Healthcare Bill - Patient
Protection and Affordable Care Act
On March 23, 2010, President Obama signed into law H.R. 3590,
the Patient Protection and Affordable Care Act
as passed by the Senate on December 24, 2009, and by the House
on March 21, 2010. However, this law is only the first installment
of two pieces of legislation that, together, would reform the
U.S. health system and impact most employers, virtually all taxpayers,
and all segments of the health care industry. The second part
of the puzzle, passed by the House on March 21, and to be taken
up by the Senate under the reconciliation process, is H.R. 4872,
the Health Care and Education Reconciliation Act of 2010, i.e.,
the "Amendment in the Nature of a Substitute to H.R. 4872,
as amended."
H.R. 4872 amends the health reform
bill that the Senate passed in December to make it more acceptable
to House members. The Senate may take up this measure as early
as March 23. Assuming this second a bill passes the Senate (only
a simple majority is needed under the reconciliation rules), it
will be cleared for the President's signature, thus completing
a massive overhaul of the U.S. health care system.
Here are highlights of the two-part reform measure based on information
released by the House Rules Committee, the House Ways & Means
Committee, and the Joint Committee on Taxation.
Tax Changes Relating to Universal Health Coverage
Mandate
Penalty for remaining uninsured.
Effective for tax years beginning after December 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. For 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.
Low-income tax credits for
participating in health exchanges.
For tax years ending after 2013, tax credits would be available
for individuals and families with incomes up to 400% of the federal
poverty level ($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. 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.
Employer responsibilities.
Effective for months beginning after December 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.
"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 offering health coverage.
Effective for tax years beginning after 2009, a qualified small
employer would be given a tax credit for nonelective 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 $50,000.
However, the full amount of the credit would be available only
to an employer with 10 or fewer FTEs and whose employees have
average annual fulltime equivalent wages from the employer of
less than $25,000. These wage limits would be indexed to the Consumer
Price Index for Urban Consumers ("CPI-U") for years
beginning in 2014.
For tax years beginning in 2010 through 2013, the credit would
be 35% for small employers with fewer than 25 employees and average
annual wages of less than $50,000 who offer health insurance coverage
to their employees. In 2014 and later, eligible small employers
who purchase coverage through the Insurance Exchange would be
eligible for a tax credit for two years of up to 50% of their
contribution.
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.
Health-Related Revenue Raisers
Excise tax on high-cost employer-sponsored health coverage.
For tax years beginning after December 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.
New employer reporting responsibilities.
For tax years beginning after December 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.
Additional Hospital Insurance Tax (HI) for high wage workers.
For tax years beginning after December 31, 2012, the HI tax rate
would be increased by 0.9 percentage points on an individual taxpayer
earning over $200,000 ($250,000 for married couples filing jointly);
these figures are not indexed.
Surtax on unearned income.
For tax years beginning after December 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 FSA 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 December 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 December 31, 2010.
Increased tax on nonqualifying 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 December 31, 2010.
Modified threshold for claiming medical expense deductions.
For tax years beginning after December 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 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 December 31, 2012.
Industry-Specific Revenue Raisers
The following revenue raising changes would be imposed on health
related industries -
New deduction limit on executive compensation
would apply to insurance providers. If at least 25% of the insurance
provider's gross premium income is derived from health insurance
plans that meet the minimum essential coverage requirements in
the bill ("covered health insurance provider"), an annual
$500,000 per tax year compensation deduction limit would apply
for all officers, employees, directors, and other workers or service
providers performing services for or on behalf of a covered health
insurance provider. The limit would apply for remuneration paid
in tax years beginning after 2012, with respect to services performed
after 2009.
Pharmaceutical manufacturers and importers would
have to pay an annual flat fee beginning in 2011 allocated across
the industry according to market share. The schedule for the flat
fee would be: 2011, $2.5 billion; 2012 to 2016, $3 billion; 2017,
$4 billion; 2018, $4.1 billion; 2019 and later, $2.8 billion.
The fee would not apply to companies with sales of branded pharmaceuticals
of $5 million or less.
Manufacturers or importers of medical devices
would have to pay 2.3% of the sale price imposed on the sale of
any taxable medical device by the manufacturer, producer, or importer
of the device. A taxable medical device would be any device, defined
in section 201 (h) of the Federal Food, Drug, and Cosmetic Act,
intended for humans. The excise tax would not apply to eyeglasses,
contact lenses, hearing aids, and any other medical device determined
by the IRS to be of a type that is generally purchased by general
public at retail for individual use.
Health insurance providers would face an annual
flat fee on the health insurance sector effective for calendar
years beginning after December 31, 2013. The fee would be allocated
based on market share of net premiums written for a U.S. health
risk for calendar years beginning after December 31, 2012. The
schedule for the flat fee would be: 2014, $8 billion; 2015 and
2016, $11.5 billion; 2017, $13.5 billion; 2018, $14.3 billion
and indexed to medical inflation for later years. The fee would
not apply to companies whose net premiums written are $25 million
or less.
The indoor tanning industry would be hit with
a 10% excise tax on indoor tanning services, effective for services
provided on or after July 1, 2010.
Non-profit Blue Cross Blue Shield organization
would have to maintain a medical loss ratio of 85% or higher in
order to take advantage of the special tax benefits provided to
them, including the deduction for 25% of claims and expenses and
the 100% deduction for unearned premium reserves. The provision
is effective 2010.
Non-Health Related Revenue Raisers
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 December 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 biofuel
from cellulosic feedstocks in order to encourage the development
of new production capacity for biofuels that are not derived from
food source materials. Congress is aware that some taxpayers are
seeking to claim the cellulosic biofuel tax credit for unprocessed
fuels, such as "black liquor." For fuel sold or used
after December 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 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.
For tax years beginning after 2010, a new employee benefit cafeteria
plan to be known as a Simple Cafeteria Plan would be established.
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.
Liberalized adoption credit and adoption assistance rules.
For tax years beginning after December 31, 2009, the adoption
tax credit would be increased by $1,000, made refundable, and
extended through 2011. The adoption assistance exclusion also
would be increased by $1,000.
New credit for new therapies.
Effective for expenses paid or incurred after Decenber 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 underserved or health professional
shortage areas would be excluded from gross income, effective
for amounts received by an individual in tax years beginning after
December 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.)
For further information and clarification on these matters,
please contact Cheryl A. Prout, CPA and Partner at (716) 250-6600.
