On March 21, the House of Representatives passed two pieces of legislation that, together, are expected to dramatically change U.S. health system and impact most employers, virtually all taxpayers, and all segments of the health care industry. First, the House by a vote of 219-212 approved H.R. 3590, the Patient Protection and Affordable Care Act (The Patient Protection Act) as passed by the Senate in December of 2008. (This bill was signed into law by the President on March 23, 2010.)

Next, the House by a vote of 220 to 211 approved the “Health Care and Education Reconciliation Act of 2010” (The Health Care Act.) This act, a substitute for an amendment to the Senate bill just signed into law, was passed to make health care reform more palatable to House members. This bill must still pass in the Senate where only a simple majority is needed under the reconciliation rules. If and when that happens and the bill receives the President's signature, Congress will have completed a massive overhaul of the U.S. health care system.

The two Health Care bills contain well over 1,000 pages, most of which deal with changes in how individuals are covered, who is covered, who and what can be excluded from insurance coverage, modifications to Medicare and Medicaid reimbursement policies, incentives to expand the health care workforce and many, many other topics. In order to pay for the acts, Congress included a number of income tax and excise tax changes and encacted several changes to reporting requirements.

The following is a brief summary of the major tax provisions and reporting requirement changes contained in the new health care reform acts. This summary is based on information released by the House Rules Committee, the House Ways & Means Committee, and the Joint Committee on Taxation. Unless otherwise indicated, each description of a tax change in the health reform legislation reflects the Patient Protection Act (PL 111–148) as it would be amended by the Health Care Act (HR 4872).

 

Tax Changes Relating to Universal Health Coverage Mandate

The Penalty for Remaining Uninsured. The act creates new IRC § 5000A, which requires U.S. citizens and legal residents to maintain minimum amounts of health insurance coverage. Minimum essential coverage includes various government-sponsored programs, eligible employer-sponsored plans, plans in the individual market, grandfathered group health plans and other coverage as recognized by the Secretary of Health and Human Services in coordination with the Secretary of the Treasury. This requirement would not apply to individuals who are incarcerated, not legally present in the United States or maintain religious exemptions.

Effective for tax years beginning after Dec. 31, 2013, non-exempt U.S. citizens and legal residents would have to maintain minimum essential coverage or pay a penalty. Those failing to maintain minimum essential coverage in 2016 would be subject to a penalty equal to the greater of:

(1) 2.5% of household income over the threshold amount of income required for income tax return filing, or

(2) $695 per uninsured adult in the household.

The fee for an uninsured individual under age 18 would be one-half of the fee for an adult. The total household penalty wouldn't exceed 300% of the per-adult penalty ($2,085), nor exceed the national average annual premium for the “bronze level” health plan offered through the Insurance Exchange that year for the household size.

The per-adult annual penalty would be phased in as follows: $95 for 2014; $325 for 2015; and $695 in 2016. Beginning with years after 2016, the $695 amount would be indexed to CPI-U, rounded to the next lowest $50.

The percentage of income would be phased in as follows: 1% for 2014; 2% in 2015; and 2.5% beginning after 2015. If a taxpayer files a joint return, the individual and spouse would be jointly liable for any penalty payment. The penalty, which would apply to any period the individual does not maintain minimum essential coverage (determined monthly) would be assessed through the Code.

Among those individuals who would be exempted from the penalty: Individuals who cannot afford coverage because their required contribution for employer sponsored coverage or the lowest cost “bronze plan” in the local Insurance Exchange exceeds 8% of household income; those who are exempted for religious reasons; and those residing outside of the U.S.

Premium Assistance Credit. For tax years ending after 2013, the act provides for refundable tax credits that eligible taxpayers can use to help cover the cost of health insurance premiums for individuals and families who purchase health insurance through a state health benefit exchange (which each state is required to establish under section 1311 of the act). Under new IRS § 36B, an eligible individual will enroll in a plan offered through an exchange and report his or her income to the exchange. Based on the information provided to the exchange and his or her income, the individual will receive a premium assistance credit. Treasury will pay the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual will then pay to the plan in which he or she is enrolled the dollar difference between the premium tax credit amount and the total premium charged for the plan.

Eligibility for the premium assistance credit is based on the individual's income for the tax year ending two years prior to the enrollment period. Tax credits would be available for individuals and families with incomes up to 400% of the federal poverty level (currently $43,420 for an individual or $88,200 for a family of four) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The credit amount is determined by the Secretary of Health and Human Services, based on the percentage of income the cost of premiums represents, rising from 2% of income for those at 100% of federal poverty level for the family size involved to 9.5% of income for those at 400% of federal poverty level for the family size involved. These individuals and families would have to obtain health care coverage in newly established Insurance Exchanges in order to obtain credits. Additionally, effective on the enactment date, a “cost-sharing subsidy” would be provided to low income individuals to help with health insurance costs.

New Large Employer Responsibilities. Effective for months beginning after Dec. 31, 2013 an “applicable large employer” (generally, one that employed an average of at least 50 full-time employees during the preceding calendar year) not offering coverage for all its full-time employees, offering minimum essential coverage that is unaffordable, or offering minimum essential coverage that consists of a plan under which the plan's share of the total allowed cost of benefits is less than 60%, would have to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee.

The penalty for any month would be an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by one-twelfth of $2,000.

Also, an applicable large employer that offers, for any month, its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer sponsored plan would be subject to a penalty if any full-time employee is certified to the employer as having enrolled in health insurance coverage purchased through a State exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to such employee or employees.

New “Free Choice Vouchers.” After 2013, employers offering minimum essential coverage through an eligible employer-sponsored plan and paying a portion of that coverage would have to provide qualified employees with a voucher whose value could be applied to purchase of a health plan through the Insurance Exchange. Qualified employees would be those employees: who do not participate in the employer's health plan; whose required contribution for employer sponsored minimum essential coverage exceeds 8%, but does not exceed 9.5% of household income; and whose total household income does not exceed 400% of the poverty line for the family. The value of the voucher would be equal to the dollar value of the employer contribution to the employer offered health plan.

Tax Credits for Small Employers Who Offer Health Coverage. Effective with tax years beginning after 2009, a qualified small employer would be given a tax credit for non elective contributions to purchase health insurance for its employees.

A qualified small business employer for this purpose generally would be an employer with no more than 25 full-time equivalent employees (FTEs) employed during the employer's tax year, and whose employees have annual full-time equivalent wages that average no more than $40,000.

The tax credits for small businesses and individuals was designed to increase levels of health insurance coverage, as part of the IRC § 38 general business credit.

Small businesses would be eligible for a credit of up to 50% of non-elective contributions the business makes on behalf of their employees for insurance premiums (new IRC § 45R). Tax-exempt organizations would get a 35% credit against payroll taxes.

Employers with 10 or fewer employees and average wages of less than $20,000 would get 100% of the credit; it would be phased out, up to the 25-employee limit. The $20,000 average annual wages figure will be indexed for inflation after 2013. Five-percent owners under the section 416 top-heavy plan rules and 2% S corporation shareholders are not included in the definition of employee, but leased employees are counted.

This credit is available for tax years beginning after Dec. 31, 2009.

Dependent Coverage in Employer Health Plans. Effective on the enactment date, the health reform measure would extend the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year. This change would also be intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change would be made for VEBAs and 401(h) accounts. Also, self-employed individuals would be permitted to take a deduction for any child of the taxpayer who has not attained age 27 as of the end of the tax year.

Tax-Exempt Health Insurers. The act provides for a program administered by the Department of Health and Human Services that will foster the creation of qualified nonprofit health insurance issuers to offer health insurance. Insurers receiving federal grants or loans under the program would be exempt from federal tax (under IRC § 501(a)) for periods when the insurer complies with the terms of the program.

New Employer Reporting Responsibilities. Starting in tax years that begin after Dec. 31, 2010, employers would have to disclose the value of the benefit provided by them for each employee's health insurance coverage on the employee's annual Form W-2.

The act requires businesses to file an information return (e.g., a Form 1099) for all payments aggregating $600 or more in a calendar year to a single payee, including corporations (other than a payee that is a tax-exempt corporation). The provision is effective for payments made after Dec. 31, 2011.

New Insurer Reporting Requirements. The act requires insurers (including employers who self-insure) that provide minimum essential coverage to any individual during a calendar year to report certain health insurance coverage information to both the covered individual and to the IRS (new IRC § 6055).

The information required to be reported includes:

(1) The name, address, and taxpayer identification number of the primary insured, and the name and taxpayer identification number of each other individual obtaining coverage under the policy;

(2) The dates during which the individual was covered under the policy during the calendar year;

(3) Whether the coverage is a qualified health plan offered through an exchange;

(4) The amount of any premium tax credit or cost-sharing reduction received by the individual with respect to such coverage; and

(5) Such other information as the Secretary may require.

This requirement is effective for calendar years beginning after 2013.

 

Health-Related Revenue Raisers

Excise Tax on High-cost Employer-sponsored Health Coverage. Beginning with tax years starting after Dec. 31, 2017, the bill would place a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage would apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions.

The tax would apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans would be disregarded in applying the tax. The dollar amount thresholds would be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than the Congressional Budget Office (CBO) estimates in 2010.

Employers with age and gender demographics that result in higher premiums could value the coverage provided to employees using the rates that would apply using a national risk pool.

The excise tax would be levied at the insurer level. Employers would be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax.

Additional Hospital Insurance Tax for High Wage Workers. Under the act, the employee portion of the hospital insurance tax part of FICA, currently amounting to 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer's spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case. These figures are not indexed.

For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount.

The provision applies to remuneration received and tax years beginning after Dec. 31, 2012.

Surtax on Unearned Income. For tax years beginning after Dec. 31, 2012, a 3.8% surtax called the Unearned Income Medicare Contribution, would be placed on net investment income of a taxpayer earning over $200,000 ($250,000 for a joint return). Net investment income would be interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income would be reduced by properly allocable deductions to such income.

New limit on Health Flexible Savings Account Contributions. The amount of contributions to health flexible spending accounts (FSAs) would be limited to $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount would be inflation indexed after 2013.

Restricted Definition of Medical Expenses for Employer-provided Coverage. For purposes of employer provided health coverage (including health reimbursement accounts (HRAs) and health flexible savings accounts (FSAs), health savings accounts (HSAs), and Archer medical savings accounts (MSAs)), the definition of medicine expenses deductible as a medical expense would generally be conformed to the definition for purposes of the itemized deduction for medical expenses. But this change would not apply to doctor prescribed over-the-counter medicine. Thus, the cost of over-the-counter medicine (other than insulin or doctor prescribed medicine) could not be reimbursed through a health FSA or HRA. In addition, the cost of over-the-counter medicines (other than insulin or doctor prescribed medicine) could not be reimbursed on a tax-free basis through an HSA or Archer MSA. These changes would be effective for tax years beginning after Dec. 31, 2010.

Increased Tax on Non qualifying HSA or Archer MSA Distributions. The additional tax for HSA withdrawals before age 65 that are used for purposes other than qualified medical expenses would be increased from 10% to 20%, and the additional tax for Archer MSA withdrawals that are used for purposes other than qualified medical expenses would be increased from 15% to 20%, both effective for distributions made after Dec. 31, 2010.

Increased Threshold for Claiming Medical Expense Deductions. Beginning with tax years starting after Dec. 31, 2012, the adjusted gross income (AGI) threshold for claiming the itemized deduction for medical expenses would be increased from 7.5% to 10%. However, the 7.5%-of-AGI threshold would continue to apply through 2016 to individuals age 65 and older (and their spouses).

Deduction for Employer Part D Subsidy Would be Eliminated. The deduction for the subsidy for employers who maintain prescription drug plans for their Medicare Part D eligible retirees would be eliminated, for tax years beginning after Dec. 31, 2012.

Insurer Fees on Health Plans. Under new section 4375, a fee is imposed on each specified health insurance policy. The fee is equal to two dollars (one dollar in the case of policy years ending during fiscal year 2013) multiplied by the average number of lives covered under the policy. The issuer of the policy is liable for payment of the fee.

For any policy year beginning after September 30, 2014, the dollar amount is equal to the sum of: (1) the dollar amount for policy years ending in the preceding fiscal year, plus (2) an amount equal to the product of (A) the dollar amount for policy years ending in the preceding fiscal year, multiplied by (B) the percentage increase in the projected per capita amount of National Health Expenditures, as most recently published by the Secretary before the beginning of the fiscal year.

The issuer of the policy is liable for payment of the fee.

In the case of an applicable self-insured health plan, new IRC § 4376 imposes a fee equal to two dollars (one dollar in the case of policy years ending during fiscal year 2013) multiplied by the average number of lives covered under the plan. For any policy year beginning after September 30, 2014, the dollar amount is equal to the sum of: (1) the dollar amount for policy years ending in the preceding fiscal year, plus (2) an amount equal to the product of (A) the dollar amount for policy years ending in the preceding fiscal year, multiplied by (B) the percentage increase in the projected per capita amount of National Health Expenditures, as most recently published by the Secretary before the beginning of the fiscal year. The plan sponsor is liable for payment of the fee.

The fee is effective with respect to policies and plans for portions of policy or plan years beginning on or after Oct. 1, 2012.

Industry-specific Revenue Raisers. The following revenue raising changes would be imposed on health related industries:

Non-Health Related Revenue Raisers

New Corporate Information Reporting. Businesses that pay any amount greater than $600 during the year to corporate providers of property and services would have to file an information report with each provider and with IRS, effective for payments made after Dec. 31, 2011.

Codification of Economic Substance Doctrine and Imposition of Penalties. The economic substance doctrine is a judicial doctrine that has been used by the courts to deny tax benefits when the transaction generating these tax benefits lacks economic substance. The courts have not applied the economic substance doctrine uniformly. The manner in which the economic substance doctrine should be applied by the courts would be clarified and a penalty would be imposed on understatements attributable to a transaction lacking economic substance. These changes would be effective for transactions entered into after the enactment date.

Elimination of Credit for “Black Liquor.” A $1.01 per gallon tax credit applies for the production of bio fuel from cellulosic feed stocks in order to encourage the development of new production capacity for bio fuels that are not derived from food source materials. Congress is aware that some taxpayers are seeking to claim the cellulosic bio fuel tax credit for unprocessed fuels, such as “black liquor.” For fuel sold or used after Dec. 31, 2009, eligibility for the tax credit would be limited to processed fuels (i.e., fuels that could be used in a car engine or in a home heating application).

Estimated Taxes for Large Corporations. The required corporate estimated tax payments factor for corporations with assets of at least $1 million would be increased by 15.75 percentage points for payments due in July, August, and September of 2014.

 

Other Tax Changes

Simple Cafeteria Plans for Small Businesses. Beginning with tax years starting after 2010, a new employee benefit cafeteria plan to be known as a "Simple Cafeteria Plan" (SCP) would be established.

Under the provision, an eligible small employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan, including group term life insurance, benefits under a self insured medical expense reimbursement plan, and benefits under a dependent care assistance program. Under the safe harbor, a cafeteria plan and the specified qualified benefits are treated as meeting the specified nondiscrimination rules if the cafeteria plan satisfies minimum eligibility and participation requirements and minimum contribution requirements.

This plan would be subject to eased participation restrictions so that small businesses could provide tax-free benefits to their employees; it would include self-employed individuals as qualified employees.

New Requirements for Charitable Hospitals. The act establishes new requirements applicable to section 501(c)(3) hospitals, regarding conducting a community health needs assessment, adopting a written financial assistance policy, limitations on charges, and collection activities.

Liberalized Adoption Credit and Adoption Assistance Rules. For 2010, the maximum adoption credit is increased to $13,170 per eligible child (a $1,000 increase). This increase applies to both non-special needs adoptions and special needs adoptions. Also, the adoption credit is made refundable. The new dollar limit and phase-out of the adoption credit are adjusted for inflation in tax years beginning after Dec. 31, 2010. Also, the scheduled sunset of EGTRRA provisions relating to the adoption credit is delayed for one year (i.e., the sunset becomes effective for tax years beginning after Dec. 31, 2011).

For adoption assistance programs, the maximum exclusion is increased to $13,170 per eligible child (a $1,000 increase). The new dollar limit and income limitations of the employer-provided adoption assistance exclusion are adjusted for inflation in tax years beginning after Dec. 31, 2010. The EGTRRA sunset of provisions relating to adoption assistance programs is also delayed for one year (i.e., the sunset becomes effective for tax years beginning after Dec. 31, 2011).

A New Credit for New Therapies. Effective for expenses paid or incurred after Dec. 31, 2008, in tax years beginning after that date, a two-year temporary credit would be created, subject to an overall cap of $1 billion, to encourage investments in new therapies to prevent, diagnose, and treat acute and chronic diseases.

New Exclusion for Certain Health Professionals. Payments made under any State loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in undeserved or health professional shortage areas would be excluded from gross income, effective for amounts received by an individual in tax years beginning after Dec. 31, 2008. (A separate provision would exclude from gross income the value of specified Indian tribal health benefits, effective for benefits and coverage provided after the enactment date.)

Return Information Disclosure. The act allows the IRS, upon written request of the Secretary of Health and Human Services, to disclose certain taxpayer return information if the taxpayer's income is relevant in determining the amount of the tax credit or cost-sharing reduction, or eligibility for participation in the specified state health subsidy programs.

Upon written request from the Commissioner of Social Security, the IRS may disclose the certain limited return information of a taxpayer whose Medicare Part D premium subsidy, according to the records of the Secretary, may be subject to adjustment.