us tax: Senate taxwriters approve comprehensive health care bill
The bill is the product of several months of closed-door deliberations by a bipartisan group of negotiators and an eight-day mark-up. Ultimately, it was crafted by Finance Chairman Max Baucus, D-Mont., as the bipartisan negotiators in the "Gang of Six" failed to produce a workable agreement. Significantly, moderate Republican Olympia Snowe of Maine, whose support committee Democrats were trying to secure, ultimately broke ranks with her GOP colleagues and voted for the bill.
She cautioned, however, that she might withhold her support in the future if Democratic leaders make too many changes to the Finance Committee package before it reaches the Senate floor.
"My vote today is my vote today; it doesn't forecast what my vote will be tomorrow," Snowe told the committee. Statutory language is not yet available, but a detailed description of the bill as approved has been provided by the Finance Committee staff. Revenue estimates are available from the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) staff.
Excise tax on high-cost insurance
The Finance Committee bill generally would impose a 40 percent excise tax on employer-provided health coverage with an aggregate value that exceeds $8,000 for individuals or $21,000 for families, for tax years beginning after December 31, 2012. These threshold amounts would be indexed to the Consumer Price Index for Urban Consumers plus 1 percent beginning in 2014.
Who pays – The excise tax would be imposed on the issuer of the insurance. The plan administrator would pay the tax in the case of a self-insured group health plan, a health flexible spending arrangement (FSA), or a health reimbursement arrangement (HRA). The employer would pay the excise tax when it acts as plan administrator for the same benefit arrangements and with respect to employer contributions to a health savings account (HSA).
Calculation and reporting – 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 premium for health coverage provided through an HRA is also included in the aggregate amount. The amount subject to the high-premium excise tax does not include fixed indemnity health coverage that is purchased by the employee with after-tax dollars.
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 otherwise would have been paid to the date the penalty is paid.
Exceptions – 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, then reduced by half each year thereafter until the additional premium iseliminated entirely for taxable years beginning after December 31, 2015.
For retired individuals over the age of 55 and for plans that cover employees engaged in high-risk professions, the threshold amount is increased by $1,850 for individual coverage and $5,000 for family coverage. High-risk professions include law enforcement officers, firefighters, members of a rescue squad or ambulance crew, and individuals engaged in the construction, mining, agriculture (but not food processing), forestry, or fishing industries.
Under the provision, an individual's threshold cannot be increased by more than $1,850 for individual coverage or $5,000 for family coverage, even if the individual would qualify for an increased threshold both on account of his or her status as a retiree over age 55 and as a participant in a plan that covers employees in a high-risk profession.
Effective date – The excise tax would be effective for tax years beginning after December 31, 2012. The JCT estimates that the provision would raise $201.4 billion over 10 years. Because of the delayed effective date, the provision would only raise revenue for seven of the ten budget years.
Executive comp restrictions for health insurance providers
The approved bill would prohibit any health insurance provider from deducting under section 162(m) executive pay over $500,000 per year if at least 25 percent of the provider's gross premium income is derived from health insurance plans that meet the minimum creditable coverage requirements in the legislation. This limitation also would apply to performance based compensation and commissions. Currently, businesses may deduct up to $1 million per year per executive.
Individuals subject to the restriction include all officers, employees, directors, and other workers or service providers (such as consultants) performing services for or on behalf of a covered health insurance provider. Employers with self-insured plans are not considered covered health insurance providers for purposes of this provision. The provision would be effective for remuneration paid in taxable years beginning after 2012 with respect to services performed after 2009, and would raise an estimated $600 million over 10 years according to the JCT.
The Finance Committee's decision to include this provision reflects the continued scrutiny of executive compensation by taxwriters who, last year, capped the tax deduction at $500,000 for financial institutions that had received assistance under the government's Troubled Asset Relief Program.
New fees on health-related industries
The bill would impose annual fees on U.S. health insurance providers ($6.7 billion), medical device manufacturers ($4 billion), and pharmaceutical manufacturers ($2.3 billion). The fees would take effect in 2010 and are estimated to raise $121.2 billion over 10 years.
Few details available – Based on the conceptual language available from the Finance Committee, it is unclear whether these fees would be administered through the tax code or how they would be structured. These questions are expected to be answered when the committee releases legislative language for the bill.
The Finance Committee does explain that fees for pharmaceutical and medical device manufacturers would be allocated by prior-year domestic market share. Fees for health insurance providers would be apportioned among the providers based on relative market share, described as a provider's net premiums written with respect to health insurance as a percentage of the total reported net premiums written with respect to health insurance for all U.S. health insurance providers. The fee assessed would be determined by the provider's market share in the preceding calendar year.
The fees would not be deductible for U.S. income tax purposes.
Other revenue provisions
Corporate information reporting – Businesses would be required to file a Form 1099 to report payments made to a corporation totaling $600 or more in a calendar year, effective for payments made after December 31, 2011. (JCT 10-year revenue estimate: $17.1 billion.)
Limit on FSA contributions – The bill would impose a limit of $2,500 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, 2010.
It would not apply to HRAs. (JCT 10-year revenue estimate: $14.6 billion.)
Itemized deduction for medical expenses – The bill would increase the adjusted gross income (AGI) threshold for claiming the itemized deduction for medical expenses from 7.5 percent of AGI to 10 percent for regular income tax purposes. The provision does not change the alternative minimum tax treatment of the deduction. For seniors age 65 and older and their spouses, the threshold would remain at 7.5 percent. The proposal would be effective for taxable years beginning after December 31, 2012. (JCT 10-year revenue estimate: $15.2 billion.)
Definition of qualified medical expenses – This provision 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 theitemized deduction for medical expenses. The modification would not apply to doctor-prescribed 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 bill would reduce the deduction for retiree prescription drug expenses by the current excluded subsidy given to 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: $5.4 billion.)
Tax-exempt hospitals – The bill would impose new requirements on section 501(c)(3) tax-exempt hospitals, including a requirement to conduct community needs assessments at least once every three years and to report the findings to the IRS. Failure to complete a needs assessment would result in a penalty on the organization of up to $50,000. A hospital that fails to disclose how it is meeting needs identified in the assessment would be subject to existing incomplete return penalties.
The bill also includes provisions related to financial assistance and collection policies, as well as new reporting requirements. 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 ineligible HSA withdrawals – 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, 2010. (JCT 10-year revenue estimate: $1.3 billion.)
Employer health insurance reporting – The bill 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.)
Small Business Health Care Affordability Tax Credit – The Finance Committee bill would allow nonprofit companies to take advantage of the Small Business Health Care Affordability Tax Credit. In 2011 and 2012, eligible nonprofits that contribute to the cost of health care coverage for their employees could receive a credit for up to 25 percent of their contribution. Once the health insurance exchanges are operating in 2013, qualified nonprofits purchasing insurance through the exchanges could receive a tax credit for two years that covers up to 35 percent of their contribution.
Refundable tax credit for low-income individuals – The bill would provide a refundable tax credit for individuals and families who purchase insurance through a state health exchange. The credit would be available for single or joint filers with a modified gross income between 134 percent and 300 percent of the federal poverty level between enactment and December 31, 2012. Beginning in 2013, the credit would be available for those making between 100 percent and 133 percent of poverty. A cost estimate is not currently available.
Indian tribe health benefits – Native Americans would be permitted to exclude the value of specified Indian tribe health benefits from gross income for tax purposes. According to the JCT, the new provision would cost less than $50 million over 10 years and would be effective for health benefits and coverage provided after the date of enactment.
Temporary credit for chronic disease therapy – The bill provides a credit for businesses with 250 or fewer employees to invest in acute and chronic disease research. The credit would equal 50 percent of the qualified investment. The credit has a $1 billion cap, and qualifying investments made during 2009 and 2010 would be eligible. Treasury would award certification for eligibility. The JCT estimates that the provision would cost $900 million over 10 years.
Individual and employer mandates
The Finance Committee bill 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 of $750 per adult in the household would be imposed on individuals who fail to obtain adequate coverage. The penalty for failure to pay the excise tax would be limited to withholding of federal payments due. The tax phases in beginning in 2013 and would reach $750 in 2017. The CBO has estimated that the excise tax would raise $4 billion between 2010 and 2019.
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). The fee would not be deductible for federal income tax purposes.
An employer that provides health insurance coverage and has 200 or more employees must automatically enroll employees into the health insurance plan it offers. Individuals with other acceptable coverage may opt out of an employer-provided
plan.
The CBO estimates that employer fees would raise $23 billion between 2010 and 2019.
Next Stop: Senate Floor
Now that the Finance Committee bill has been approved, Senate Democratic leaders can formally merge it with the largely nontax legislation approved by the Health, Education, Labor and Pensions Committee this summer, although negotiations have already commenced. Floor action on the combined package could come as early as the week of October 19.
TAX NEWS - October 2009
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