Health Care Law Upholds[1]
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Health Care Law Upholds[1]

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Summary of Key Provisions in the recently upheld Health Care Law

Summary of Key Provisions in the recently upheld Health Care Law

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Health Care Law Upholds[1] Document Transcript

  • 1. CCH Tax BriefingSUPREME COURT UPHOLDSHEALTH CARE LAWJune 29, 2012 Special Report HIGHLIGHTS Supreme Court Upholds Health Care Individual Mandate To Take Law; All Tax Measures Preserved Effect Starting In 2014 T he U. S. Supreme Court has upheld effective since 2010 and 2011, others have All Tax Provisions Upheld the constitutionality of the 2010 been in force only this year, and many health care reform legislation, in- other major provisions apply starting in Penalty On States For cluding its linchpin individual mandate that 2013, 2014 or later. Refusing Expanded Medicaid requires individuals to pay a penalty if they fail to carry minimum essential health in- COMMENT. Uncertainty over the health Unconstitutional surance (National Federation of Independent care legislation has been abated by the Premium Assistance Tax Business, et al. v. Sebelius, SCt, 2012-2 USTC Supreme Court’s decision, but clearly not Credit To Help Offset ¶50,423). In its landmark 5 to 4 decision eliminated. Concerns remain over how handed down on June 28, 2012, the Court the IRS will interpret parts of the law as it Cost of Coverage cleared the path for President Obama’s sig- continues issuing guidance to implement Limits On Health nature health care law, the Patient Protec- it. Also adding to uncertainty are renewed tion and Affordable Care Act (PPACA) and pledges made by the presumptive GOP- FSAs And Other the Health Care and Education Reconcili- nominee for president Mitt Romney to Arrangements Continue ation Act (HCERA), to move forward on repeal the PPACA if elected, and by GOP schedule. However, the mechanism used to leaders on Capitol Hill to dismantle the Small Employer force states to expand Medicaid eligibility health care legislation. In the meantime, Health Insurance Tax did not pass constitutional muster. however, employers and taxpayers must as- Credit Preserved sume that key provisions will go into effect This special Briefing describes the tax measures in 2013, 2014, and beyond, or risk being New Rules For Charitable preserved by the Court’s decision along with the unprepared to fully comply in time for the Hospitals Move Forward related guidance issued by the Treasury Depart- law’s complex provisions. ment, the IRS, United States Department of Codified Economic Substance Health and Human Services (HHS), and the Doctrine Sustained United States Department of Labor (DOL). SUPREME COURT’S ANALYSIS IMPACT. The PPACA was passed by Con- INSIDE gress and signed into law by President The Supreme Court heard three days of oral Obama in March 2010. Since then, the arguments in March 2012 on whether theSupreme Court Analysis ........................1 IRS and other federal agencies have issued Anti-Injunction Act (Code Sec. 7421) ap- final regulations, temporary regulations, plies, whether the individual mandate (CodeIndividual Tax Provisions ...................... 2 proposed regulations, and other guid- Sec. 5000A) is a proper exercise of Congress’Business Tax Provisions ........................ 7 ance on many of the tax provisions in the taxing power or its power under the Consti- PPACA (also known as the ACA). Many tution’s Commerce or Necessary and ProperEffective Dates Chart ............................ 9 businesses and employers have waited to Clauses; and whether the PPACA’s expan- fully implement these regulations until the sion of Medicaid exceeds the government’sIRS Guidance Chart ..............................11 Supreme Court determined the fate of the spending authority. The Court also heardReporting................................................11 health care reform law. Now that the Court arguments on the viability of the PPACA has spoken, all taxpayers—businesses large without the individual mandate.Additional Provisions .......................... 12 and small, as well as individuals—must prepare in earnest for implementation of Writing for the majority, Chief Justice John the PPACA. Some requirements have been Roberts said that the government’s reading
  • 2. 2012 Health Care Update2 of the statute – that it imposes a tax on in- Medicaid expansion, the majority found: The PPACA and HCERA add to or amend dividuals without insurance – is a reasonable “Nothing in our opinion precludes Con- numerous sections of the Internal Revenue one. “Under the mandate, if an individual gress from offering funds under the Afford- Code, resulting in the largest set of tax law does not maintain health insurance, the only able Care Act to expand the availability of changes in more than 20 years. The IRS has consequence is that he must make an addi- health care, and requiring that States ac- been working on many fronts to issue guidance tional payment to the IRS...” The Chief Jus- cepting such funds comply with the condi- on these provisions, to flesh out certain benefits tice continued, “our precedent demonstrates tions on their use. What Congress is not free and requirements, and to set up procedures that Congress had the power to impose the to do is to penalize States that choose not necessary for compliance. exaction in Section 5000A under the taxing to participate in that new program by tak- power, and that Section 5000A need not be ing away their existing Medicaid funding.” The remainder of this Briefing highlights the read to do more than impose a tax. That is Since an estimated 17 million currently major tax provisions of PPACA and HCERA, sufficient to sustain it.” Chief Justice Rob- uninsured individuals would benefit from and the guidance that has been developed erts was joined by Justices Ginsburg, Breyer, the Medicaid expansion, the impact that since enactment. Sotomayor, and Kagan in upholding the law this part of the Court’s decision will have on under Congress’ power to tax. PPACA’s overall goals remains to be seen. COMMENT. In June 2012, the Treasury Inspector General for Tax Administration COMMENT. The majority acknowledged CAUTION. Several PPACA cases remain (TIGTA) reported that overall, the IRS that Congress did not label Code Sec. outstanding and need to be resolved. For has developed appropriate plans to imple- 5000A as a tax but held that labels do example, a case pending in the Fifth Cir- ment most tax-related provisions in the not control. The majority used the follow- cuit Court of Appeals, Physician Hospitals PPACA. TIGTA reported that the IRS ing example: “Suppose Congress enacted v. Sebelius, challenges the constitutionality would benefit from estimating resources a statute providing that every taxpayer of PPACA Section 6001, which imposes beyond fiscal year (FY) 2013. The IRS who owns a house without energy ef- restrictions on physician-owned hospitals. agreed with TIGTA and announced that ficient windows must pay $50 to the Another case, Coons v. Geithner, cur- it would complete an evaluation of the IRS. The amount due is adjusted based rently pending in the district court of Ari- major PPACA provisions for which im- on factors such as taxable income and zona, raises several other issues, including plementation has not been completed and joint filing status, and is paid along with the constitutionality of the Independent evaluate the resources needed for imple- the taxpayer’s income tax return. Those Payment Advisory Board, which PPACA mentation. Nevertheless, many observers whose income is below the filing thresh- created to find savings in Medicare. As a contend that the IRS is significantly un- old need not pay. The required payment is result of the Supreme Court’s decision, the derfunded at current levels to handle its not called a ‘tax,’ a ’penalty,’ or anything core of the PPACA remains intact, and expected multi-faceted role in implement- else. No one would doubt that this law other challenges to the law based on those ing the health care law over the 2013- imposed a tax, and was within Congress’s same grounds will not continue. However, 2018 period. power to tax. That conclusion should not other issues are still playing out, and one of change simply because Congress used the them may provide the vehicle for invali- word ‘penalty’ to describe the payment.” dating significant PPACA provisions that INDIVIDUAL TAX are not related to the individual mandate PROVISIONS In their dissent, Justices Scalia, Kennedy, or the Medicaid expansion. Thomas, and Alito said, “We have never Individual Mandate held that any exaction imposed for viola- tion of the law is an exercise of Congress’ HIGHLIGHTS OF PPACA/ The PPACA requires applicable individuals taxing power—even when the statute calls HCERA AND IRS GUIDANCE to carry minimum essential health coverage it a tax, much less when (as here) the stat- for themselves and their dependents (also ute repeatedly calls it a penalty.” The dis- The Supreme Court has left standing all tax known as the individual mandate) or other- sent noted that “eighteen times in Section provisions within PPACA and HCERA. wise pay a shared responsibility penalty for 5000A itself and elsewhere throughout the This decision, which was unexpected by each month of noncompliance. The indi- Act, Congress called the exaction in Section many Court-watchers, brings with it a sense vidual mandate provision is scheduled to be 5000A(b) a ‘penalty.’” The dissent would of urgency to employers, individuals and effective beginning in calendar year 2014. have struck down the entire law. other stakeholders that time is now growing “The individual mandate requires most short both to prepare for those major chang- Americans to maintain ‘minimum essential’ COMMENT. In addressing the unconsti- es soon to take place in 2013 and 2014 and health insurance coverage,” Chief Justice tutionality of denying Medicaid funding also to implement provisions or benefits that Roberts wrote. “For individuals who are not to states that refuse to implement PPACA’s are already effective and available. exempt and do not receive health insurance CCH Tax Briefing ©2012 CCH. All Rights Reserved.
  • 3. June 29, 2012 3through a third party, the means of satisfy- thered health plan (discussed below), cover- exchange may qualify for a premium assis-ing the requirement is to purchase insurance age under Medicaid and Medicare, and oth- tance tax credit under Code Sec. 36B unlessfrom a private company.” er government-sponsored coverage, subject they are eligible for other minimum essen- to some exceptions. tial coverage, including employer-sponsored IMPACT. Chief Justice Roberts, writing coverage that is affordable and provides for the majority, recognized the tremen- Calculating the penalty. The penalty is minimum value. dous impact of the individual mandate: generally calculated by taking the greater of “By requiring that individuals purchase a flat dollar amount and a calculation based COMMENT. The 3% Withholding health insurance, the mandate prevents on a percentage of the taxpayer’s household Repeal and Job Creation Act of 2011 cost-shifting by those who would oth- income, and is imposed on a monthly basis amended the Code Sec. 36B credit to erwise go without it. In addition, the (one-twelveth per month of this ‘greater of ’ include Social Security benefits in a tax- mandate forces into the insurance risk amount). The annual flat dollar amount is payer’s modified adjusted gross income pool more healthy individuals, whose assessed per individual or dependent with- (MAGI) for purposes of the credit. premiums on average will be higher than out coverage and is scheduled to be phased their health care expenses. This allows in- in over three years ($95 for 2014; $325 for Minimum value. A plan fails to provide surers to subsidize the costs of covering the 2015; and $695 in 2016 and subsequent minimum value if the plan provides less unhealthy individuals the reforms require years, indexed for inflation after 2016; one- than 60 percent coverage of the total allowed them to accept.” half of these amounts for individuals under costs. If employer-sponsored coverage fails to provide minimum value, an employeeIndividuals who are exempt. Some in- may be eligible for the Code Sec. 36B credit.dividuals are exempt from the individual “The Supreme Court In Notice 2012-31, the IRS requested com-mandate. They include (not an exhaustive ments on how to determine if health cov-list) individuals covered by Medicaid and has left standing all tax erage under an employer-sponsored planMedicare, incarcerated individuals, indi- provisions within PPACA provides minimum value. The IRS describedviduals not lawfully present in the United several approaches: An actuarial value cal-States, health care ministry members, mem- and HCERA.” culator (AV calculator) or a minimum valuebers of an Indian tribe, and members of a calculator (MV calculator); design-basedreligion conscientiously opposed to accept- safe harbors in the form of checklists; anding benefits. No penalty will be imposed on the age of 18). The flat dollar amount is for plans with nonstandard features thatindividuals without coverage for fewer than compared to a percentage of the extent to preclude the use of the AV calculator or the90 days (with only one period of 90 days which the taxpayer’s household income ex- MV calculator without adjustments, an ap-allowed in a year). Generally, individuals ceeds the income tax filing threshold. The propriate certification by a certified actuarywith employer-provided health insurance, if applicable percentage is 1 percent for 2014, that the plan provides minimum value.it satisfies minimum essential coverage and 2 percent for 2015, and 2.5 percent foraffordability requirements, are also exempt. 2016 and subsequent years. The taxpayer’s Eligibility. In final regulations (TD 9590, penalty is equal to the greater of the flat dol- 5/18/12), the IRS explained that eligibilityAdditionally, no penalty will be imposed on lar amount or the percentage of household for the Code Sec. 36B credit is determinedindividuals who are unable to afford cover- income. The amount cannot exceed the na- by the relationship of the taxpayer’s house-age (generally, an individual will be treated tional average of the annual premiums of a hold income to the federal poverty levelas unable to afford coverage if the required “bronze level” health insurance plan offered (FPL). A taxpayer’s household income forcontribution for employer-sponsored cover- through a health exchange. the tax year must be at least 100 percent butage or a bronze-level plan on an Exchange not more than 400 percent of the FPL forexceeds eight percent of the individual’s IRS guidance pending. In March 2012, the taxpayer’s family size. A taxpayer’s fam-household income for the tax year). Those IRS Chief Counsel William Wilkins said ily includes the individuals for whom theapplicable individuals whose household in- that guidance on the individual mandate taxpayer claims a deduction for a personalcome is below their income thresholds for would wait until after the Supreme Court exemption under Code Sec. 151 for thefiling income tax returns are also exempt. hands down its decision. tax year. The final regulations clarify that a family may include individuals who are notMinimum essential coverage. Under the subject to the penalty for failing to maintainPPACA, minimum essential coverage gen- Premium Assistance Tax Credit minimum essential coverage.erally includes (not an exhaustive list) cov- Beginning in 2014, eligible lower-incomeerage under an eligible employer-sponsored individuals who obtain coverage under a Employer-sponsored coverage. The finalplan, an individual market plan, a grandfa- qualified health plan through an insurance regulations treat an employer-sponsored CCH Tax Briefing
  • 4. 2012 Health Care Update4 plan as affordable for an employee and re- (HRAs), and how wellness programs af- medical expenses. For changes in the rules lated individuals if the portion of the an- fect affordability. governing health flexible spending ar- nual premium the employee must pay for rangements (health FSAs), see the discus- self-coverage does not exceed the required Advance credit payments. The PPACA sion later in this Briefing. contribution percentage (9.5 percent for tax provides that advance payments of the pre- years beginning before January 1, 2015) of mium assistance tax credit may be made di- COMMENT. On June 7, 2012, the the taxpayer’s household income. rectly to the insurer. Advance payments are House approved the Health Care Cost Re- reconciled against the amount of the fam- duction Act of 2012 (HR 436). Among IMPACT. The credit is fully refundable. ily’s actual premium tax credit, as calculated other provisions, the bill would repeal The Congressional Budget Office esti- on the family’s federal income tax return. disqualification of expenses for over-the- mates that the credit will provide an av- Any excess payment must be repaid as ad- counter drugs for health FSAs, Archer erage subsidy of about $5,000 per year for ditional tax but is subject to a cap for tax- MSAs and HRAs. The provision would individuals and families. payers with household income under 400 apply to expenses incurred after Decem- percent of FPL. ber 31, 2012. The cost of HR 436 would EXAMPLE. Kate has household income be offset by recapturing in full any over- of $47,000 in 2014. She is an employee IMPACT. Taxpayers receiving an advance payments of refundable Code Sec. 36B of ABC Co., which offers its employees a payment must file a return. healthcare exchange subsidies. At the time health insurance plan that requires her this Briefing was prepared, it was unclear to contribute $3,450 for self-only cover- if the Senate would take up HR 436. age for 2014. This represents 7.3 percent Medical Deduction Threshold of Kate’s household income. The IRS ex- The PPACA increases the threshold to claim Debit/credit cards. Debit cards, credit plained that because Kate’s required con- an itemized deduction for unreimbursed cards, and stored value cards may be used to tribution for self-only coverage does not medical expenses from 7.5 percent of ad- reimburse participants in an FSA. In Notice exceed 9.5 percent of household income, justed gross income (AGI) to 10 percent of 2010-59, the IRS indicated that it will not ABC’s plan is affordable for Kate, and AGI for tax years beginning after December challenge the use of FSA and HRA debit Kate is eligible for minimum essential 31, 2012. However, individuals (or their cards for expenses incurred through Janu- coverage for all months in 2014. spouses) age 65 and older before the close of ary 15, 2011. In Notice 2011-5, the IRS the tax year are exempt from the increased modified Notice 2010-59, explaining that IMPACT. A large employer may be liable threshold, and the 7.5 percent threshold after January 15, 2011, FSA and HRA debit for an assessable payment if any full-time continues to apply until after 2016. cards may continue to be used to purchase employee receives a premium assistance prescribed over-the-counter medicines from tax credit. The assessable payment is dis- IRS guidance pending. The IRS has not vendors (other than drug stores and phar- cussed later in this Briefing. (as of the date of this Briefing) issued guid- macies, non-health care merchants that have ance on the medical deduction threshold as pharmacies, and mail order and web-based COMMENT. In the final regulations, the amended by the PPACA. vendors that sell prescription drugs) having IRS advised that additional guidance health care related Merchant Codes. Health will be issued on determining afford- COMMENT. The PPACA did not change FSA and HRA debit cards may be used to ability for related individuals, treatment the alternative minimum tax (AMT) purchase over-the-counter medicines at “90 of health reimbursement arrangements treatment of the itemized deduction for percent pharmacies” but only as provided in Notice 2010-59. For all other providers and merchants, other than those described in this notice, health FSA and HRA debit HEALTH CARE TAX CREDIT cards may not be used to purchase over-the- counter medicines or drugs after January The Health Care Tax Credit (HCTC) was extended and enhanced by the 15, 2011. Trade Adjustment Assistance Act of 2011 (TAA 2011). The HCTC is refund- able and can also be advanced. Individuals eligible for the HCTC include Additional Tax On individuals receiving Trade Adjustment Allowances; individuals receiving wage subsidies in the form of Reemployment Trade Adjustment Assistance HSA/MSA Distributions (RTAA) benefits; and individuals between the ages of 55 and 64 receiving payments from the Pension Benefit Guaranty Corporation (PBGC). The Distributions from a health savings account (HSA) or Archer medical savings account HCTC is scheduled to sunset after 2013. (Archer MSA) not used for the beneficiary’s CCH Tax Briefing ©2012 CCH. All Rights Reserved.
  • 5. June 29, 2012 5qualified medical expenses are generally in- 31, 2012. The tax is imposed on the lesser of IMPACT. This 3.8 percent tax would becluded in the beneficiary’s gross income. an individual’s net investment income for the on top of any increase in the dividends/Distributions included in gross income are tax year or modified adjusted gross income capital gains/ordinary income rates thatsubject to an additional tax of 10 percent of in excess of $200,000 ($250,000 for married some lawmakers are currently consideringthe included amount, unless made after the couples filing a joint return and $125,000 for upon expiration of the Bush-era tax cutsbeneficiary’s death, disability, or attainment married couples filing a separate return). at the end of 2012.of the age of Medicare eligibility. Effective fordistributions made after December 31, 2010, Net investment income is the excess of the Home sales. A home sale may result in athe additional tax on HSAs and Archer MSAs sum of the following items less any other- capital gain that increases net investmentincreases from 10 percent to 20 percent, in wise allowable deductions properly alloca- income. Net investment income includesthe case of HSAs, and from 15 percent to 20 ble to such income or gain: interest, dividends, annuities, royalties, cer-percent, in the case of Archer MSAs, of the tain rents, and certain other passive businessamount included in gross income. income as well as the amount of capital gain on a home sale that exceeds the amount “Employers and others that can be excluded from taxation. UnderAdditional Medicare Tax current law, single individuals may exclude must assume that keyFor tax years beginning after December 31, up to $250,000 in capital gain, and mar-2012, an additional 0.9 percent Medicare provisions will go into ried couples may exclude up to $500,000tax is imposed on wages and self-employ- effect in 2013 and 2014 or in capital gain. A home sale may also gener-ment income of higher-income individu- ate a capital gain that increases a taxpayer’sals. The additional Medicare tax applies to risk being unprepared to modified adjusted gross income above theindividuals with remuneration in excess of fully comply in time.” general threshold for the 3.8 percent tax.$200,000; married couples filing a joint re-turn with incomes in excess of $250,000;and married couples filing separate returns Adoption Creditwith incomes in excess of $125,000. Gross income from interest, dividends, The PPACA made the adoption credit re- annuities, royalties and rents unless such fundable for 2010 and 2011. The PPACAIRS guidance pending. The IRS has not income is derived in the ordinary course also increased the amount of the credit toissued formal guidance on the additional of any trade or business (excluding a $13,360 for 2011. The IRS issued guid-Medicare tax as of the date of this Briefing. passive activity or financial instruments/ ance on the temporary enhancements to the commodities trading); adoption credit in Notice 2010-66. IMPACT. Unlike the general 1.45 percent Other gross income from any passive Medicare tax, the additional 0.9 percent trade or business; and COMMENT. The PPACA’s enhancements tax is on the combined wages of the em- Net gain included in computing taxable to the adoption credit have expired. ployee and the employee’s spouse, in the income that is attributable to the dispo- Pending legislation would permanently case of a joint return. sition of property other than property extend the enhancements (HR 4373). held in any trade or business that is not COMMENT. Employers must withhold a passive trade or business. on the higher rate if the employee re- Indoor Tanning Excise Tax ceives wages in excess of $200,000. The IMPACT. Investors will be scrambling to Amounts paid for indoor tanning services employer may disregard the amount of determine the parameters of this addi- performed after June 30, 2010, are subject wages received by the employee’s spouse. If tional 3.8 percent tax, especially within to a 10 percent excise tax. Tanning salons the Medicare tax is not withheld by the the context of passive investment income. are responsible for collecting the excise tax employer, the employee is required to pay The IRS has not issued formal guidance and paying over the tax on a quarterly ba- the tax. as of the date of this Briefing, although sis. Tanning salons that fail to collect the tax IRS officials had said in April 2012 that from patrons are liable for the excise tax. proposed regulations would be releasedMedicare Tax On soon. However, they said not to expect IMPACT. The excise tax does not applyInvestment Income resolution at that time of the relation- to phototherapy performed by a licensed ship between this tax and the Code Sec. medical professional.The PPACA imposes a 3.8 percent Medicare 469 rules governing passive activity losses,contribution tax on unearned income effec- which has been an area that continues to The IRS quickly issued final regulationstive for tax years beginning after December generate confusion. (TD 9486, 6/14/10) on the indoor tanning CCH Tax Briefing
  • 6. 2012 Health Care Update6 tax only weeks before its starting date. The Dependent Coverage Until Age 26 ployer-provided accident or health plan to final regulations explain that payment for any employee’s child who has not attained indoor tanning services is treated as made, The PPACA also requires group health plans age 27 as of the end of the tax year. The and liability for the tax is imposed, at the and health insurance issuers providing de- amendment was effective March 30, 2010. time it can be reasonably determined that pendent coverage for children to continue payment is made specifically for indoor tan- to make the coverage available for an adult The IRS issued guidance in Notice 2010- ning services. The regulations also address child until turning age 26. The coverage re- 38, which explains that the exclusion ap- “bundled services,” where indoor tanning quirement is effective for the first plan year plies for reimbursements for health care of is bundled with other goods and services, beginning on or after September 23, 2010. individuals who are not age 27 or older at membership fees to a qualified physical fit- any time during the tax year. The tax year ness facility, and payment by gift card for COMMENT. For plan years beginning is the employee’s tax year (generally a cal- indoor tanning services. before January 1, 2014, grandfathered endar year). The IRS also explained that a group plans do not have to offer depen- child for purposes of the extended exclusion In 2012, the IRS followed up on the final dent coverage as amended by the PPACA is an individual who is the son, daughter, regulations with more guidance. The IRS if a young adult is eligible for group cov- stepson, or stepdaughter of the employee. A released final, temporary and proposed erage outside his or her parent’s plan. child includes an adopted individual and an regulations adding the Code Sec. 5000B eligible foster child. indoor tanning services excise tax to the The IRS issued temporary regulations in TD list of excise taxes for which disregarded 9482 (5/10/10). The IRS explained that, IMPACT. The exclusion applies only for entities are treated as separate entities ef- with respect to a child who has not attained reimbursements for medical care of in- fective for taxes imposed on amounts paid age 26, a plan or issuer may not define de- dividuals who are not age 27 or older at on or after July 1, 2012 (TD 9596, NPRM pendent for purposes of eligibility for de- any time during the tax year. The IRS ex- REG-125570-10 06/25/12). The tempo- pendent coverage for children other than in plained in Notice 2010-38 that employers rary regulations also treat a single-owner terms of a relationship between a child and may assume that an employee’s tax year is eligible entity that is disregarded as an enti- the participant. A plan or issuer may not the calendar year: a child attains age 27 ty separate from its owner for any purpose deny or restrict coverage for a child who has on the 27th anniversary of the date the under Reg. §301.7701-2 as a corporation not attained age 26 based on the presence or child was born. For example, an individ- with respect to the indoor tanning services absence of the child’s financial dependency ual born on May 1, 1986 attains age 27 excise tax. (upon the participant or any other person), on May 1, 2013, and is therefore covered residency with the participant or with any under this provision through 2012. Em- IMPACT. Tanning services providers other person, student status, employment, ployers may rely on the employee’s represen- report the tax on Form 720, Quarterly or any combination of those factors. tation as to the child’s date of birth. Federal Excise Tax Return, and pay the excise tax on a quarterly basis: April 30 EXAMPLE. A group health plan offers a IMPACT. There is no requirement that a to report tax collected in January, Febru- choice of self-only or family health cov- child generally qualify as a dependent for ary and March; July 31 to report tax col- erage. Dependent coverage is provided tax purposes. There is also no requirement lected in April, May and June; October under family health coverage for children that an employer provide this coverage (as 31 to report tax collected in July, August of participants who have not attained opposed to dependent coverage under age and September; and January 31 to re- age 26. The plan imposes an additional 26, described above). port tax collected in October, November premium surcharge for children who are and December. older than age 18. The IRS explained that the group health plan violates the Student Loan As a result of the 2012 temporary regula- regulations because the plan varies the Repayment Programs tions, Form 720, Quarterly Federal Excise terms for dependent coverage of children Tax Return, reporting of indoor tanning based on age. The PPACA provides for exclusion of assis- services excise taxes imposed on amounts tance provided to participants in state stu- paid on or after July 1, 2012, must be filed dent loan repayment programs for health under the name and employer identifica- Medical Benefits For professionals. The assistance is intended to tion number (EIN) of the entity rather Children Under 27 increase the availability of health care in ar- than under the name and EIN of the dis- eas traditionally underserved by health pro- regarded entity’s owner. This affects returns The PPACA amended Code Sec. 105(b) to fessionals. As of the date of this Briefing, of this tax that are due on or after October extend the exclusion from gross income for the IRS has not issued official guidance on 31, 2012. medical care reimbursements under an em- the exclusion. CCH Tax Briefing ©2012 CCH. All Rights Reserved.
  • 7. June 29, 2012 7Indian Tribes COMMENT. By January 1, 2014, each in certain circumstances, employers have State must establish an American Health six months to determine whether a newly-The PPACA excludes from gross income Benefit Exchange and a Small Business hired employee is a full-time employee andqualified health care benefits provided to Health Options Program (SHOP Ex- will not be subject to a shared responsibil-the member of an Indian tribe, the mem- change) to provide qualified individuals ity payment during that six-month periodber’s spouse or the member’s dependents. and qualified small business employers, re- with respect to that employee.The exclusion applies to benefits and cover- spectively, access to qualified health plans,age provided after March 23, 2010. thus rounding out coverage from the large employer down to the self-employed indi- Small Employer Health vidual, and all workers in-between. Insurance Tax CreditBUSINESSTAX PROVISIONS In Notice 2011-36, the IRS requested com- The PPACA created the temporary Code ments on the issue of who is a full-time em- Sec. 45R small employer health insurance ployee, including a potential “look-back/ tax credit. For tax years 2010 through 2013,Shared Responsibility stability period safe harbor” method for the maximum credit is 35 percent of healthFor Employers determining full-time status of an em- insurance premiums paid by small busi- ployee. In Notice 2012-17, the IRS posted ness employers (25 percent for small tax-The PPACA’s employer shared responsibil- frequently asked questions about employer exempt employers). The credit is scheduledity provisions (also known as the “employer shared responsibility, noting that the “look- to increase to 50 percent for small businessmandate”) specify that an applicable large back/stability safe harbor” is expected to employers (35 percent for small tax-exemptemployer may be subject to a shared respon- allow look-back and stability periods not employers) after 2013 (but will terminatesibility payment (also known as an “assessable exceeding 12 months. In Notice 2011-73, after 2015). However, in tax years that be-payment”) if any full-time employee is cer- the IRS described a safe harbor allowing gin after 2013, an employer must partici-tified to receive an applicable premium tax employers to use an employee’s Form W-2 pate in an insurance exchange in order tocredit or cost-sharing reduction payment. wages (as reported in Box 1) instead of claim the credit, and other modificationsGenerally, this may occur where either: household income in determining whether and restrictions on the credit apply. coverage offered is affordable. The employer does not offer to its full- In Notice 2010-44, the IRS provided guid- time employees (and their dependents) IMPACT. In Notice 2012-17, the IRS ance on the small employer health insurance the opportunity to enroll in minimum reported that future guidance is expected tax credit, including transition relief for tax essential coverage under an eligible em- to provide that, at least for the first three years beginning in 2010 with respect to the ployer-sponsored plan; or months following an employee’s date of hire, requirements for a qualifying arrangement. The employer offers its full-time em- an employer that sponsors a group health The IRS expanded on the guidance in Notice ployees (and their dependents) the plan will not, by reason of failing to offer 2010-82. The IRS explained in Notice 2010- opportunity to enroll in minimum coverage to the employee under its plan 82 that a qualified employer must have: essential coverage under an eligible during that three-month period, be subject employer-sponsored plan that either is to the employer shared responsibility. The Fewer than 25 full-time equivalent em- unaffordable relative to an employee’s guidance is also expected to provide that, ployees (FTEs) for the tax year; household income or does not provide minimum value (that pays at least 60 percent of benefits). EXCHANGES COMMENT. The provision applies to months beginning after December 31, 2013. The PPACA requires each state to establish an American Health Benefit Exchange and Small Business Health Options Program (SHOP Exchange) toFor purposes of the employer shared re- provide qualified individuals and qualified small business employers accesssponsibility payment, an applicable large to health plans. Exchanges will have four levels of coverage: bronze, silver,employer is an employer that on average gold, or platinum. In early 2012, HHS reported that 34 states and the Dis-employed 50 or more full-time equivalent trict of Columbia have received grants to fund their progress toward build-employees on business days during the pre- ing Exchanges. HHS also provided an Exchange blueprint that states mayceding calendar year. A full-time employee use. If a state decides not to operate an Exchange for its residents, HHS willis an employee who is employed on average operate a federally-facilitated Exchange (FFE).at least 30 hours per week. CCH Tax Briefing
  • 8. 2012 Health Care Update8 Average annual wages of its employees fied health plan offered through an Ameri- IMPACT. The $2,500 limit on salary for the year of less than $50,000 per can Health Benefit Exchange. reduction contributions to a health FSA FTE; and applies on an employee-by-employee basis. A “qualifying arrangement” that is The IRS explained that $2,500 (as in- maintained. Health FSAs Offered In dexed for inflation) is the maximum sal- Cafeteria Plans ary reduction contribution each employee The IRS also described in Notice 2010-82 may make for a plan year, regardless of the how to calculate the Code Sec. 45R credit. Effective for tax years beginning after De- number of other individuals (for example, cember 31, 2012, the PPACA limits contri- a spouse, dependents, or adult children IMPACT. The Code Sec. 45R credit has butions to health flexible spending arrange- whose medical expenses are reimbursable been heavily promoted by the Obama ments (health FSAs) to $2,500, down from under the employee’s health FSA. administration but appears to be under- an overall $5,000 FSA limit. The $2,500 lim- utilized. The Government Accountability itation is adjusted annually for inflation for IMPACT. The $2,500 limit applies only Office (GAO) has reported that 170,300 tax years beginning after December 31, 2013. to salary reduction contributions and not small employers claimed the credit in tax to employer non-elective contributions, year 2010 out of a pool estimated at be- sometimes called flex credits, which are tween 1.4 million and 4 million eligible Over-the-Counter Medicines subject to certain limitations. Generally, firms. One reason may be the perceived The PPACA revises the definition of medi- an employer may make flex credits avail- complexity of calculating the credit. cal expenses for health flexible spending able to an employee who is eligible to par- arrangements (health FSAs), health reim- ticipate in the cafeteria plan, to be used COMMENT. Sole proprietors, partners in bursement arrangements (HRAs), health (at the employee’s election) only for one or a partnership, shareholders owning more savings accounts (HSAs) and Archer Medi- more qualified benefits. than two percent of the stock in an S corp, cal Savings Accounts (Archer MSAs). After and any owners of more than five percent December 31, 2010, expenses incurred for a COMMENT. On June 7, 2012, the of other businesses are not counted as em- medicine or drug are treated as a reimburse- House approved the Health Care Cost Re- ployees for purposes of the credit. Family ment for a medical expense only if the med- duction Act of 2012 (HR 436). Among members of these owners and partners are icine or drug is a prescribed drug or insulin. other provisions, the bill would amend also not considered employees. the rules for taxable distributions of un- IMPACT. The limitation does not apply to used balances under health FSAs. Gener- items for medical care that are not medi- ally, up to $500 of unused balances under Free Choice Vouchers cines or drugs. Items such as crutches, sup- a health FSA could be distributed; the The PPACA, beginning in 2014, would gen- plies such as bandages, and diagnostic de- amount distributed would be included in erally have required employers offering quali- vices, such as blood sugar test kits, qualify the recipient’s gross income in the tax year fied health insurance to provide a free choice for reimbursement by a health FSA or in which distributed and would be taken voucher to employees with incomes of less than HRA if purchased after December 31, into account as wages or compensation. 400 percent of federal poverty guidelines whose 2010. A distribution from an HSA or This provision would apply to plan years share of the premium exceeded 8 but was less Archer MSA for the cost of such items will beginning after December 31, 2012. than 9.8 percent of their income, and who still be tax-free, regardless of whether the The cost of HR 436 would be offset by chose to enroll in a plan in an Exchange. The items are purchased using a prescription. recapturing in full any overpayments of amount of the free choice voucher generally refundable Code Sec. 36B healthcare ex- would have been excluded from the employee’s The IRS issued guidance in Notice 2012-40. change subsidies. At the time this Briefing gross income. However, the Department of The IRS explained that the $2,500 limit on was prepared, it was unclear if the Senate Defense and Full-Year Continuing Appropria- health FSA salary reduction contributions would take up HR 436. tions Act, 2011 (P 112-10) repealed the free .L. applies on a plan year basis and is effective choice voucher provisions of the PPACA. for plan years beginning after December 31, 2012. Thus, employers with non-calendar Simple Cafeteria Plans year plans will not be required to comply For tax years beginning after December 31, Exchange-Participating Qualified until plan year renewal in 2013. The IRS 2010, the PPACA establishes a simple caf- Health Plans Offered Through also reported that it is considering possible eteria plan for small businesses. The PPACA Cafeteria Plans modification of the “use-or-lose rule” to provides a safe harbor from nondiscrimina- provide a different form of administrative tion requirements to qualified small busi- For tax years beginning after December 31, relief (instead of, or in addition to, the cur- nesses. Generally, the employer must have 2013, a cafeteria plan cannot offer a quali- rent 2½ month grace period rule). employed an average of 100 or fewer em- CCH Tax Briefing ©2012 CCH. All Rights Reserved.
  • 9. June 29, 2012 9ployees on business days during either of the on the treatment of the retiree prescription transaction. Codification of the economictwo preceding years. drug subsidy under the PPACA. substance doctrine, and its related penalty of either 20 percent or 40 percent designed IMPACT. The provisions allow small to enforce it, apply to transactions entered employers to retain potentially discrimi- Limitation on Employee into or after March 30, 2010, the effective natory benefits for highly compensated Remuneration date of HCERA. and key employees while allowing other employees to enjoy the benefits of a caf- The PPACA limits the allowable deduction In Notice 2010-62, the IRS explained that eteria plan. to $500,000 for applicable individual re- it will continue to rely on relevant case law muneration and deferred deduction remu- under the common-law economic sub- COMMENT. A cafeteria plan is a sepa- neration attributable to services performed stance doctrine in applying the two-prong rate written plan maintained by an em- by applicable individuals that is otherwise conjunctive test. The IRS subsequently is- ployer for employees under Code Sec. 125. deductible by a covered health insurance sued several directives to its personnel about A cafeteria plan provides participants provider in taxable years beginning after application of the economic substance doc- with an opportunity to receive certain December 31, 2012. trine. In LB&I Directive 4-0711-015, the benefits on a pretax basis. IRS identified various factors that examin- In Notice 2011-2, the IRS explained that ers must consider to determine if applica- the provision may affect deferred compen- tion of the economic substance doctrine isRetiree Prescription Drug Subsidy sation attributable to services performed appropriate. In CC-2012-008, IRS ChiefThe Medicare Prescription Drug, Improve- in a tax year beginning after December Counsel provided instructions to its person-ment, and Modernization Act of 2003 pro- 31, 2009. The IRS also provided a de mi- nel on the economic substance doctrine invides a subsidy of 28 percent of covered nimis rule. examinations, reviews of proposed deficien-prescription drug costs to employers that cy notices (or notices of final partnershipsponsor group health plans with drug ben- administrative adjustment (FPAAs)), litiga-efits to retirees. PPACA requires the amount Economic Substance Doctrine tion, and administrative pronouncements.otherwise allowable as a business deduction HCERA codified the economic substancefor retiree prescription drug costs to be re- doctrine. A transaction is treated as hav- IMPACT. In Notice 2010-62, the IRSduced by the amount of the excludable ing economic substance under a conjunc- rejected calls to publish an “angel list”subsidy-payments received, effective for tax tive two prong test only if the transaction of transactions. The IRS emphasizedyears beginning after December 31, 2012. changes in a meaningful way the taxpayer’s that it does not intend to issue general economic position (not including federal, administrative guidance regarding theGuidance status. As of the date of this Brief- state, or local tax effects), and the taxpayer types of transactions to which the eco-ing, the IRS has not issued formal guidance has a substantial business purpose for the nomic substance doctrine either applies or does not apply. EFFECTIVE DATES OF SELECTED COMMENT. HCERA imposes a strict PPACA/HCERA PROVISIONS liability penalty of 20 percent (40 per- Small Employer Sec. 45R Credit Tax years beginning in 2010 cent for undisclosed transactions) of any underpayment attributable to the disal- Economic Substance Doctrine After 03/30/2010 lowance of claimed tax benefits by rea- OTC Limitations For Health Accounts Tax years beginning after 12/31/2010 son of the application of the economic Indoor Tanning Services Excise Tax On or after 07/01/2010 substance doctrine or failing to meet the requirements of any similar rule of law. Itemized Deduction For Medical Expenses Tax years beginning after 12/31/2012 The IRS has explained in LB&I Direc- Additional 0.9% Medicare Tax: After 12/31/2012 tive 4-0711-015 that until further guid- ance is issued, the related penalty provi- 3.8% Medicare Contribution Tax: After 12/31/2012 sions are limited to the application of the Medical Device Excise Tax Sales after 12/31/2012 economic substance doctrine and may not Employer Shared Responsibility After 12/31/2013 be imposed due to the application of any other “similar rule of law” or judicial Branded Prescription Drug Fees Calendar years beginning after 12/31/2010 doctrine, (for example, the step transac- Sec. 36B Premium Assistance Credit Tax years ending after 12/31/2013 tion doctrine, substance over form, or Excise Tax On High Dollar Insurance Tax years beginning after 12/31/2017 sham transaction). CCH Tax Briefing
  • 10. 2012 Health Care Update10 Excise Tax on High-Cost of the fee by annually submitting Form COMMENT. The IRS also provided a Health Coverage 8947, Report of Branded Prescription safe harbor in the proposed regulations Drug Information. Submission of Form identifying certain categories of taxable Employer-sponsored health coverage that ex- 8947 is voluntary. medical devices that fall within the re- ceeds a threshold amount is scheduled to be tail exemption. subject to a 40-percent excise tax starting in COMMENT. The PPACA treats the 2018. The dollar limits for determining the branded prescription drug fee as an excise COMMENT. On June 7, 2012, the tax thresholds are $10,200 (for 2018) multi- tax so that only civil actions for refund House approved the Health Care Cost Re- plied by the health cost adjustment percent- may be pursued under the procedures of duction Act of 2012 (HR 436). Among age for an employee with self-only coverage; subtitle F. The fee may be assessed and other provisions, the bill would repeal and $27,500 (for 2018) multiplied by the collected without regard to the deficiency the 2.3 percent medical device excise tax. health cost percentage for an employee with procedures of Code Secs. 6211-6216. The The cost of HR 436 would be offset by coverage other than self-only coverage. temporary regulations provide that the recapturing in full any overpayments of IRS must assess the amount of the section refundable Code Sec. 36B healthcare ex- COMMENT. The IRS has not issued 9008 fee for any fee year within three change subsidies. At the time this Briefing official guidance on the excise tax on years of September 30th of that fee year. was prepared, it was unclear if the Senate high-cost health coverage as of the date would take up HR 436. of this Briefing. Medical Device Excise Tax The PPACA imposes an excise tax on the sale Credit For Therapeutic Branded Prescription Drug Fee of certain medical devices by the manufac- Discovery Projects The PPACA imposes an annual fee on each turer, producer, or importer of the device in covered entity engaged in the business of an amount equal to 2.3 percent of the sale Eligible taxpayers may qualify for a 50-per- manufacturing or importing branded pre- price. The excise tax applies to sales of taxable cent tax credit for investments in thera- scription drugs. A covered entity is any medical devices after December 31, 2012. peutic discovery projects. The PPACA manufacturer or importer with gross re- also established the qualifying therapeutic ceipts from branded prescription drug sales. In NPRM REG-113770-10, the IRS is- discovery project program to consider and A branded prescription drug is any prescrip- sued proposed regulations on the medical award certifications for qualified invest- tion drug whose application was submitted device excise tax, explaining that the PPA- ments eligible for the credit. The credit was under section 505(b) of the Federal Food, CA links the definition of “taxable medical available for qualified investments made or Drug, and Cosmetic Act (FFDCA) or any device” to the definition of “device” in the to be made in 2009 and 2010. Addition- biological product the license for which was Federal Food, Drug & Cosmetic Act. The ally, the PPACA provides for grants in lieu submitted under section 351(a) of the Pub- IRS also described dual use devices (devices of tax credits for investments in therapeutic lic Health Service Act. with medical and non-medical uses) and discovery projects. research-only devices. In TD 9544 (8/18/11), the IRS issued tem- In Notice 2010-45, the IRS explained who porary regulations defining covered entities, Retail exemption. The PPACA exempts is an eligible taxpayer for the credit, how a the information requested from covered en- certain devices from the excise tax, such as project will be certified, application proce- tities, and how to calculate the annual fee. eyeglasses, contact lenses and hearing aids. dures, and grants in lieu of tax credits. The IRS will send each covered entity its In the proposed regulations, the IRS pro- final fee calculation no later than August 31 vided a facts and circumstances approach to COMMENT. The credit is part of the of each fee year and also provides that cov- evaluating whether a taxable medical device investment credit. Pending legislation in ered entities must pay their fee by Septem- is of a type that is generally purchased by the Senate would extend the credit for ber 30 of the fee year. In Notice 2011-92, the general public at retail for individual therapeutic discovery projects through the IRS reported that for the 2012 fee year, use. A device is considered to be of a type 2012 (Sen. 3232). the IRS would mail each covered entity a generally purchased by the general public paper notice of its preliminary fee calcula- at retail for individual use if (i) the device tion by April 2, 2012. There is no tax return is regularly available for purchase and use Tax Treatment Of Certain to be filed for the fee. by individual consumers who are not medi- Health Organizations cal professionals, and (ii) the device’s de- COMMENT. Under the temporary regu- sign demonstrates that it is not primarily Under the PPACA, certain health organi- lations, a covered entity may provide in- intended for use in a medical institution or zations that previously qualified for Code formation relevant to the determination office, or by medical professionals. Sec. 833 tax treatment will not qualify un- CCH Tax Briefing ©2012 CCH. All Rights Reserved.
  • 11. June 29, 2012 11less the health organization’s medical loss In Notice 2010-69, the IRS made report- individual for whom minimum essentialratio during the tax year is not less than 85 ing optional for all employers for 2011. In coverage is provided (Code Sec. 6055 re-percent. An organization’s medical loss ra- Notice 2012-9, the IRS provided transition porting). Additionally, every applicabletio is equal to the amount expended on re- relief for small employers. For 2012 Forms large employer (within the meaning ofimbursement for clinical services provided W-2 (and W-2s issued in later years, unless Code Sec. 4980H(c)(2)) that is required toto enrollees under its policies during the tax and until further guidance is issued), an meet the shared employer responsibility re-year divided by the organization’s total pre- employer is not subject to reporting for any quirements of the PPACA during a calendarmium revenue. calendar year if the employer was required year must file a return with the IRS report- to file fewer than 250 Forms W-2 for the ing the terms and conditions of the healthIn Notice 2010-79, the IRS provided transi- preceding calendar year, the IRS explained. care coverage provided to the employer’stion relief and interim guidance on the com- Whether an employer is required to file full-time employees for the year (Code Sec.putation of an organization’s medical loss fewer than 250 Forms W-2 for a calendar 6056 reporting). The reporting require-ratio. In Notice 2011-51, the IRS extended year is determined based on the Forms W-2 ments apply to calendar years beginning onthe transition relief and interim guidance that it would be required to file if it filed or after January 1, 2014.for another year to any tax year beginning Forms W-2 to report all wages paid by thein 2010 and the first tax year beginning af- employer and without regard to use of an In Notice 2012-32, the IRS requested com-ter December 31, 2010. In Notice 2012-37, agent under Code Sec. 3504. ments on how to implement reporting. Thethe IRS extended the transition relief and IRS asked for comments on how to deter-interim guidance in Notice 2010-79 and COMMENT. Certain types of coverage, mine when an individual’s coverage beginsNotice 2011-51 through the first tax year such as major medical, must be reported. and ends for purposes of reporting the datesbeginning after December 31, 2012. Other types of coverage are optional. The of coverage; how to minimize duplicative IRS identified the types of optional cover- reporting, and more. age in Notice 2012-9.REPORTING COMMENT. Reporting under Code Secs. 6055 and 6056 is separate from report- Health Care Coverage ReportingForms W-2 ing of health care coverage on an employ- The PPACA requires every health insur- ee’s Form W-2.The PPACA generally requires employers ance issuer, sponsor of a self-insured healthto disclose the aggregate cost of applicable plan, government agency that administersemployer-sponsored coverage on an em- government-sponsored health insurance Disclosuresployee’s Form W-2 for tax years beginning programs and other entity that provides Because the PPACA is being implementedon or after January 1, 2011. Reporting is for minimum essential coverage to file an an- by multiple federal agencies, the statuteinformational purposes only. nual return reporting information for each authorizes the IRS to disclose return in- formation to HHS and other agencies. IRS GUIDANCE FOR SELECTED Return information is scheduled to be disclosed for, among other purposes, eli- PPACA/HCERA PROVISIONS gibility for the Code Sec. 36B premium Branded Prescription Drug Fees: TD 9544 assistance tax credit. Code Sec. 36B Credit: TD 9590 In NPRM REG-119632-11, the IRS ex- Code Sec. 45R Credit: Notice 2010-44/Notice 2010-82 plained that it will disclose taxpayer identity Disclosure Of Return Information: NPRM REG-119632-11 information, filing status, the number of in- dividuals for which a deduction under Code Grandfathered Plans: TD 9506 Sec. 151 was allowed (“family size”), modi- Health Coverage Information Reporting: Notice 2012-32/Notice 2012-33 fied adjusted gross income, and the tax year to which the information relates or, alterna- Health FSA $2,500 Limitation Notice 2012-40 tively, that the information is not available. Indoor Tanning Services Excise Tax TD 9486 Where modified adjusted gross income is Medical Device Excise Tax: NPRM REG-113770-10 not available, the IRS will disclose adjusted gross income. Minimum Value: Notice 2012-31 OTC Limitations For Health Accounts: Notice 2010-59/Rev. Rul. 2010-23 COMMENT. The proposed regulations Summary Of Benefits: TD 9575 further provide where some or all of the CCH Tax Briefing
  • 12. 2012 Health Care Update12 items of return information prescribed by CHNA and related requirements. The CLASS Program statute or regulation is unavailable, the IRS also cautioned that it will impose the IRS will provide information indicating $50,000 excise tax under Code Sec. 4959 The PPACA created the Community Living why the particular item of return infor- on any hospital organization that fails to Assistance Services and Supports (CLASS) mation is not available. satisfy the CHNA requirements. Program, which was intended to be a consumer-funded, voluntary long-term in- The IRS also revised Form 990, Return surance program. In October 2011, HHS Nonprofit Health of Organization Exempt From Taxation, announced that it could not implement a Insurance Issuers Schedule H, Hospitals, to reflect compli- financially sustainable, voluntary, and self- ance with the new requirements. The IRS financed CLASS Program. The PPACA establishes the Consumer Op- issued Ann. 2011-37 which made filing Part erated and Oriented Plan (CO-OP) Pro- V, Section B of Schedule H optional for tax gram. The CO-OP Program is intended to year 2010. In Notice 2012-4, the IRS ex- ADDITIONAL PROVISIONS encourage the creation of qualified nonprof- plained that for tax year 2011, hospitals are it health insurance issuers to offer competi- required to complete all parts and sections Grandfathered Plans tive health plans in the individual and small of Schedule H, with the exception of lines group markets. The PPACA also enacted 1–7 of Part V, Section B, which relate to Certain plans or coverage existing as of Code Sec. 501(c)(29) to provide require- community health needs assessments. March 23, 2010 (the date of enactment of ments for tax exemption under Code Sec. the PPACA) are subject to only some provi- 501(a) for qualified nonprofit health insur- In proposed regulations, the IRS provided sions of the PPACA. These plans are known ance issuers (QNHIIs). guidance on the PPACA’s financial as- as “grandfathered plans.” sistance policy for tax-exempt charitable In Notice 2011-23, the IRS requested com- hospitals, describing how a hospital should The IRS, HHS and DOL issued interim final ments on Code Sec. 501(c)(29) and fol- determine the maximum amounts it may regulations in 2010 and subsequently amend- lowed up with temporary regulations (TD charge individuals eligible for financial as- ed the interim final regulations (TD 9506). 9574). The IRS explained that a QNHII sistance for emergency and other medically The agencies explained that a group health which has received a loan through the CO- necessary care (NPRM REG-130266-11, plan or group or individual health insurance OP program may be recognized as exempt 06/25/12). The proposed regulations also coverage is a grandfathered health plan with from taxation under Code Sec. 501(a) only set limits on various collection actions. respect to individuals enrolled on March 23, if, among other things, the QNHII gives 2010 regardless of whether an individual later notice to the agency. In Rev. Proc. 2012-11, renews the coverage. Additionally, a group a QNHII seeking recognition of exemption Patient-Centered Outcomes health plan that provided coverage on March under Code Sec. 501(c)(29) must submit a Research Trust Fund 23, 2010 generally is also a grandfathered letter application (rather than a form) with health plan with respect to new employees Form 8718, User Fee for Exempt Organiza- The PPACA establishes the Patient-Cen- (whether newly hired or newly enrolled) and tion Determination Letter Request. tered Outcomes Research Institute. The their families that enroll in the grandfathered Institute is funded by the Patient-Centered health plan after March 23, 2010. Outcomes Research Trust Fund. The Trust Tax-Exempt Charitable Hospitals Fund is to be financed, in part, by fees to IMPACT. In the IRS/HHS/DOL guid- The PPACA imposes additional require- be paid by issuers of specified health insur- ance, the agencies explained that there are ments on Code Sec. 501(c)(3) charitable ance policies (Code Sec. 4375) and spon- circumstances where a group health plan hospitals. Tax-exempt hospitals must con- sors of applicable self-insured health plans may need to make administrative changes duct a community health needs assessment (Code Sec. 4376). that do not affect the benefits or costs of a (CHNA) and adopt a financial assistance plan. For example, an insurer may stop policy. The PPACA also places limitations In NPRM REG-136008-11 (4/17/12), offering coverage in a market or a com- on charges to individuals who qualify for the IRS explained that the Code Sec. 4375 pany may change hands. In those cases, financial assistance and prohibits certain fee is calculated using the applicable dollar the employer can maintain grandfathered collection actions. Tax-exempt hospitals amount in effect for the policy year and one status for their employee plan. must satisfy these additional requirements of the permitted methods for determining to maintain their exempt status. the average number of lives covered under the policy during the policy year. The Code Automatic Enrollment In Notice 2011-52, the IRS described Sec. 4376 fee is calculated using the applica- Under the PPACA, an employer with more which organizations must conduct a ble dollar amount in effect for the plan year. than 200 full-time employees must auto- CCH Tax Briefing ©2012 CCH. All Rights Reserved.
  • 13. June 29, 2012 13matically enroll new full-time employees in have been preparing their SBCs for the coverage may not impose any preexistingone of the employer’s health benefits plans Fall 2012 health plan enrollment period. condition exclusion. The PPACA also pro-(subject to any waiting period authorized by hibits group health plans and health insur-law), and to continue the enrollment of cur- ance issuers offering group or individualrent employees in a health benefits plan of- Internal Appeals/External Reviews health insurance coverage from imposingfered through the employer. Employees may The PPACA generally requires non-grandfa- lifetime or annual limits on the dollar valueopt out of any coverage in which he or she thered health plans to provide internal and of health benefits. Additionally, a groupwas automatically enrolled. external claims and appeals processes for health plan, or a health insurance issuer of- adverse determinations. Adverse determina- fering group or individual health insuranceIn 2010, the IRS, HHS and DOL an- tions include denials, reductions, or termi- coverage, must not rescind coverage exceptnounced that employers would not need to nations of coverage. in the case of fraud or an intentional mis-comply with the automatic enrollment re- representation of a material fact.quirement until regulations are issued. The In 2010, the IRS, HHS and DOL issuedagencies have indicated in frequently asked interim final regulations, RIN 1545-BJ63/ COMMENT. A group health plan orquestions (FAQs) on the DOL website that TD 9494 (7/22/10), subsequently amend- group health insurance coverage mustregulations are expected by 2014. ed in 2011, RIN 1210-AB45, to imple- comply with the prohibition against pre- ment the requirements regarding internal existing condition exclusions; however, a claims and appeals and external review grandfathered health plan that is indi-Summary Of processes for group health plans and health vidual health insurance coverage is notBenefits/Uniform Glossary insurance coverage in the group and in- required to comply with the prohibition. dividual markets under the PPACA. TheThe PPACA directed the IRS, HHS and interim final regulations describe internal The IRS, HHS and DOL issued interimDOL to develop standards for use by a appeals’ processes and external reviews of final regulations in 2010. The agencies ex-group health plan and a health insurance adverse determinations. plained that the prohibition against pre-issuer offering group or individual health existing condition exclusions generally isinsurance coverage in compiling and pro- COMMENT. Notices of adverse determi- effective with respect to plan years (in theviding a summary of benefits and coverage nations must be provided in a culturally individual market, policy years) beginning(SBC) that accurately describes the benefits and linguistically appropriate manner. on or after January 1, 2014. However, theand coverage under the applicable plan or The DOL has posted model notices of ad- prohibition became effective for enrolleescoverage. The PPACA also required the de- verse determinations on its website. who are under 19 years of age for plan yearsvelopment of standards for the definitions (in the individual market, policy years) be-of terms used in health insurance coverage. ginning on or after September 23, 2010. Preventive ServicesIn TD 9575 (2/9/12), the IRS described The PPACA requires that non-grandfa- The agencies also explained that the annualthe required elements for the SBC includ- thered group health plans and health in- limits do not apply to health flexible spend-ing a description of coverage, cost-sharing surance issuers offering non-grandfathered ing accounts (health FSAs), Archer medicalrequirements, exceptions or limits under group or individual health insurance cover- savings accounts (Archer MSAs) and healththe plan, and coverage examples. The IRS age provide benefits for certain preventive savings accounts (HSAs); and plans and is-explained that an SBC must be provid- health services without cost sharing. suers cannot rescind coverage unless an indi-ed by a group health insurer to a group vidual was involved in fraud or made an in-health plan; by a group health insurer and The IRS, HHS and DOL issued interim tentional misrepresentation of material fact.a group health plan to participants and final regulations in 2010, followed by finalbeneficiaries; and by a health insurer to rules for women’s health services in 2012.individuals and dependents in the indi- The IRS, HHS and DOL subsequently re- Business Information Reportingvidual market. An SBC must be provided quested comments on accommodating reli- The PPACA requires businesses, charitieson application for coverage, upon renewal gious organizations while ensuring contra- and government entities to file an informa-or reissuance, and upon request. The IRS ceptive coverage. tion return (Form 1099) when they wouldalso provided a glossary of terms used in make annual purchases aggregating $600health insurance coverage. or more to a single vendor, other than to Patient’s Bill Of Rights a vendor that is a tax-exempt organization, IMPACT. The SBC requirements apply The PPACA generally provides that a group for payments made after December 31, to both grandfathered and non-grandfa- health plan and a health insurance issuer of- 2011 and reported in 2013 and years there- thered health plans. Employers reportedly fering group or individual health insurance after. The PPACA also repealed the long- CCH Tax Briefing
  • 14. 2012 Health Care Update14 standing reporting exception for payments one half of the provisions in the PPACA/ are under age 65 with incomes up to 133 made to corporations. HCERA requiring action by the IRS were percent of the federal poverty level (FPL). effective in 2010, which forced the IRS to The PPACA also requires states to maintain The Comprehensive 1099 Taxpayer Pro- conduct short term implementations and current Medicaid coverage levels through tection and Repayment of Exchange Sub- long term strategic planning simultane- 2013 for adults and 2019 for children. Ad- sidy Overpayments Act of 2011 repealed ously. GAO reported that the IRS gener- ditionally, the PPACA requires that for states the expansion of business information re- ally followed a risk management plan for to obtain Medicaid matching funds, a state porting under the PPACA as if it had never implementing provisions of the PPACA/ cannot make Medicaid eligibility standards, been enacted. HCERA, including outreach to affected methodologies, or procedures more restric- stakeholders. GAO also discovered that the tive than those in effect on March 23, 2010 COMMENT. The cost of repeal was off- IRS has made progress implementing the (the date of enactment of the PPACA). The set by increasing the amount of any excess PPACA/HCERA; however, work remains PPACA also makes some changes to the Chil- Code Sec. 36B premium assistance tax to be done in a number of areas, such as dren’s Health Insurance Program (CHIP). credit that must be repaid by a taxpayer, design of information technology systems subject to certain caps. and guidance for the health exchanges. The Supreme Court’s health care decision re- strains the federal government’s imposition IT systems. GAO reported that the IRS of this program on the states. While states IRS Implementation must modify existing IT systems or design are free to adopt the expanded requirements Of PPACA/HCERA new IT systems to support the health ex- (and to accept some federal funding), the changes. Data must be transmitted from Court held that the federal government can- Since passage of the PPACA and HCERA, the IRS to HHS (and vice versa) about tax- not punish recalcitrant states by eliminating the IRS has moved quickly to issue guid- payer income, filing status, family status, existing Medicaid funding benefits to states ance on provisions with immediate ef- and more. that choose not to expand their program. fective dates or effective dates in the near future. In June 2012, the Government COMMENT. HHS issued final regula- Accountability Office (GAO) reviewed Medicaid tions on Medicaid eligibility under the the IRS’s implementation of the PPACA/ The PPACA generally requires states to ex- PPACA in CMS-2011-0139-0489 HCERA. According to GAO, more than pand Medicaid to qualified individuals who (03/23/2012). CCH Tax Briefing ©2012 CCH. All Rights Reserved.
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