Chlebina Capital Management, LLCLarry ChlebinaPresident843 N. Cleveland-Massillon RdSuite DN12Akron, OH 44333330-668-9200lchlebina@ccapmanagement.comwww.chlebinacapital.com

Health-Care Reform

January 08, 2016Page 1 of 8, see disclaimer on final page

Health-Care ReformThe primary goals of the Patient Protectionand Affordable Care Act, as amended by theHealth Care and Education AffordabilityReconciliation Act (collectively, the 2010health-care reform legislation) are to ensurethat all Americans and legal residents haveaccess to a minimum level of affordable healthcare, and to help contain the burgeoning costsof our health-care delivery system. Thehealth-care reform legislation invokes ashared responsibility between both state andfederal governments, as well as employersand individuals, to contribute toward thoseends.

In general, the legislation mandates that mostindividuals have minimum health insurance.While employers are not required to offerhealth insurance to their employees, thosethat choose not to offer coverage may face apenalty. The legislation creates new publicprograms and expands Medicare andMedicaid to include more beneficiaries, whilemandating that all health plans extendcoverage to all individuals, regardless ofhealth status. Revenue provisions are alsoincluded, not only to help fund the cost ofthese programs, but to extend the viability ofMedicare.

How does health-care reformaffect individuals?

While some portions of the law becameeffective in 2010, other provisions are phasedin over time. Nevertheless, it is almost certainthat at least some of these reforms will havean effect on you and your family.

Changes to private health insurance

The health-care reform law containsprovisions that expand benefits, improveaccess to health care, and protect the rights of

• Plans must fully cover certain wellness andpreventive care benefits (e.g.,immunizations, cancer, diabetes, heartdisease screenings, and smoking cessationprograms)

• Plans can no longer charge more forout-of-network emergency care

• Plans can't impose annual or lifetime limitson health coverage

• Children can remain on a parent's healthplan up to age 26

• Health coverage can't be rescinded due toillness (only for fraud or intentionalmisrepresentation)

Individual health insurance mandate

You generally are required to have healthinsurance or face a tax penalty (someexceptions apply). If you don't have insurance,or you've found coverage too expensive toobtain, the reforms may make it easier for youto get and keep health insurance. Insurers willhave to accept you regardless of your healthhistory, and premiums can only vary based ontobacco use and age, not on health status orgender. If you don't have access to affordablehealth insurance through an employer, you'llbe able to purchase coverage throughstate-based American Health BenefitExchanges. Premium and cost-sharingsubsidies will be available to individuals andfamilies with incomes at or below 400 percentof the Federal Poverty Level (FPL), which willhelp reduce the cost of insurance purchasedthrough an exchange. In addition, Medicaidavailability will be expanded to includenondisabled individuals under age 65 withincomes up to 133 percent of the FPL.

consumers. Here are some of the changesthat will apply to most private health plans(although some will apply only to new, notexisting, coverage).

One primary goal of thePatient Protection andAffordable Care Act, asamended by the Health Careand Education AffordabilityReconciliation Act(collectively, the 2010health-care reformlegislation) is to ensure thatall Americans and legalresidents have access to aminimum level of affordablehealth care.

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Considerations for SeniorsThe health-care reform legislation enacted in2010 contains some provisions that directlyaffect our nation's older population. If you're asenior, you may be concerned about howthese reforms could affect your access tohealth care and the benefits you are currentlyreceiving.

Medicare spending cuts

At the outset, the legislation does not affectMedicare's guaranteed benefits. However, twogoals of the health-care legislation is to slowthe increasing cost of Medicare premiums youpay, and to ensure that Medicare will not runout of funds. To help achieve these goals,some cuts in Medicare spending will occurover a ten-year period, beginning in 2011,particularly targeting Medicare Advantageprograms--Medicare programs providedthrough private insurers but subsidized by thefederal government. These cuts could reduceor eliminate some of the extra benefits yourMedicare Advantage plan may offer, such asdental or vision care, and your insurer maychoose to increase your premiums to offsetthe decrease in government reimbursements.But Medicare Advantage plans cannot reduceyour primary Medicare benefits, nor can theyimpose deductibles and co-payments that aregreater than what is allowed under thetraditional Medicare program for comparablebenefits. And, you may have access to moredoctors because some of the federal fundspreviously earmarked for Medicare will bereallocated to doctors and surgeons as anincentive to treat Medicare patients.

Medicare Part D drug programchanges

If you're a Medicare Part D beneficiary, youhave to pay for the entire cost of prescriptiondrugs out-of pocket after reaching a gap inyour annual coverage, referred to as the"donut hole." Medicare generally pays for yourmedications up to a certain annual dollar limit,

Benefits added to Medicare

The legislation also improves some traditionalMedicare benefits. For example, Medicarebeneficiaries receive free wellness andpreventive care benefits.

Increased access tohome-based care

People facing a long-term disability or illnessoften prefer to receive care at home instead ofat a hospital or nursing home. The health-carereform law provides for programs andincentives enabling greater access to in-homecare. The Community First Choice Option isavailable for states to add to their Medicaidprograms. This option provides benefits toMedicaid-eligible individuals forcommunity-based care instead of placementin a nursing home. In addition, the StateBalancing Incentive Program providesincreased federal funds to qualifying statesthat offer Medicaid benefits to disabledindividuals seeking long-term care services athome, or in the community, instead of in anursing home. In an attempt to reduce costsassociated with multiple emergency roomvisits and hospital readmissions for the samechronic illness, the Independence at Homedemonstration program will provide Medicarebeneficiaries with chronic conditions theopportunity to receive primary care services athome.

after which you have to pay more of the costfor your prescriptions. But the amount youhave to pay within the coverage gapdecreases each year until 2020, at which timea combination of federal subsidies and adecrease in co-payments reduces yourout-of-pocket costs for medications in the gapto 25%. However, if your annual income isgreater than $85,000 ($170,000 for couples),you will see your Part D premiums increase asthe federal subsidy offsetting some of the costof Medicare Part D premiums is reduced.

Tax Changes for IndividualsThe health-care reform legislation contained anumber of tax changes. Some of thesechanges took effect immediately; others werespread out over several years. Here's abreakdown of some of the changes.

Tanning salons and dependentchildren

Bad news if you frequent tanningsalons--there's a new 10 percent tax assessedon amounts paid for indoor tanning services.

In addition, if you're covered by an employerhealth plan, the tax benefits (i.e., the ability toexclude the value of the benefits from income)associated with the health coverage and anyreimbursements you receive for medical care

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expenses are extended to children who havenot reached age 27 by the end of the year.Similarly, self-employed individuals candeduct the costs associated with health-carecoverage for any child who doesn't reach age27 by year-end.

Health savings arrangementsand medical expensedeductions

If you have a flexible spending arrangement(FSA), health reimbursement arrangement(HRA), health savings account (HSA), orArcher medical savings account (ArcherMSA), it's important to note thatover-the-counter medications (except forinsulin and medications that are prescribed bya physician) are no longer consideredqualified medical expenses for purposes ofreimbursement and tax-free distributions. And,the additional tax that applies to HSA andArcher MSA distributions that aren't made forqualifying expenses is 20 percent. HealthFSAs that are part of a cafeteria plan arecapped at a $2,550 reimbursement limit.

Do you itemize your deductions on ScheduleA? For many, it's going to get a little moredifficult because the threshold to deductunreimbursed medical expenses on ScheduleA is 10 percent of adjusted gross income(AGI), instead of the 7.5 percent threshold thatpreviously applied. Until 2017, however, if youor your spouse turns age 65 before the end ofthe taxable year, the 7.5 percent AGIthreshold will continue to apply. Beginning in2017, the 10 percent AGI threshold will applyto individuals who have reached age 65 aswell.

Medicare taxes

If you receive a paycheck, you probably havesome familiarity with the Federal InsuranceContributions Act (FICA) employment tax; atthe very least, you've probably seen the taxdeducted on your paystub. The old age,survivors, and disability insurance (OASDI)portion of this FICA tax is equal to 6.2 percentof covered wages. The hospital insurance (HI)portion of the tax (commonly referred to as theMedicare payroll tax) is equal to 1.45 percentof covered wages, and is not subject to awage cap. FICA tax is assessed on bothemployers and employees (that is, anemployer is subject to the 6.2 percent OASDItax and the 1.45 percent HI tax, and eachemployee is subject to the 6.2 percent OASDItax and the 1.45 percent HI tax on wages aswell), with employers responsible for collectingand remitting the employees' portions of the

tax.

Self-employed individuals are responsible forpaying an amount equivalent to the combinedemployer and employee rates on netself-employment income (12.4 percent OASDItax on net self-employment income up to thetaxable wage base, and 2.9 percent HI tax onall net self-employment income), but are ableto take a deduction for one-half ofself-employment taxes paid.

The health-care reform legislation increasedthe HI tax on high-wage individuals by 0.9percent (to 2.35 percent). Who will be subjectto the additional tax? If you're married and filea joint federal income tax return, the additionalHI tax will apply to the extent that thecombined wages of you and your spouseexceed $250,000. If you're married but file aseparate return, the additional tax will apply towages that exceed $125,000. For everyoneelse, the threshold is $200,000 of wages. So,a single individual with wages of $230,000 willowe HI tax at a rate of 1.45 percent on the first$200,000 of wages, and HI tax at a rate of2.35 percent on the remaining $30,000 ofwages for the year.

Employers will be responsible for collectingand remitting the additional tax on wages thatexceed $200,000. (Employers will not factor inthe wages of a married employee's spouse.)You'll be responsible for the additional tax ifthe amount withheld from your wages isinsufficient. The employer portion of the HI taxremains unchanged (at 1.45 percent).

If you're self-employed, the additional 0.9percent tax applies to self-employment incomethat exceeds the dollar amounts above(reduced, though, by any wages subject toFICA tax). If you're self-employed, you won'tbe able to deduct any portion of the additionaltax.

Also, a 3.8 percent Medicare contribution taxis imposed on the unearned income ofhigh-income individuals (the new tax is alsoimposed on estates and trusts, althoughslightly different rules apply). The tax is equalto 3.8 percent of the lesser of your netinvestment income (generally, net incomefrom interest, dividends, annuities, royaltiesand rents, and capital gains, as well asincome from a business that is considered apassive activity or a business that tradesfinancial instruments or commodities), or yourmodified adjusted gross income (basically,your adjusted gross income increased by anyforeign earned income exclusion) thatexceeds $200,000 ($250,000 if married filing ajoint federal income tax return, $125,000 if

The health-care reformlegislation contained anumber of tax changes.Some of these changes tookeffect immediately; otherswere spread out overseveral years.

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married filing a separate return).

So, effectively, you'll only be subject to theadditional 3.8 percent tax if your adjustedgross income exceeds the dollar thresholdslisted above. Interest on tax-exempt bonds,veterans' benefits, and excluded gain from thesale of a principal residence that are excludedfrom gross income are not considered netinvestment income for purposes of theadditional tax. Qualified retirement plan andIRA distributions are also not consideredinvestment income.

Together, these two new Medicare-relatedtaxes are expected to provide a major sourceof revenue to finance other parts ofhealth-care reform.

Health insurance credits andpenalty tax

A new premium assistance tax credit will helpeligible individuals purchase health-careinsurance through one of the newlyestablished state exchanges. If you qualify forthe credit, it will be paid directly to theexchange insurance plan that you join. Whoqualifies? Individuals with household incomebetween 100 percent and 400 percent of thefederal poverty level will qualify, with the exactamount of the credit based on income level.

In addition to a premium assistance tax credit,those with household income between 100percent and 400 percent of the federal povertylevel may qualify for a cost-sharing subsidy tohelp cover out-of-pocket costs, likeco-payments and deductibles, when they buyhealth insurance through an exchange. Likethe tax credit, the subsidy will be paid directlyto the plan.

If you're a U.S. citizen or legal resident, you'regenerally required to have adequatehealth-care coverage. If you don't, you'll face apenalty tax. The tax equals the greater of 2.5percent of the amount of your householdincome that exceeds a specific amount(generally, the standard deduction pluspersonal exemption amounts you're entitled tofor the year) or $695 per uninsured adult (halfthat for uninsured family members under age18), with a maximum household penalty of$2,085.

Generally, individuals who are offeredcoverage through an employer health planwon't qualify for the credit unless the employerhealth plan doesn't cover an adequate shareof benefits (60 percent), or it's considered"unaffordable" (the employee portion of thepremium is 9.66 percent or more of theemployee's household income).

A new premium assistancetax credit will help eligibleindividuals purchasehealth-care insurancethrough one of the newlyestablished stateexchanges.

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How Does Health-Care Reform Affect Businesses?The health-care reform legislation includesnew taxes, but there are also some tax breaksavailable to help small businesses pay forhealth insurance. Two of the changes gettinga lot of attention are: a tax credit available tosmall businesses that offer health-carecoverage to employees, and a tax to penalizeemployers who do not offer coverage.

Small business tax credit

The new health-care reform legislationprovides a tax credit to small businesses thatoffer health insurance coverage to theiremployees. The maximum credit is 50percent.

To be eligible for the tax credit, the followingconditions must be met:

• An employer must have the equivalent offewer than 25 full-time employees for thetax year. Generally, this is determined bydividing the total hours for which wageswere paid for all eligible employees duringthe year by 2,080.

• Average annual wages must be less than$50,000 (to calculate, total wages paidduring the tax year are divided by thenumber of full-time employees, androunded down to the nearest $1,000).

• The employer must contribute at least 50percent of the premium cost of a qualifyinghealth plan offered to employees.

Special rules apply to seasonal employeesand to tax exempt employers. Also, soleproprietors, partners, 2 percent shareholdersof an S corporation, and 5 percent owners ofan employer generally are not consideredemployees for purposes of the credit. Inaddition, family members of ineligibleemployees are not counted as employees.

The maximum credit is available to qualifyingemployers with 10 or fewer full-timeemployees with average annual wages notexceeding $25,000. The credit is phased outfor employers with between 10 and 25full-time employees, and for employers whohave full-time employees with average annualwages between $25,000 and $50,000.

The total premium paid by the employer that'seligible for the credit cannot exceed theaverage premium for the small-group marketin the state where the employer offers healthcoverage. The average premium for eachstate is published by the IRS. The credit isclaimed on the employer's annual tax return

as a general business credit.

The maximum credit is 50 percent; however,qualifying arrangements are restricted tohealth insurance purchased by the employerthrough a state-run health exchange.Additionally, the credit can be claimed by theemployer for only two years.

Other employer incentives

Small businesses with up to 100 employeesmay be able to purchase health insurancethrough Small Business Health OptionsProgram (SHOP) Marketplaces. Themarketplaces offer at least four benefitcategories of plans based on covering anincreasing percentage of benefit costs.

Penalty taxes encourageemployers to offer coverage

While employers aren't required to providehealth-care coverage to employees, a newexcise tax will encourage them to do so. Apenalty tax will be assessed on employerswho do not offer health-care coverage to atleast 95 percent of employees and theirdependent children up to age 26 if:

• The employer has 50 or more full-timeequivalent (FTE) employees, and

• At least 1 FTE purchases health insurancecoverage through a federal or statemarketplace, and is entitled to a tax creditor cost-sharing reduction

The tax is assessed on a monthly basis, andis equal to the number of full-time employeesexceeding 30 multiplied by $180 ($2,160divided by 12).

Even employers (those with at least 50 FTEs)that do offer health-care coverage toemployees may still face a tax penalty if atleast 1 FTE purchases health insurancecoverage through a federal or statemarketplace, and is entitled to a tax credit as aresult of:

• An employer's coverage consisting of aplan that pays less than 60 percent of thetotal allowed cost of benefits, or

• An employer's coverage being considered"unaffordable" for an employee (generally,coverage would be consideredunaffordable if an employee's portion of thepremium exceeds 9.66 percent of theemployee's household income)

The new health-care reformlegislation provides a taxcredit to small businessesthat offer health insurancecoverage to theiremployees.

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In this case the tax, assessed on a monthlybasis, equals $270 (one-twelfth of $3,240) foreach FTE that buys coverage through amarketplace and receives a premium taxcredit. The tax is capped, however, at the

amount that would be due if an employer didnot offer health-care coverage to employees(i.e., the number of full-time employeesexceeding 30 multiplied by $180).

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Chlebina Capital Management,LLC

Larry ChlebinaPresident

843 N. Cleveland-Massillon RdSuite DN12

Akron, OH 44333330-668-9200

lchlebina@ccapmanagement.comwww.chlebinacapital.com

January 08, 2016Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

IMPORTANT DISCLOSURES

Securities offered through Securities Service Network, Inc., Member FINRA/SIPC. Fee-based advisoryservices are offered through Chlebina Capital Management, LLC., a registered investment advisor.

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