perhaps even more importantly the Equal Credit Opportunity Act (ECOA) prohibits the use of certain items for use in the calculation of your score. These are: 1) Race or color, 2) Religion, 3) Sex (gender), 4) National origin, 5) Marital Status and 6) whether you have formally disputed information contained on your credit report.

Overall the factors align in five broad categories: 1) 30% is amount you owe, 2) 35% is payment history, 3) 15% is length of credit history, 4) 10% is new credit and 5) 10% is credit mix. Some of the items used to calculate your credit score are:

• Payment History
• How long your accounts have been open and available foryou? Generally, more is better. • How long it has been since you used certain accounts?
• How long specific credit accounts have been established?
• What percentage of your available credit are you currently using?
• How many accounts are listed on your credit report?
• The age of your oldest account, the age of your newest account and an average age of all your accounts.
• The mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.
• The derogatory marks such as accounts sent to collections, bankruptcies, civil judgements or tax liens.
• How many new accounts have you recently opened? • How many hard credit inquiries are shown on your credit report?

Where does this information come from? Your credit score is calculated from information contained on your credit report. For this reason, Bankrate.com confirms for us:

“A consumer has three FICO scores, one for each credit report provided by the three major credit bureaus: Equifax, Experian and TransUnion. Unfortunately, consumers currently have access to only their Equifax and TransUnion FICO scores. Experian ended its agreement with myFICO.com in 2009.”

A FICO score will range between 300 and 850. The higher the score, the better. The Federal Trade Commission gives us the following guidance for how to improve our credit score:

“Credit scoring systems are complex and vary among creditors or insurance companies and for different types of credit or insurance. If one factor changes, your score may change — but improvement generally depends on how that factor relates to others the system considers. Only the business using the system knows what might improve your score under the particular model they use to evaluate your application.”

Nevertheless, scoring models usually consider the following types of information in your credit report to help compute your credit score:

• Have you paid your bills on time? You can count on payment history to be a significant factor. If your credit report indicates you have paid bills late, had an account referred to collections, or declared bankruptcy, it is likely to affect your score negatively.

• Are you maxed out? Many scoring systems evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, it’s likely to have a negative effect on your score.

• How long have you had credit? Generally, scoring systems consider your credit track record. An insufficient credit history may affect your score negatively, but factors like timely payments and low balances can offset that.

• Have you applied for new credit lately? Many scoring systems consider whether you have applied for credit recently by looking at “inquiries” on your credit report. If you have applied for too many new accounts recently, it could have a negative effect on your score. Every inquiry isn’t counted: for example, inquiries by creditors who are monitoring your account or looking at credit reports to make “prescreened” credit offers are not considered liabilities.

• How many credit accounts do you have and what kinds of accounts are they? Although it is generally considered a plus to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many scoring systems consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may have a negative effect on your credit score.

Scoring models may be based on more than the information in your credit report. When you are applying for a mortgage loan, for example, the system may consider the amount of your down payment, your total debt, and your income, among other things.

Improving your score significantly is likely to take some time, but it can be done. To improve your credit score under most systems, focus on paying your bills in a timely way, paying down any outstanding balances, and staying away from new debt.”

On June 26, 2016, LaToya Irby published an article entitled 10 Things You Can Do Today to Improve Your Credit Score.

1. Get a copy of your credit reports.
2. Dispute a credit report error.
3. Avoid new credit card purchases.
4. Pay off a past due balance.
5. Avoid a new credit card application.
6. Leave accounts open, especially those with balances.
7. Make contact with your creditors.
8. Pay off debt.
9. Get professional help.
10. Be patient and persistent.

The full article can be read at http://credit.about.com/od/creditrepair/tp/improvecredit.htm

On June 28, 2016 LaToya Irby followed this article with an article titled Nine Things That Boost Your Credit Score.

http://credit.about.com/od/creditrepair/tp/Things-That-Boost-Your-Credit-Score.htm

Both of these articles give you practical, straight-forward suggestions on this question which seems to be on many people’s mind.

This list of four items By Christine Digangi of Credit.com was published by ABC.com March 26, 2014 4 (Perfectly Legal) Hacks to Improve Your Credit Score

1. Use a Buddy System
2. Pay Often
3. Strategically Open Accounts
4. A Card Lost

The full article can be found at http://abcnews.go.com/Business/perfectly-legal-hacks-improve-credit-score/story?id=23071180

Without a doubt, there is a much higher awareness of our credit scores these days. Offer clients a better understanding of what the credit score is, how it is calculated and provides some practical suggestions for improving their scores, if needed.

Jerry Love is the sole owner of Jerry Love CPA, LLC in Abilene, Texas. Love graduated from Abilene Christian University. In addition to being a CPA, Love has also earned the designations of PFS, CFP, CVA, ABV, CITP, CFF, and CFFA. In 2006-07, Love was the Chairman of the Texas Society of CPAs.

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Written by: Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA

Published: 30 June 2016

It has taken the Department of Labor (DOL) almost two years to release the final regulations requested by President Obama. The DOL press release announcing the final regulations indicates:

“This long-awaited update will result in a meaningful boost to many workers’ wallets, and will go a long way toward realizing President Obama’s commitment to ensuring every worker is compensated fairly for their hard work.”

At a press conference on March 13, 2014, President Obama issued a Presidential Memorandum directing the DOL to modernize and update the regulations which define the white collar exemption from overtime pay. At that time, he expressed his concern.

“The salary level test is supposed to help identify salaried workers who are entitled to overtime pay when they work long hours. The current salary level is outdated and no longer does its job of helping to separate salaried white collar employees who should get overtime pay for working extra hours from those who should be exempt.”

A case can be made for the wage amount used to determine exemption from OT is out of date and inflation has caused it to be irrelevant. A blog post by the DOL states:

“For decades, the salary threshold under which all white-collar, salaried workers qualify for overtime has failed to keep up with the rising cost of living. In 1975, 62% of full-time salaried workers were eligible for overtime protection based on their pay. Today, only 7% are eligible under the outdated salary level. The current salary level is so low that it does not effectively identify which white-collar workers are entitled to overtime protection. That is an economy out of balance.

“So we’re fixing it. We have more than doubled the salary threshold − lifting it from $23,660 to $47,476 per year. That means some 35% of full-time salaried workers, based on their pay, will now be eligible for overtime.”

https://blog.dol.gov/2016/05/19/middle-class-work-deserves-middle-class-wages/ In another blog post by the DOL, they project who they believe will be the primary beneficiaries of the new regulations:

“The updates will impact 4.2 million workers who will either gain new overtime protections or get a raise to the new salary threshold. So who are these workers?

“More than half − 56% − are women, which translates into 2.4 million women either gaining overtime protections or getting a raise to the new threshold as a result of the rule. We also find that more than half – 53% − of affected workers have at least a four-year college degree, and more than 3 in 5 (61%) are age 35 or older. And 1.5 million are parents of children under 18, which translates into 2.5 million children seeing at least one parent gain overtime protections or get a raise to the new threshold.”

https://blog.dol.gov/2016/05/18/who-benefits-from-the-new-overtime-rule/

The final regulations were released by DOL on May 18, 2016 and published in the Federal Registry shortly thereafter. It is expected initially to extend overtime pay to over 4.2 million workers. Further, DOL indicates the regulations change “strengthen existing overtime protections for 5.7 million additional white collar salaried workers and 3.2 million salaried blue collar workers whose entitlement to overtime pay will no longer rely on the application of the duties test.” The effective date for implementation is December 1, 2016.

The essential elements of the new regulations are:
1. Sets the annual salary level of $47,476 for Executive, Administrative and Professional workers to establish they will be exempt from the overtime (OT) compensation;

2. Sets the annual salary level of $134,004 for highly compensated employees (HCE) to establish they will be exempt from the overtime (OT) compensation;

3. For the first time ever, establishes a mechanism to automatically revise these compensation levels every three years beginning January 1, 2020 in order to maintain and ensure the salary levels continue to increase as the average compensation increases (DOL indicates it will publish all updated salary amounts in the Federal Register at least 150 days before their effective date, and will post them on the Wage and Hour Division’s website); and

4. Another new element is the regulations allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the newly established salary level.

The DOL published their Notice of Proposed Rulemaking (NPRM) for comment last summer on July 6, 2015. DOL received over 270,000 comments. Several elements of the exposure draft were modified based on the comments received.

Some experts in the employment law field have observed that many of them were expecting a short time period between the final ruling and the implementation date. As you will note, DOL has given employers just over a six-month period to implement the revised regulations and modify their pay structure to implement it. There is already some speculation the regulations may become a political issue in Congress and potentially the November elections. Further, some speculate the fourth item above which mandates an automatic adjustment to the salary levels may be challenged in court.

Briefly this is how the salary level was set and how it will be revised every three years. The annual salary of $47,476 is based on the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region (which is currently the South). The current salary of $23,660 has not been adjusted since 2004. This salary level is one item DOL modified in the final regulations based on the public comments. Another item which was modified in the final regulations was this salary level would be adjusted each three years versus annually.

The adjustment of the annual salary amount for this exemption will mostly likely jump significantly again in 2020. This is because the method specified to determine the salary amount is the average of the employees classified as salaried employees. Therefore, if everyone who is eligible to be exempt is paid $47,476 or more, then the average will be higher than this minimum amount. After the recalculation in 2020, we can expect the adjusted salary amount to stabilize and fluctuate in relationship to market influences. Future automatic updates will take effect on January 1 of 2023, 2026, etc.

However, employers should begin evaluating how these new regulations impact their compensation structure and what additional record keeping may be needed.

As noted on the DOL website and in the Fair Labor Standards Act (FLSA or Act):

“Since 1940, the Department’s regulations have generally required each of three tests to be met for the FLSA’s executive, administrative, and professional (EAP) exemption to apply:

(1) The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (salary basis test);

(2) The amount of salary paid must meet a minimum specified amount (salary level test); and

(3) The employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (duties test).”

Items #1 and #3 are essentially unchanged from the current regulations.

1. For item #1 above for a person to be exempt from the OT pay, they must be paid on a salary basis which would be a predetermined fixed amount. However, employers need to understand simply paying a person a fixed salary does not automatically make them exempt from being paid OT. This is a common misconception I find with employers.

2. For item #3 above, the new regulations do not change the duties test in the current law and regulations. See FSLA website: https://www.dol.gov/whd/overtime/fs17a_overview.htm. DOL is not making any changes to the standard duties test. The Duties Test includes:

Executive Exemption
• The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;

• The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent;

• The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

Administrative Exemption
• The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers;

• The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Professional Exemption
• The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;

• The employee must have advanced knowledge and must be in a field of science or learning; and

• The employee’s advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

See the FLSA site for more examples and details of the duties test.

The DOL in their May 18 press release offers a justification of the new regulations:

“The standard salary level set in this Final Rule addresses our conclusion that the salary level set in 2004 was too low given the Department’s elimination of the more rigorous long duties test. For many decades the long duties test − which limited the amount of time an exempt employee could spend on nonexempt duties and was paired with a lower salary level − existed in tandem with a short duties test − which did not contain a specific limit on the amount of nonexempt work and was paired with a salary level that was approximately 130 to 180 percent of the long test salary level. In 2004, the long and short duties tests were eliminated and the new standard duties test was created based on the short duties test and was paired with a salary test based on the long test.

“The effect of the 2004 Final Rule’s pairing of a standard duties test based on the short duties test (for higher paid employees) with a salary test based on the long test (for lower paid employees) was to exempt from overtime many lower paid workers who performed few EAP duties and whose work was otherwise indistinguishable from their overtime-eligible colleagues. This has resulted in the inappropriate classification of employees as EAP exempt who pass the standard duties test but would have failed the long duties test.

“The Final Rule’s salary level represents the most appropriate line of demarcation between overtime-protected employees and employees who may be EAP exempt and works appropriately with the current duties test, which does not limit non-EAP work.”

The DOL asserts “With the new, higher threshold, 8.9 million overtime-eligible salaried workers − and their employers − will be able to determine more easily that they should be receiving overtime pay. Because their salaries are below the new threshold, their employers will no longer have to figure out whether they pass the ‘duties test,’ and they will no longer have to wonder if that test has been applied appropriately. This will simplify application of the rules and provide a bright line that protects the set of workers our workplace laws intended to protect.”

DOL further asserts in their announcement the benefits will:

1. Put more money into the pockets of many middle class workers or give them more free time.

2. Prevent a future erosion of overtime protections and ensure greater predictability.

3. Strengthen overtime protection for salaried workers already entitled to overtime and provide greater clarity for workers and employers.

4. Improve work-life balance.

5. Increase employment by spreading work.

6. Improve worker’s health.

7. Increase productivity.

Fundamental Compliance
Generally, employers that have an annual gross volume of sales of $500,000 or more are covered by the FLSA. In addition, employees of certain entities are covered by the FLSA regardless of the amount of gross volume of sales. These entities include: hospitals; businesses providing medical or nursing care for residents; schools (whether operated for profit or not for profit); and public agencies. Furthermore, if an employer is engaged in “interstate commerce” they become subject to FLSA.

For more information on enterprise and individual coverage under the FLSA, see Fact Sheet 14: Coverage Under the Fair Labor Standards Act (FLSA). https://www.dol.gov/whd/regs/compliance/whdfs14.pdf

Employees are presumed to be subject to the FLSA, which in most instances, would require they be paid hourly, and if they work more than 40 hours in the work week they should be paid one and one-half of their regular pay rate (commonly called their overtime rate).

What about compensatory time (compensatory time off)? Generally, the use of compensatory time is limited to a public agency that is a state, a political subdivision of a state, or an interstate governmental agency, under specific circumstances. Private companies are not allowed to use compensatory time to fulfill their overtime obligation and are therefore generally required to pay overtime-eligible employees an overtime premium for hours over 40 in a workweek. Compensatory time will only reduce the employer’s OT obligation if the time off is within the same workweek. For example, if an employer’s workweek is Sunday through Saturday. If the employee has worked 40 hours by Wednesday night, then the employee would be given compensatory time off for the rest of that workweek. In other words, the only way compensatory time will work is that the employee is limited to only working 40 hours and they would therefore only be paid for the 40 hours worked.

Simply paying an employee a fixed amount per pay period (a fixed salary) does not cause the employee to be exempt from OT. Nor does having a title make an employee exempt from OT.

Employers will need to implement a system to know how many hours non-exempt employees are working so they will be able to properly compensate them when they have overtime hours. See Fact Sheet 21: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA). https://www.dol.gov/whd/regs/compliance/whdfs21.pdf

Also see Fact Sheet 22: Hours Worked Under the FLSA. https://www.dol.gov/whd/regs/compliance/whdfs22.pdf

See Fact Sheet 23: Overtime Pay Requirements of FLSA https://www.dol.gov/whd/regs/compliance/whdfs23.pdf

If the employer is in a state which has a higher standard for paying OT, then the higher standard will apply.

The new regulations allow for nondiscretionary bonuses and incentive payments (including commissions) to be part of the compensation to satisfy the salary test for an exempt employee. However, it should be noted that the bonuses must be paid at least quarterly and in fact the employee must be paid enough including the bonuses to meet the minimum compensation threshold of $47,476. If an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given quarter to retain their exempt status DOL permits a “catch-up” payment at the end of each quarter. The employer has one pay period to make up for the shortfall (up to 10% of the standard salary level for the preceding 13-week period).

Employers can comply with the new rule in several different ways:

• Pay time-and-a-half for overtime work.
• Raise employees’ salaries above the new threshold.
• Limit employees’ hours to 40 per week.
• Continue to pay the employee a salary and pay overtime in addition when they work more than 40 hours in a workweek.
• Evaluate the workload and realign the hours to keep employees below 40 hours.
• Some combination of the above.

More Resources
It should be noted this new regulation is specific to the “white collar” exemption. There are many other provisions of FLSA which continue to govern other employees which determine how they are compensated. Furthermore, DOL issued some specific guidance relative to this regulation as follows:

1. Guidance for Higher Education Institutions. https://www.dol.gov/whd/overtime/final2016/highered-guidance.pdf

2. Guidance for Private Employers https://www.dol.gov/whd/overtime/final2016/general-guidance.pdf

3. Guidance for Non-Profit Organizations https://www.dol.gov/whd/overtime/final2016/general-guidance.pdf

4. Small Entity Compliance Guide to the FLSA “White Collar Exemptions” https://www.dol.gov/whd/overtime/final2016/general-guidance.pdf

5. Non-Enforcement policy for providers of Medicaid-funded services for individuals with intellectual or developmental disabilities in residential homes and facilities with 15 or fewer beds. https://www.dol.gov/whd/overtime/final2016/nonenforcementpolicy.htm

6. A Questions and Answer page https://www.dol.gov/whd/overtime/final2016/faq.htm

7. The following is a link the Federal Register where the entire 500 plus pages are posted. https://www.federalregister.gov/articles/2016/05/23/2016-11754/defining-and-delimiting-the-exemptions-for-executive-administrative-professional-outside-sales-and

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Written by: Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA

Published: 19 May 2016

Most people do not know they can incur penalties by not signing up for Medicare when they become eligible. It is very important for you to pay attention to the deadlines related to signing up for Medicare and adhere to them. You are eligible for Medicare when you turn 65. It is advisable to sign up three months before your 65th birthday. However, people younger than age 65 with certain disabilities or permanent kidney failure can also qualify for Medicare. It is important to note that even though the “full retirement age” for Social Security retirement benefits is now 66, you become eligible for Medicare at age 65.

Medicare gives you essential basic health insurance but does not cover everything. For example, Medicare does not provide long-term care coverage. This article will briefly discuss supplemental insurance (generally called Medigap insurance that can be purchased from private carriers).

There are three basic enrollment periods:

1. When You Turn 65
During this initial enrollment period you have a sevenmonth enrollment window, which includes the three months prior to the month you turn 65, the month you turn 65 and the three months after you turn 65.

2. Annual Enrollment Period
Every year the open enrollment period is October 15 to December 7. Anyone eligible for Medicare can enroll, switch or drop their coverage during this time. The coverage begins January 1.

3. Special Enrollment – Year Round
Some people will qualify for enrollment at any time during the year because they have a triggering event such as loss of insurance coverage, gaining or losing Medicaid eligibility, moving into or out of a plan service area, termination of the current plan or qualifying for a Special Needs Plan.

To Apply for Medicare benefits you can go online to the Social Security website, www.socialsecurity.gov, or go to one of the Social Security offices.

Medicare has four basic parts:

1. Part A
This part provides basic hospitalization coverage for inpatient care in a hospital or skilled nursing facility (following a hospital stay), some home health care and hospice care. If you have 40 or more quarters of Medicare- covered employment, you do not have an additional premium for your Part A coverage. In 2015, your deductible for Part A coverage is $1,260 per benefit period. This deductible amount is adjusted annually.

2. Part B
Medical care that is not inpatient is usually covered by Part B. This includes basic insurance for services from physicians and other health care providers, outpatient care, home health care, durable medical equipment and some preventive services. In 2015 the Part B monthly premium is $104.90 (higher premiums may apply based on income) with an annual deductible of $147.00. The individual will pay 20% of the Medicare-approved amount for services after the deductible is met. Beneficiaries with higher incomes (individuals with taxable incomes of more than $85,000 and couples with taxable incomes of more than $170,000) will pay more than $104.90 per month because they must pay an income-related surcharge. These income thresholds are expected to remain the same through 2019.

AARP gives this caution to seniors at http://www.aarp.org/work/social-security/ info-05-2012/signing-up-for-socialsecurity- medicare.html

“Medicare has a seven-month period in which you can sign up for Part B, which covers doctor bills and other outpatient medical costs. This period begins three months before the month of your 65th birthday, includes the month you turn 65 and ends three months after your birthday month. It’s a good idea to apply at the start of that period. If you miss the deadline, your monthly premium will probably be 10 percent higher — for the rest of your life — for each 12-month period you were eligible but did not enroll.

However, there’s an important exception to this rule. If when you turn 65 you’re still working and have health insurance from your employer or through your spouse’s employer, Medicare may permit you to postpone, without penalty, the date when you have to enroll. Generally speaking, that exception period ends when you stop working and no longer have job-based health care coverage.”

3. Part C
This is an option that is not available in every region. If it is available and you have Medicare Parts A and B, you can choose to receive all of their health care services through one of these provider organizations under Part C. These are also called Medicare Advantage plans and they are Medicare-approved plans offered by private health insurance carriers for individuals who are enrolled in Original Medicare, Part A and Part B. If you sign up for a Medicare Advantage plan, you are still in the Medicare program and must continue paying your Part B premium. Generally these Medicare Advantage plans offer additional benefits, such as vision, dental, and hearing, and many include prescription drug coverage. These plans may have networks, which provide you access to certain doctors and hospitals in their network.

If you enroll in a Medicare Advantage plan, you cannot have a Medigap policy because the Medicare Advantage plans generally cover many of the same benefits that a Medigap policy would cover, such as extra days in the hospital after you have used the number of days that Medicare covers.

4. Part D
This provides basic prescription drug coverage. You can go to Medicare.gov to get more details on the coverage provided for prescriptions: http://www.medicare.gov/part-d/index.html.

“Most Medicare Prescription Drug Plans charge a monthly fee that varies by plan. You pay this in addition to the Medicare Part B premium. If you belong to a Medicare Advantage Plan (Part C) or a Medicare Cost Plan that includes Medicare prescription drug coverage, the monthly premium you pay to your plan may include an amount for drug coverage.”

Part D may have a deductible, which can range from zero to more than $320 in 2015 ($360 in 2016). After you meet your deductible some plans have a copay (such as $10 per prescription) or coinsurance (such as 25% of the prescription cost). In most cases, the copay or coinsurance is based on a 30-day supply of the prescription.

You can have your monthly premium for Medicare Part D deducted from your Social Security retirement check.

There is a late enrollment penalty for Part D. As explained on Medicare.gov .

“The late enrollment penalty is an amount added to your Medicare Part D monthly premium. You may owe a late enrollment penalty if you go without Part D or creditable prescription drug coverage for any continuous period of 63 days or more after your Initial Enrollment Period is over. The cost of the late enrollment penalty depends on how long you went without Part D or creditable prescription drug coverage. Medicare calculates the penalty by multiplying 1% of the "national base beneficiary premium" ($33.13 in 2015) times the number of full, uncovered months you didn't have Part D or creditable coverage. The monthly premium is rounded to the nearest $.10 and added to your monthly Part D premium.”

Who is entitled to Medicare?

If you or your spouse are receiving Social Security benefits, railroad retirement benefits or are eligible to receive them, you are eligible for Medicare. Some other categories of people are also eligible, but the primary focus of this article is targeting those entering their retirement period at age 65 or older.

Anyone who is eligible for Medicare Part A can enroll in Part B by paying the monthly premium. If you have a higher income, you will pay a higher premium.

When do you sign up for Medicare?

People who become newly entitled to Medicare should enroll during their initial enrollment period or during the annual coordinated election period from October 15 – December 7 each year.

People who are already receiving their Social Security retirement benefits will be contacted by SSA a few months prior to their becoming eligible for Medicare. Generally, if you live in the US, the Northern Mariana Islands, Guam, American Samoa or the Virgin Islands, you will be enrolled in Medicare Parts A and B automatically. However, because you must pay a premium for Part B coverage you do have the option of turning it down.

It is very important for you to understand that even if you are not already receiving your SSA retirement benefits, you should contact SSA about three months before your 65th birthday to sign up for Medicare. You are eligible to sign up for Medicare even if you do not plan to retire at age 65 or sign up to receive your SSA retirement benefits at same time. This is a common misconception for people who believe they must be receiving their SSA retirement benefits to be eligible for Medicare.

The next key element of signing up for Medicare is to understand the enrollment period for Medicare Part B. When you first become eligible for Medicare Part A, you have a seven-month initial enrollment period in which to sign up for medical insurance (Medicare Part B). A delay on your part will cause a delay in coverage and result in higher premiums. If you are eligible at age 65, your initial enrollment period begins three months before your 65th birthday, including the month you turn age 65 and ends three months after that birthday.

You can apply for Medicare online through Social Security Administration if you are: 1) at least 64 years and 9 months old, 2) want to sign up for Medicare but do not currently have ANY Medicare coverage, 3) do not want to start receiving Social Security benefits at this time, and 4) are not currently receiving Social Security retirement, disability or survivors benefits.

Penalty for waiting to Enroll in Medicare Part B

Your monthly premium for Medicare Part B will increase by 10 percent for each 12-month period you were eligible for, but did not enroll in, Medicare Part B. Note there are specific windows of time in which you can enroll. This is not open for enrollment year round.

You can enroll in Medicare Part B during a “general enrollment period” which is during January 1 through March 31 of each year. Your coverage will begin on July 1 of the year you enroll.

There is a special enrollment period for people who are in an employer group health plan. If you are 65 or older and are covered under a group health plan, either from your own or your spouse’s current employment, you have a “special enrollment period” in which to sign up for Medicare Part B. This entitles you to delay enrolling in Medicare Part B without having to wait for a general enrollment period and paying the 10 percent premium surcharge for late enrollment.

These rules allow you to enroll in Medicare Part B any time while you are still covered by a group health plan based on current employment. Further, it allows you to enroll during the eight-month period beginning the month after either the employment ends or the group health coverage ends, whichever happens first.

You must be careful about this exception because the special enrollment period does not apply if employment or employer-provided group health plan coverage ends during your initial enrollment period.

Medicare and Requirements of the Affordable Care Act

Medicare isn’t part of the Health Insurance Marketplace established by the Affordable Care Act (ACA), so you don't have to replace your Medicare coverage with Marketplace coverage.

Because of ACA, Medicare now covers certain preventive services such as mammograms, colonoscopies, and counseling, and screenings for prostate cancer, depression, obesity, diabetes and heart disease. You can also get an annual physical check-up at no charge. This is all included without charging you for the Part B coinsurance or deductible.

The preventive services Medicare Part B will fully cover include:

• An annual wellness exam to develop or update a personalized prevention plan

• Pap test and pelvic exams

• Pneumococcal and flu vaccines

• Hepatitis B vaccines for high-risk individuals

• HIV screening test

• Colorectal cancer screening test

• Diabetes screening test

• Cardiovascular screening test

• Bone density measurements for women at risk for osteoporosis

• Self-management training for individuals with diabetes

• Medical nutrition therapy for individuals with diabetes or kidney disease • Smoking cessation counseling if you haven't yet been diagnosed with a tobacco-related illness

• Depression screening (test is fully covered; you generally have to pay 20 percent for doctor's visit)

• Alcohol misuse screening and counseling

• Obesity screening and counseling

What is a Medigap policy?

A Medigap policy is a supplemental health insurance policy to help the individual pay for some of the coinsurance contributions and deductibles for Medicare and to cover some additional services excluded from Medicare. Medigap policy is purchased from private insurance companies. They should be clearly identified as Medicare Supplemental Insurance. It is also important to note that a Medigap policy only covers one person. Each person should determine if they wish or need to have a policy. This can be to your benefit because the needs of each spouse may be different and this will allow each to have a Medigap policy best suited to their medical needs.

You must be enrolled in Medicare Part A and B to be eligible to purchase a Medigap policy. There are currently ten standard policies approved for the market which are labeled as Plans A-D, Plans F and G, and Plans K-N (there are some variations of this in certain states and not all plans are available in all states). All policies offer the same basic benefits but some offer additional benefits, so it is important to review what the policy will cover relative to your needs and expectations.

It is important to note that Medigap policies do not include items such as long-term care, private-duty nursing care, vision, eyeglasses, dental care, or hearing aids. If you anticipate a long-term stay in a nursing home, it is important to evaluate that independent of Medicare and Medigap options. One item that may be important to you is to have a policy which will give you coverage when you travel outside of the US which Medicare does not cover.

Most seniors have a Plan F or Plan G. These plans only pay for medical services which are covered by Medicare and pay the amount for those medical services not paid by Medicare. Many think of it as a policy which pays your co-pay and deductible. These plans do not cover additional procedures which are excluded by Medicare.

A primary difference between the Plan F & G is the enrollment criteria. Everyone is eligible to obtain either of these initially. However, the Plan G has more restrictions on those applying for coverage after the initial year. This generally translates into the premium for G being lower. The premium difference in the first year may be noteworthy but may be more dramatic in subsequent years.

You can go to the Medicare.gov to see a comparison of the basic approved plans. http://www.medicare.gov/supplement-other-insurance/compare-medigap/compare-medigap.html

Another website that is very beneficial for comparing the premiums as well as identifying which insurance companies offer plans in your area is http://www.medsuprates.com/

I went to this web page to obtain an estimate for a 65 year old male in Abilene, TX. I found a range for Plan G premiums from a low of $114 to a high of $180 per month. If I opted for a Plan F, the range of premiums was from $140 to $212 per month. However, the amount of the premium should not be the only factor to consider. This is a good time to utilize a licensed insurance professional to assist you or your client in navigating the options.

The same is true for a supplemental prescription drug plan, most frequently called prescription drug plan (PDP). The companies who offer these plans frequently have a variety of levels of what the PDP will pay which also results in a range for the premiums. I did a sample search for a PDP and found a premium range for a resident of Texas would be from $26 per month to $152 per month. If a client is considering this coverage, they need to take into consideration what prescriptions they take and if this plan covers their prescriptions. The plans also have options regarding whether they have restrictions as to the quantity that can be obtained at one time. For example, some have restrictions to a 30 day supply while others allow larger quantities. There is also a variety of copay or coinsurance amounts.

One important thing to understand about Medicare is that the dates and ages of eligibility for Medicare are different than those for Social Security retirement. My research for this article has given me a much greater understanding of this subject and I have concluded that this is another topic we as CPAs need to understand and be ready to help our clients navigate when it is time to make these important financial decisions.

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Written by: Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA

Published: 19 May 2016

By now every employer and CPA assisting employers is well aware of the Affordable Care Act (The Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 - together known as the Affordable Care Act or ACA). As of January 1, 2016 all employers with more than 50 full time equivalent employees (FTE), are now required to offer affordable health insurance to all full time employees. CPA Magazine has published several articles in the past few years about ACA and if you are looking for an introduction to ACA, you might start with some of the earlier articles. Before ACA, offering health insurance to employees was optional.

This topic continues to be strongly debated from both sides and has become a prime topic in the 2016 Presidential debates. However, the purpose of this article is not to enter into the debate but to give some practical implementation steps.

ACA mandated applicable large employers (ALE) offer affordable health insurance to their employees. This was phased in by requiring ALEs with 100 or more full time equivalent employees (FTE) to comply by January 1, 2015. Beginning with January 1, 2016 ALEs with 50 or more FTEs are required to comply. There is an earlier article which discusses how to determine your FTE count and access to a spreadsheet to assist you in the calculation of FTEs.

Determine if you are an ALE. The determination of your status as an ALE is based on the prior calendar year. For 2016, an employer uses the calculation of their FTEs in 2015 to assess if they have more than 50 FTEs and would thereby be considered an ALE. This is called your “testing period” in many publications and articles. An excellent description of this process was written by Scott Dondershine, Esq. “Understanding the ACA Employer Mandate #2” in June 2013. http://www.dbd-law. com/Client-Alerts/Understanding-The-ACA-Employer-Mandate- June2013.shtml

“A large employer is defined as a company (including related entities) that has fifty or more (1) full-time employees (30 or more hours per week or 130 or more hours per month) plus (2) full-time equivalents (FTE). The test is relaxed a bit for seasonal workers.

“The number of full-time equivalents is basically determined using the hours of all non-full time employees, e.g., parttime employees. The hours for each part-time employee up to 120 per month are added and then divided by 120 to determine the number of FTEs.

“The computation is performed each month of the “testing year” which is the calendar year before the applicable year for determining whether coverage is required. For instance, 2013 is the testing year for determining whether an employer is “large” for 2014 and is subject to the employer mandate. Each month’s total is then averaged to determine the total for the testing year. Note that an employer can be large (subject to the mandate for one year) but then small for the next.”

It is important to distinguish between the testing period which is the previous calendar year which is used to determine you are an ALE and the measurement period which is used to identify the full-time employees that you will offer health insurance to them. Continue reading to understand the importance of identifying your measurement period.

Controlled or Affiliated Groups

It is very important that you develop an understanding of when you have a controlled or affiliated group. When you do then your ALE determination is made after combining the FTE from all the applicable entities. For more information of this aspect go to IRC Sec. 414(b), (c), (m), or (o); for controlled groups or affiliated service groups which are to be treated as one employer see [IRC Sec. 4980H(c) (2)(C)(i); Reg. 54.4980H-1(a)(16)].

New Employers

A new company that was not in existence on any business day of the prior calendar year will need to determine if they will be an ALE by estimating their work force.

The health insurance to be offered is to provide minimum essential coverage/benefits. Essentially the employer is required to offer a Bronze plan. See https://www.healthcare.gov/choosea- plan/plans-categories/ for more specifics about the type of plans in the Health Insurance Marketplace.

The cost of the health insurance to the employee must be affordable. Rev. Proc. 2014-37 has given the employer a safe harbor. Unaffordable will be defined as will the amount of the premium paid by the employee exceed 9.5% of the gross wages reported in box 1 of the employees W-2. Note the implication of using box one is this is not their gross wages prior to pre-tax deductions such as flex plans and 401k.

The first issue facing the employer is to know what period of time will be used to determine your full time employees. The employer can use a look-back measurement period. Using this method, the employer assesses the employee’s status as a full time employee during this measurement period. Note the employer is only required to offer health insurance to full time employees and this does not include the part time employees who were part of the FTE calculation.

Determine the measurement period. When determining if an employee is a full-time employee and, therefore, must be offered affordable health insurance coverage that provides minimum value, and coverage for his or her dependents that is at least minimum essential coverage, employers can use the look-back measurement method [Reg. 54.4980H-3(a)].

The measurement period can be a minimum of three months up to a maximum of 12 months. A stability period immediately follows the measurement period and generally cannot be shorter than six months or, if longer, the length of the measurement period. In addition, an administrative period can be scheduled at the end of the measurement period, to allow the employer to process the measurement period numbers and offer coverage to full-time employees. Make note that there are important limits on the length of an administrative period and important exceptions regarding the permitted length of the stability period, so employers should seek professional advice before designing a measurement and stability period approach.

Determine the “ongoing employees.” Generally, this will be any employee who averaged at least 30 hours of service per week or had at least 130 hours of service during a calendar month. The key here is to identify the FTE during the measurement period. It is very important to specifically identify this group of employees because if you are identified as an ALE, this is the group of employees you are required to offer affordable health insurance.

Penalty Elimination

The penalty for any month for the employer is an excise tax equal to the number of full-time employees in excess of 30 employees multiplied by one-twelfth of $2,160 (penalty amount for 2016).

No Harm No Foul

The employer penalty is assessed if one or more of the bona fide full time employees is certified by the Exchange as having purchased insurance through the Exchange and they qualified for a premium credit or cost-sharing reduced premium.

Avoiding an employer penalty. ACA requires an employer to offer coverage to the full-time employees (note this does not include employees who were part of the calculation to arrive at FTE but just those who are bona fide full time employees working more than 30 hours per week on average). However, if the employer offers affordable coverage which is rejected by the employee, the employer will not be penalized for that employee. It is very important to document the type of coverage offered, the method used to justify the coverage is affordable and if the employee rejected the coverage then have them sign a document stating such.

This is an article focused on the employer implementation segment of ACA and is not intended to be a comprehensive of all aspects of ACA or even all aspects of the employer obligations. It is written to give an employee the flow of how to know when they are an ALE and when they need to identify the employees to whom they must offer affordable insurance.

RAND’s Study of ACA

In April 2014, The RAND Corporation, which is a research organization that develops solutions to public policy challenges, reported in an online article written by Katherine Grace Carmen and Christine Eibner:

“Using a survey fielded by the RAND American Life Panel, we estimate a net gain of 9.3 million in the number of American adults with health insurance coverage from September 2013 to mid-March 2014.

“The survey, drawn from a small but nationally representative sample, indicates that this significant uptick in insurance coverage has come not only from enrollment in the new marketplaces established under the Affordable Care Act (ACA), but also from new enrollment in employer coverage and Medicaid.

“Put another way, the survey estimates that the share of uninsured American adults has dropped over the measured period from 20.5 percent to 15.8 percent. Among those gaining coverage, most enrolled through employer-sponsored coverage or Medicaid.

“Although a total of 3.9 million people enrolled in marketplace plans, only 1.4 million of these individuals were previously uninsured. Our marketplace enrollment numbers are lower than those reported by the federal government at least in part because our data do not fully capture the surge in enrollment that occurred in late March 2014.

“A more detailed report describing the results summarized below can be found:

• Of the 40.7 million who were uninsured in 2013, 14.5 million gained coverage, but 5.2 million of the insured lost coverage, for a net gain in coverage of approximately 9.3 million. This represents a drop in the share of the population that is uninsured from 20.5 percent to 15.8 percent.

• The 9.3 million person increase in insurance is driven not only by enrollment in marketplace plans, but also by gains in employer-sponsored insurance (ESI) and Medicaid.

• Enrollment in ESI increased by 8.2 million.”

On December 4, 2015 The RAND Corporation updated the expansion of health coverage as they reported in a report “Connecting Consumers to Care” by Laurie T. Martin and Jill E. Luoto:

“As of early 2015, more than 16 million Americans had gained access to health insurance, many of them for the first time. Reducing the number of uninsured Americans was a basic goal of the Affordable Care Act (ACA); accordingly, early implementation efforts focused heavily on enrollment. Encouraging these newly insured Americans to take an active role in their health care — helping them connect to routine primary care and preventive services — is crucial to the broader goals of the ACA: better health and lower costs. The challenge going forward is to make sure that consumers not only understand their health insurance policies but also use them to access primary care and preventive services.”

The Heritage Foundation published the following assessment of the enrollment figures in an article by Edmund F. Haislmaier and Drew Gonshorowski published October 15, 2015:

“Health insurance enrollment data for 2014 shows that the number of Americans with health insurance increased by 9.25 million during the year. However, the vast majority of the increase was the result of 8.99 million individuals being added to the Medicaid rolls. While enrollment in private individual-market plans increased by almost 4.79 million, most of that gain was offset by a reduction of 4.53 million in the number of people with employment-based group coverage. Thus, the net increase in private health insurance in 2014 was just 260,000 people.”

Jerry Love is the sole owner of Jerry Love CPA, LLC in Abilene, Texas. He graduated from Abilene Christian University. In addition to being a CPA, he has also earned the designations of PFS, CFP, CVA, ABV, CITP, CFF, and CFFA. In 2006-07, Love was the Chairman of the Texas Society of CPAs.

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