Some large manufacturers such as Caterpillar, Deere, and AK Steel have taken charges against the potential loss of tax deductions for retiree prescription-drug subsidies, a result of the recent healthcare reform legislation. However, small/medium manufacturers, including many molders and moldmakers, are still not sure how the bill might affect them.
Caterpillar took a $100 million charge to earnings in the first quarter, a move that reflects additional taxes due under the newly enacted healthcare legislation. After the legislation was signed, company officials warned that provisions in the legislation would subject the company to federal income taxes on the subsidies it receives for providing prescription drug benefits to retirees and their spouses. Caterpillar is one of some 3500 companies that are receiving tax-free subsidies as an incentive to maintain their drug-benefit programs since the government enacted Medicare Part D in 2003.
In talking with several CPA firms that advise businesses, the consensus is that concern about the healthcare legislation is less about health care and more about raising taxes, both on businesses and individuals.
“I am not aware of any tax provisions in this bill that provide real tax relief to our middle business clients,” notes Mark Blumenthal, tax partner and chairman of the Family Office & Private Equity Services Group of Chicago-based Blackman Kallick, an accounting and business advisory firm. “Proponents of the bill have said that the overall healthcare bill is good for business, but I’ve not heard many of our clients say that.”
In talking with many owners of molding and mold manufacturing companies, most are doubtful that there is anything good at all about this legislation. Understanding the new legislation is something that many in business are attempting currently, because the ramifications of this reform reach far and wide, and will hit businesses large and small.
According to Blackman Kallick, the new legislation will bring the most comprehensive changes to the nation’s healthcare laws in more than 40 years and has many tax implications for 2010 and beyond. An overview for small businesses provided by Blackman Kallick includes the following:
• The new law imposes penalties on certain businesses for not providing insurance coverage to their employees. These rules are complex and the penalty can range from $2000-$3000 per employee. There are no penalties for businesses with fewer than 50 employees.
• Beginning in 2010, small businesses with 25 or fewer employees with average annual wages of less than $50,000 and who meet other requirements will be eligible for a tax credit of up to 35% of the cost of insurance coverage paid for their employees. The maximum credit increases to 50% in 2014.
• In 2013 a new 0.9% surtax will be tacked onto the 1.45% hospital insurance payroll taxes paid by individuals earning more than $200,000/year or joint filers earning more than $250,000/year. This is not indexed for inflation, so more and more business owners and their employees will pay this surtax over time
• Investors in small businesses will pay a 3.8% additional tax on all unearned income received from these businesses starting in 2013 if their adjusted gross income is more than $200,000 for single filers and $250,000 for the married filing jointly.
Molders and moldmakers, the majority of whom are small businesses (less than 50 employees), are concerned about two programs that have been working well for them: Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) have become popular as a cost-effective way to provide good healthcare benefits to employees.
In the most recent survey of the American Mold Builders Assn., a question about the type of health benefits companies provide, 39 respondents said they HSAs (Health Savings Accounts) and two provide FSAs (flexible spending accounts). Pat Dolan, CFO of GH Tool & Mold Inc. (Washington, MO), isn’t happy about any legislation that might impact the HSAs and FSAs that GH Tool provides.
“The solutions we have at GH Tool incorporate a number of different things that make our healthcare insurance program work for our 100 employees and their families, including Flexible Spending Accounts and Healthcare Savings Accounts, which are a key part of our program,” he says. “The benefits we provide our employees are a key building block of our company’s ability to be profitable, competitive, and successful, and if Congress takes this away it would really hurt us as a company.”
While it won’t actually force businesses to eliminate HSAs and FSAs, it will “severely limit the attractiveness of the FSA,” notes Blumenthal. “I don’t understand why Congress would pass this legislation because I believe that when people spend their own money, they tend to be more careful in how they spend it. If they are spending it on healthcare, the laws of supply and demand say that costs will go down. When insurance pays all of it, they don’t pay attention.”
Contributions to healthcare FSAs will be limited to $2500 as of Jan. 1, 2013, and the cap will be indexed to the consumer price index. This severely limits the attractiveness of the FSA, which is what employers who offer this should be concerned about, notes Blumenthal.
“Another limitation is that money in their flexible spending and healthcare savings accounts can’t be used for a person’s over-the-counter drugs in 2011, unless those items are prescribed by a doctor,” he adds. “Obviously, that is a negative and also adds some complexity to those programs. There’s really nothing I can see that is good news in this bill.”
Bill Carteaux, president and CEO of the Society of the Plastics Industry, released a statement on March 29 in response to the passage of the legislation, stating that while the “American healthcare system is in need of reform, we are extremely disappointed with the package passed by Congress and signed into law.” Carteaux goes on to say that the legislation does little to address the real issues, and “we now face a law that places an undue burden squarely on the shoulders of the private sector employers that create and sustain America’s economic engine.”
Carteaux projects that the impact of the new law will be “far-reaching” in the plastics industry, the third-largest manufacturing sector in the U.S. “Through such provisions of the new law as the ‘pay or play’ mandate, companies with 50 or more full-time employees will be forced to purchase federally imposed levels of insurance coverage for their workers or face per-employee fines in the thousands of dollars,” said Carteaux in his statement. “Smaller SPI member companies are not spared, as those who are incorporated as ‘Subchapter S-corps’ may be subject to a new tax on their investment income. Plastic medical device manufacturers will now contend with a new excise tax on the sale of many of their products. Simply put, these new taxes and fees will inhibit a company’s ability to compete in the global marketplace, and will increase pressures on already-strained budgets and workforces.”
What’s a molder to do?
Jeff Mengel, partner in Plante & Moran LLP and a full-time follower of the plastics industry, says that while injection molders generally provide decent benefits for their employees, the healthcare legislation has some ramifications that many might not consider. For example, the injection molding industry isn’t known to be a high-paying job for entry-level employees, with an average of about $9/hr. “So compared to working at McDonalds, there’s a full array of benefits available at an injection molding plant,” says Mengel.
“But what if those companies we compete against for entry-level employees need to provide these same fringe benefits? At this stage it’s not a significant risk, but it might be that manufacturing will have more competition for entry-level workers,” Mengel adds. “I would argue that if I’m making $9/hr on the graveyard shift and my supervisor is rude and demanding, I’ll have more options available thanks to the healthcare legislation. That’s just one of the things that might increase competition for entry-level workers.”
Mengel notes that the most interesting thing about the new healthcare legislation is that it represents a “new economic substance standard in which the IRS will be observing whether an activity is a deductible expense—any activity.”
This item is “buried in the bill” says Mengel, and it broadens the ability for the IRS to say that “you did X strictly for a tax deduction, to reduce your tax burden, and it does not meaningfully further the economic position of the company, even though it meets all other requirements of the statute,” he states. “They can fine you a 40% penalty if you don’t disclose it and 20% penalty if you do disclose it. It’s odd that they put this into a healthcare reform bill, but they basically gave the IRS a trump card to use as they see fit. Clearly there have been abuses in the system, but you hate to see a bureaucracy with that kind of power.”
Mengel says he can understand that business owners are “wary” of what’s going on in Washington. “The government now has to pay for all that they’ve done to get us out of a recession and now has added this major piece of legislation on top of it that will have to be paid for as well.” —Clare Goldsberry