US Tax: Baucus introduces health care reform proposal; includes excise tax on 'Cadillac' plans

Senate Finance Committee Chairman Max Baucus, D-Mont., unveiled his much-anticipated chairman's mark of comprehensive health care reform legislation early September 16. As proposed, the America's Healthy Future Act of 2009 retains the revenue provisions included in the draft summary Baucus released September 8, most notably an excise tax on so-called "Cadillac" health plans offered by insurance companies. Additionally, the bill includes a corporate information reporting provision, a host of new fees targeting health-related industries, and new requirements for nonprofit hospitals.

Statutory language is not yet available, but a detailed description of the proposal has been provided by the Joint Committee on Taxation (JCT) staff.


A Finance Committee mark-up of the proposal is set for September 22, but the drafting process could be difficult. The chairman's mark was based in part on negotiations among the so-called Gang of Six, a group of Republican and Democratic Senate taxwriters who have been attempting to forge a bipartisan compromise. But despite ongoing negotiations, the Republican contingent of the Gang of Six reportedly has not signed on to the package and it is unclear how much, if any, Republican support the bill will garner in the rest of the Senate. Some Senate Democrats apparently have their own issues with the proposal as well.


Excise tax on high-cost insurance and other revenue provisions

The chairman's mark would impose a 35 percent excise tax on employer-provided health coverage with an aggregate value that exceeds $8,000 for individuals or $21,000 for families. The threshold amounts would apply to 2013 and would be indexed to the Consumer Price Index for Urban Consumers thereafter.

The tax would be imposed on the issuer of the insurance. The employer would pay the excise tax, however, where the employer acts as the plan administrator to a self-insured group health plan, a health flexible spending arrangement (FSA), or a health reimbursement arrangement (HRA), and for employer contributions to a health savings account (HSA).

The amount subject to the excise tax is the sum of the premiums for health insurance coverage, the amount of salary deductions for Health FSAs for the taxable year, and the amount of employer contributions to HSAs, minus the threshold amount. Health insurance coverage includes the premiums for medical, dental, vision, and other supplementary health insurance coverage.

The provision requires that the employer calculate and report the amount subject to excise tax to each insurer and plan administrator and to the Treasury Secretary. The insurer or plan administrator is then responsible for calculating, reporting, and paying the excise tax.

Employers would be penalized for undervaluing the insurance cost subject to the excise tax. The penalty would equal the amount of any additional excise tax that the insurer or administrator would have owed if the employer had reported correctly, plus interest to be accrued from the date the tax would have been otherwise paid to the date the penalty is paid. The excise tax would phase in for the 17 "highest cost" states. In these states, the excise tax threshold would be increased by 20 percent in the first year, 10 percent in the second year, and 5 percent in the third year.

The excise tax would be effective for tax years beginning after December 31, 2012. The JCT estimates that the provision would raise $215 billion over 10 years. Because of the delayed effective date, the provision would only raise revenue for seven of the ten budget years.

Limit on FSA contributions – The bill would impose a limit of $2,000 per taxable year on employee salary reductions for coverage under a cafeteria plan FSA. The provision would be made effective for years beginning after December 31, 2012. It would not apply to HRAs. (JCT 10-year revenue estimate: $16.5 billion.)

Corporate information reporting – Under the chairman's mark, businesses would be required to file a Form 1099 to report payments made to a corporation totaling $600 or more in a calendar year. The provision would be effective for payments made in taxable years beginning after December 31, 2011. (JCT 10-year revenue estimate: $17.1 billion.)

Definition of qualified medical expenses – The proposal would revise the definition of qualified medical expenses for HRAs, Health FSAs, HSAs, and Archer Medical Savings Accounts (MSAs) to conform to the existing definition under the itemized deduction for medical expenses. The modification would not apply to prescription over-the-counter medication.

Nonprescription over-the-counter drugs would not be eligible for reimbursement through an HSA or Archer MSA. The modification would be effective for taxable years beginning after December 31, 2009. (JCT 10-year revenue estimate: $5.4 billion.)

Deduction for subsidies for retiree drug benefits – The chairman's mark would eliminate the deduction for the subsidy for employers who provide prescription drug plans for their retirees eligible for Medicare Part D. This would be effective for taxable years beginning after December 31, 2010. (JCT 10-year revenue estimate: $4 billion.)

Tax-exempt hospitals – The chairman's mark would impose new requirements on section 501(c)(3) tax-exempt hospitals.

For example, the hospitals would be subject to periodic community needs assessments. The hospital would be required to report the findings to the IRS. Failure to adequately report would trigger a penalty. The modifications would be effective for taxable years beginning after the date of enactment. (JCT 10-year revenue estimate: negligible revenue effect.)

Higher penalties for HSAs – The current-law penalty of 10 percent on withdrawals from HSAs not used for qualified medical expenses would be increased to 20 percent for ineligible withdrawals made before age 65, effective for disbursements made during tax years starting after December 31, 2009. (JCT 10-year revenue estimate: $1.3 billion.)

New fees – Health-related industries would face a range of new fees, although it is unclear whether these fees would be administered through the tax code. The chairman's mark would impose annual fees on health insurance providers ($6 billion), medical device manufacturers ($4 billion), pharmaceutical manufacturers ($2.3 billion), and clinical laboratories ($750 million). The fees would take effect in 2010 and would be allocated by market share. They would not be deductible for U.S. income tax purposes. (JCT 10-year revenue estimate: $93.2 billion.)

Employer health insurance reporting – The chairman's mark would require an employer to disclose the value of health benefits it provides for each employee's health insurance coverage on the employee's annual Form W-2. To the extent that the employee receives health insurance coverage under multiple plans, the employer would disclose the aggregate value of all such health coverage, but exclude the value of a health FSA. The provision would be effective beginning in the first taxable year after December 31, 2009. (JCT 10-year revenue estimate: negligible revenue effect.)


Individual and employer mandates

The chairman's mark would require individuals to obtain and maintain a minimum level of health insurance beginning in 2013. Existing health plans would be grandfathered. An excise tax would be imposed on individuals who fail to obtain adequate coverage.

Employers would not be required to provide coverage to employees. An employer with more than 50 employees that does not offer coverage would be charged a fee for each full‐time employee (defined as those working 30 or more hours a week) who receives a tax credit for health insurance through a state exchange. The fee would be based on the average exchange subsidy received by the employees and would be capped at $400 per total number of employees (whether they are receiving a tax credit or not).

An employer with 200 or more employees would be required to provide automatic enrollment for new employees. Individuals with other acceptable coverage may opt out of an employer-provided plan.

The revenue effects of these provisions were not scored by the JCT.


Bipartisan objections

Despite Baucus's attempts to win bipartisan support, the three Republican taxwriters active in the Gang of Six discussions – ranking member Charles Grassley of Iowa, Olympia Snowe of Maine, and Mike Enzi of Wyoming – have refused to attach their support to the bill. Grassley said September 15 that the bill "does not meet the shared goals for affordable, accessible health coverage that we set forth when this process began" and that "there are still some serious outstanding issues that have yet to be resolved." For their part, Snowe and Enzi have a number of nontax policy concerns that stopped them from supporting the legislation.

Baucus may have problems with his own party as well. Several Democrats, including Finance Health Subcommittee Chairman John Rockefeller of West Virginia and Finance member Ron Wyden of Oregon have signaled their discontent with the current bill. Rockefeller has argued that his middle-class constituents may be hit hard by the proposed excise tax under the individual coverage mandate, while Wyden has said that the bill would limit choice and be too costly for low-income taxpayers.

Given the range of objections, it is unclear how long the mark-up process will take, and whether or not any changes to the bill that may be adopted will secure a filibuster-proof majority on the Senate floor.

Senate Majority Leader Harry Reid, D-Nev., said September 15 that he aims to have the full Senate consider a comprehensive health care reform bill by September 28.