|Posted Wednesday, July 04, 2012|
HIGHLIGHTS OF PPACA/HCERA AND IRS GUIDANCE
The Supreme Court has left standing all tax provisions within PPACA and HCERA. This decision, which was unexpected by many Court-watchers, brings with it a sense of urgency to employers, individuals and other stakeholders that time is now g
rowing short both to prepare for those major changes soon to take place in 2013 and 2014 and also to implement provisions or benefits that are already effective and available.
The PPACA and HCERA add to or amend numerous sections of the Internal Revenue Code, resulting in the largest set of tax law changes in more than 20 years. The IRS has been working on many fronts to issue guidance on these provisions, to flesh out certain benefits and requirements, and to set up procedures necessary for compliance.
The remainder of this Briefing highlights the major tax provisions of PPACA and HCERA, and the guidance that has been developed since enactment.
INDIVIDUAL TAX PROVISIONS
The PPACA requires applicable individuals to carry minimum essential health coverage for themselves and their dependents (also known as the individual mandate) or otherwise pay a shared responsibility penalty for each month of noncompliance. The individual mandate provision is scheduled to be effective beginning in calendar year 2014. "The individual mandate requires most Americans to maintain ‘minimum essential’ health insurance coverage," Chief Justice Roberts wrote. "For individuals who are not exempt and do not receive health insurance through a third party, the means of satisfying the requirement is to purchase insurance from a private company."
Individuals who are exempt. Some individuals are exempt from the individual mandate. They include (not an exhaustive list) individuals covered by Medicaid and Medicare, incarcerated individuals, individuals not lawfully present in the United States, health care ministry members, members of an Indian tribe, and members of a religion conscientiously opposed to accepting benefits. No penalty will be imposed on individuals without coverage for fewer than 90 days (with only one period of 90 days allowed in a year). Generally, individuals with employer-provided health insurance, if it satisfies minimum essential coverage and affordability requirements, are also exempt.
Additionally, no penalty will be imposed on individuals who are unable to afford coverage (generally, an individual will be treated as unable to afford coverage if the required contribution for employer-sponsored coverage or a bronze-level plan on an Exchange exceeds eight percent of the individual's household income for the tax year). Those applicable individuals whose household income is below their income thresholds for filing income tax returns are also exempt.
Minimum essential coverage. Under the PPACA, minimum essential coverage generally includes (not an exhaustive list) coverage under an eligible employer-sponsored plan, an individual market plan, a grandfathered health plan (discussed below), coverage under Medicaid and Medicare, and other government-sponsored coverage, subject to some exceptions.
Calculating the penalty. The penalty is generally calculated by taking the greater of a flat dollar amount and a calculation based on a percentage of the taxpayer's household income, and is imposed on a monthly basis (one-twelfth per month of this ‘greater of ’ amount). The annual flat dollar amount is assessed per individual or dependent without coverage and is scheduled to be phased in over three years ($95 for 2014; $325 for 2015; and $695 in 2016 and subsequent years, indexed for inflation after 2016; onehalf of these amounts for individuals under the age of 18). The flat dollar amount is compared to a percentage of the extent to which the taxpayer's household income exceeds the income tax filing threshold. The applicable percentage is 1 percent for 2014, 2 percent for 2015, and 2.5 percent for 2016 and subsequent years. The taxpayer's penalty is equal to the greater of the flat dollar amount or the percentage of household income. The amount cannot exceed the national average of the annual premiums of a "bronze level" health insurance plan offered through a health exchange.
Premium Assistance Tax Credit
Beginning in 2014, eligible lower-income individuals who obtain coverage under a qualified health plan through an insurance exchange may qualify for a premium assistance tax credit under Code Sec. 36B unless they are eligible for other minimum essential coverage, including employer-sponsored coverage that is affordable and provides minimum value. The PPACA provides that advance payments of the premium assistance tax credit may be made directly to the insurer.
Medical Deduction Threshold
The PPACA increases the threshold to claim an itemized deduction for unreimbursed medical expenses from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI for tax years beginning after December 31, 2012. However, individuals (or their spouses) age 65 and older before the close of the tax year are exempt from the increased threshold, and the 7.5 percent threshold continues to apply until after 2016.
HEALTH CARE TAX CREDIT
The Health Care Tax Credit (HCTC) was extended and enhanced by the Trade Adjustment Assistance Act of 2011 (TAA 2011). The HCTC is refundable and can also be advanced. Individuals eligible for the HCTC include individuals receiving Trade Adjustment Allowances; individuals receiving wage subsidies in the form of Reemployment Trade Adjustment Assistance (RTAA) benefits; and individuals between the ages of 55 and 64 receiving payments from the Pension Benefit Guaranty Corporation (PBGC). The HCTC is scheduled to sunset after 2013.
Additional Tax On HSA/MSA Distributions
Distributions from a health savings account (HSA) or Archer medical savings account (Archer MSA) not used for the beneficiary's qualified medical expenses are generally included in the beneficiary's gross income. Distributions included in gross income are subject to an additional tax of 10 percent of the included amount, unless made after the beneficiary's death, disability, or attainment of the age of Medicare eligibility. Effective for distributions made after December 31, 2010, the additional tax on HSAs and Archer MSAs increases from 10 percent to 20 percent, in the case of HSAs, and from 15 percent to 20 percent, in the case of Archer MSAs, of the amount included in gross income.
Additional Medicare Tax
For tax years beginning after December 31, 2012, an additional 0.9 percent Medicare tax is imposed on wages and self-employment income of higher-income individuals. The additional Medicare tax applies to individuals with remuneration in excess of $200,000; married couples filing a joint return with incomes in excess of $250,000; and married couples filing separate returns with incomes in excess of $125,000.
Medicare Tax On Investment Income
The PPACA imposes a 3.8 percent Medicare contribution tax on unearned income effective for tax years beginning after December 31, 2012. The tax is imposed on the lesser of an individual's net investment income for the tax year or modified adjusted gross income in excess of $200,000 ($250,000 for married couples filing a joint return and $125,000 for married couples filing a separate return).
Net investment income is the excess of the sum of the following items less any otherwise allowable deductions properly allocable to such income or gain:
- Gross income from interest, dividends, annuities, royalties and rents unless such income is derived in the ordinary course of any trade or business (excluding a passive activity or financial instruments/commodities trading);
- Other gross income from any passive trade or business; and
- Net gain included in computing taxable income that is attributable to the disposition of property other than property held in any trade or business that is not a passive trade or business.
Indoor Tanning Excise Tax
Amounts paid for indoor tanning services performed after June 30, 2010, are subject to a 10 percent excise tax. Tanning salons are responsible for collecting the excise tax and paying over the tax on a quarterly basis. Tanning salons that fail to collect the tax from patrons are liable for the excise tax.
Dependent Coverage Until Age 26
The PPACA also requires group health plans and health insurance issuers providing dependent coverage for children to continue to make the coverage available for an adult child until turning age 26. The coverage requirement is effective for the first plan year beginning on or after September 23, 2010.
The IRS issued temporary regulations in TD 9482 (5/10/10). The IRS explained that, with respect to a child who has not attained age 26, a plan or issuer may not define dependent for purposes of eligibility for dependent coverage for children other than in terms of a relationship between a child and the participant. A plan or issuer may not deny or restrict coverage for a child who has not attained age 26 based on the presence or absence of the child's financial dependency (upon the participant or any other person), residency with the participant or with any other person, student status, employment, or any combination of those factors.
Medical Benefits For Children Under 27
The PPACA amended Code Sec. 105(b) to extend the exclusion from gross income for medical care reimbursements under an employer-provided accident or health plan to any employee's child who has not attained age 27 as of the end of the tax year. The amendment was effective March 30, 2010.
The IRS issued guidance in Notice 2010-38, which explains that the exclusion applies for reimbursements for health care of individuals who are not age 27 or older at any time during the tax year. The tax year is the employee's tax year (generally a calendar year). The IRS also explained that a child for purposes of the extended exclusion is an individual who is the son, daughter, stepson, or stepdaughter of the employee. A child includes an adopted individual and an eligible foster child.
There is no requirement that a child generally qualify as a dependent for tax purposes. There is also no requirement that an employer provide this coverage (as opposed to dependent coverage under age 26, described above).
Student Loan Repayment Programs
The PPACA provides for exclusion of assistance provided to participants in state student loan repayment programs for health professionals. The assistance is intended to increase the availability of health care in areas traditionally underserved by health professionals.
BUSINESS TAX PROVISIONS
Shared Responsibility For Employers
The PPACA's employer shared responsibility provisions (also known as the "employer mandate") specify that an applicable large employer may be subject to a shared responsibility payment (also known as an "assessable payment") if any full-time employee is certified to receive an applicable premium tax credit or cost-sharing reduction payment. Generally, this may occur where either:
- The employer does not offer to its fulltime employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan; or
- The employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that either is unaffordable relative to an employee's household income or does not provide minimum value (that pays at least 60 percent of benefits).
The provision applies to months beginning after December 31, 2013.
For purposes of the employer shared responsibility payment, an applicable large employer is an employer that on average employed 50 or more full-time equivalent employees on business days during the preceding calendar year. A full-time employee is an employee who is employed on average at least 30 hours per week.
The PPACA requires each state to establish an American Health Benefit Exchange and Small Business Health Options Program (SHOP Exchange) to provide qualified individuals and qualified small business employers access to health plans. Exchanges will have four levels of coverage: bronze, silver, gold, or platinum. In early 2012, HHS reported that 34 states and the District of Columbia have received grants to fund their progress toward building Exchanges. HHS also provided an Exchange blueprint that states may use. If a state decides not to operate an Exchange for its residents, HHS will operate a federally-facilitated Exchange (FFE).
Small Employer Health Insurance Tax Credit
The PPACA created the temporary Code Sec. 45R small employer health insurance tax credit. For tax years 2010 through 2013, the maximum credit is 35 percent of health insurance premiums paid by small business employers (25 percent for small taxexempt employers). The credit is scheduled to increase to 50 percent for small business employers (35 percent for small tax-exempt employers) after 2013 (but will terminate after 2015). However, in tax years that begin after 2013, an employer must participate in an insurance exchange in order to claim the credit, and other modifications and restrictions on the credit apply.
In Notice 2010-44, the IRS provided guidance on the small employer health insurance tax credit, including transition relief for tax years beginning in 2010 with respect to the requirements for a qualifying arrangement. The IRS expanded on the guidance in Notice 2010-82. The IRS explained in Notice 2010-82 that a qualified employer must have:
- Fewer than 25 full-time equivalent employees (FTEs) for the tax year;
- Average annual wages of its employees for the year of less than $50,000 per FTE; and
- A "qualifying arrangement" that is maintained.
Exchange-Participating Qualified Health Plans Offered Through Cafeteria Plans
For tax years beginning after December 31, 2013, a cafeteria plan cannot offer a qualified health plan offered through an American Health Benefit Exchange.
Health FSAs Offered In Cafeteria Plans
Effective for tax years beginning after December 31, 2012, the PPACA limits contributions to health flexible spending arrangements (health FSAs) to $2,500, down from an overall $5,000 FSA limit. The $2,500 limitation is adjusted annually for inflation for tax years beginning after December 31, 2013.
The PPACA revises the definition of medical expenses for health flexible spending arrangements (health FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs) and Archer Medical Savings Accounts (Archer MSAs). After December 31, 2010, expenses incurred for a medicine or drug are treated as a reimbursement for a medical expense only if the medicine or drug is a prescribed drug or insulin
Retiree Prescription Drug Subsidy
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 provides a subsidy of 28 percent of covered prescription drug costs to employers that sponsor group health plans with drug benefits to retirees. PPACA requires the amount otherwise allowable as a business deduction for retiree prescription drug costs to be reduced by the amount of the excludable subsidy-payments received, effective for tax years beginning after December 31, 2012.
Limitation on Employee Remuneration
The PPACA limits the allowable deduction to $500,000 for applicable individual remuneration and deferred deduction remuneration attributable to services performed by applicable individuals that is otherwise deductible by a covered health insurance provider in taxable years beginning after December 31, 2012.
In Notice 2011-2, the IRS explained that the provision may affect deferred compensation attributable to services performed in a tax year beginning after December 31, 2009. The IRS also provided a de minimis rule.
Medical Device Excise Tax
The PPACA imposes an excise tax on the sale of certain medical devices by the manufacturer, producer, or importer of the device in an amount equal to 2.3 percent of the sale price. The excise tax applies to sales of taxable medical devices after December 31, 2012.
Retail exemption. The PPACA exempts certain devices from the excise tax, such as eyeglasses, contact lenses and hearing aids. In the proposed regulations, the IRS provided a facts and circumstances approach to evaluating whether a taxable medical device is of a type that is generally purchased by the general public at retail for individual use. A device is considered to be of a type generally purchased by the general public at retail for individual use if (i) the device is regularly available for purchase and use by individual consumers who are not medical professionals, and (ii) the device's design demonstrates that it is not primarily intended for use in a medical institution or office, or by medical professionals.
Credit For Therapeutic Discovery Projects
Eligible taxpayers may qualify for a 50-percent tax credit for investments in therapeutic discovery projects. The PPACA also established the qualifying therapeutic discovery project program to consider and award certifications for qualified investments eligible for the credit. The credit was available for qualified investments made or to be made in 2009 and 2010. Additionally, the PPACA provides for grants in lieu of tax credits for investments in therapeutic discovery projects.
The PPACA generally requires employers to disclose the aggregate cost of applicable employer-sponsored coverage on an employee's Form W-2 for tax years beginning on or after January 1, 2011. Reporting is for informational purposes only.
In Notice 2010-69, the IRS made reporting optional for all employers for 2011. In Notice 2012-9, the IRS provided transition relief for small employers. For 2012 Forms W-2 (and W-2s issued in later years, unless and until further guidance is issued), an employer is not subject to reporting for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year, the IRS explained.
Health Care Coverage Reporting
The PPACA requires every health insurance issuer, sponsor of a self-insured health plan, government agency that administers government-sponsored health insurance programs and other entity that provides minimum essential coverage to file an annual return reporting information for each individual for whom minimum essential coverage is provided (Code Sec. 6055 reporting). Additionally, every applicable large employer (within the meaning of Code Sec. 4980H(c)(2)) that is required to meet the shared employer responsibility requirements of the PPACA during a calendar year must file a return with the IRS reporting the terms and conditions of the health care coverage provided to the employer's full-time employees for the year (Code Sec. 6056 reporting). The reporting requirements apply to calendar years beginning on or after January 1, 2014.
Because the PPACA is being implemented by multiple federal agencies, the statute authorizes the IRS to disclose return information to HHS and other agencies. Return information is scheduled to be disclosed for, among other purposes, eligibility for the Code Sec. 36B premium assistance tax credit.
In NPRM REG-119632-11, the IRS explained that it will disclose taxpayer identity information, filing status, the number of individuals for which a deduction under Code Sec. 151 was allowed ("family size"), modified adjusted gross income, and the tax year to which the information relates or, alternatively, that the information is not available. Where modified adjusted gross income is not available, the IRS will disclose adjusted gross income.
Nonprofit Health Insurance Issuers
The PPACA establishes the Consumer Operated and Oriented Plan (CO-OP) Program. The CO-OP Program is intended to encourage the creation of qualified nonprofit health insurance issuers to offer competitive health plans in the individual and small group markets. The PPACA also enacted Code Sec. 501(c)(29) to provide requirements for tax exemption under Code Sec. 501(a) for qualified nonprofit health insurance issuers (QNHIIs).
Tax-Exempt Charitable Hospitals
The PPACA imposes additional requirements on Code Sec. 501(c)(3) charitable hospitals. Tax-exempt hospitals must conduct a community health needs assessment (CHNA) and adopt a financial assistance policy. The PPACA also places limitations on charges to individuals who qualify for financial assistance and prohibits certain collection actions. Tax-exempt hospitals must satisfy these additional requirements to maintain their exempt status.
Certain plans or coverage existing as of March 23, 2010 (the date of enactment of the PPACA) are subject to only some provisions of the PPACA. These plans are known as "grandfathered plans."
The IRS, HHS and DOL issued interim final regulations in 2010 and subsequently amended the interim final regulations (TD 9506). The agencies explained that a group health plan or group or individual health insurance coverage is a grandfathered health plan with respect to individuals enrolled on March 23, 2010 regardless of whether an individual later renews the coverage. Additionally, a group health plan that provided coverage on March 23, 2010 generally is also a grandfathered health plan with respect to new employees (whether newly hired or newly enrolled) and their families that enroll in the grandfathered health plan after March 23, 2010.
Patient's Bill Of Rights
The PPACA generally provides that a group health plan and a health insurance issuer offering group or individual health insurance coverage may not impose any preexisting condition exclusion. The PPACA also prohibits group health plans and health insurance issuers offering group or individual health insurance coverage from imposing lifetime or annual limits on the dollar value of health benefits. Additionally, a group health plan, or a health insurance issuer offering group or individual health insurance coverage, must not rescind coverage except in the case of fraud or an intentional misrepresentation of a material fact.
A group health plan or group health insurance coverage must comply with the prohibition against preexisting condition exclusions; however, a grandfathered health plan that is individual health insurance coverage is not required to comply with the prohibition.
The IRS, HHS and DOL issued interim final regulations in 2010. The agencies explained that the prohibition against preexisting condition exclusions generally is effective with respect to plan years (in the individual market, policy years) beginning on or after January 1, 2014. However, the prohibition became effective for enrollees who are under 19 years of age for plan years (in the individual market, policy years) beginning on or after September 23, 2010.
The agencies also explained that the annual limits do not apply to health flexible spending accounts (health FSAs), Archer medical savings accounts (Archer MSAs) and health savings accounts (HSAs); and plans and issuers cannot rescind coverage unless an individual was involved in fraud or made an intentional misrepresentation of material fact.
Business Information Reporting
The PPACA requires businesses, charities and government entities to file an information return (Form 1099) when they would make annual purchases aggregating $600 or more to a single vendor, other than to a vendor that is a tax-exempt organization, for payments made after December 31, 2011 and reported in 2013 and years thereafter. The PPACA also repealed the long-standing reporting exception for payments made to corporations.
The Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 repealed the expansion of business information reporting under the PPACA as if it had never been enacted.
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