If you do feel compelled to read through the actual legislation yourself, it’s probably a good idea to first review the Joint Committee’s explanation, which you can find at http://www.jct.gov/publications.html?func=startdown&id=3673 (released on 3/21/10 as document JCX-18-10 and entitled Technical Explanation Of The Revenue Provisions Of The “Reconciliation Act Of 2010,” As Amended, In Combination With The “Patient Protection And Affordable Care Act”).
In an attempt to clarify the overall impact, this overview incorporates the following two Acts that recently became law and addresses the law as it stands after their combined passage. They are as follows:
- H.R.3590 - Patient Protection and Affordable Care Act - signed into law on 3/23/10. (Available at http://hdl.loc.gov/loc.uscongress/legislation.111hr3590)
- H.R.4872 - Health Care and Education Affordability Reconciliation Act of 2010 - signed into law on 3/30/10. (Available at http://hdl.loc.gov/loc.uscongress/legislation.111hr4872)
While the thousands of pages of text in the new law address a host of issues relating to health care related items, including taxes (as well as seemingly unrelated items such as student loans), the key tax issues fall into a handful of categories that affect individuals and businesses:
- New and/or Increased Taxes and Fees
- New and/or Expanded Credits and Incentives
- Deduction/Exclusion Limitations and/or Restrictions
- Information Reporting and Disclosure
- New and/or Expanded Administrative Requirements
Without further ado, here is a brief discussion of the more widely-applicable tax related provisions.
NEW AND/OR INCREASED TAXES AND FEES
BUSINESSES
- EXCISE TAX ON HIGH COST EMPLOYER-SPONSORED HEALTH COVERAGE
- Imposes a new nondeductible 40% excise tax on “coverage providers” of employer-sponsored health insurance if the aggregate value of such coverage for an employee exceeds a specified threshold. Depending on the type of coverage, “coverage providers” are generally employers, and/or plan administrators.
- The threshold for 2018 for individuals is $10,200 and for families it is $27,500, but will be subject to adjustment for differences in increases in health care costs between 2010 and 2018 compared to projections. In addition, adjustments will be made based on differences in age, gender, and high-risk profession rates.
- Effective for taxable years beginning after 12/31/17.
- IMPOSITION OF ANNUAL FEE ON BRANDED PRESCRIPTION PHARMACEUTICAL MANUFACTURERS AND IMPORTERS
- Imposes an annual nondeductible fee on entities that manufacture and/or import branded prescription drugs for sale to (or attributable to) certain government programs. The multi-billion dollar fees are to be apportioned amongst the covered businesses based on their relative shares of branded prescription drug sales for the prior year (more heavily weighted for businesses with higher sales).
- Effective for calendar years beginning after 12/31/10.
- IMPOSITION OF ANNUAL FEE ON HEALTH INSURANCE PROVIDERS
- Imposes an annual nondeductible fee on certain entities that provide health insurance coverage of United States health risks as part of their business.
- The multi-billion dollar fees are to be apportioned amongst the covered businesses based on their relative shares of their health insurance net written premiums for the prior year (more heavily weighted for businesses with higher sales).
- Effective for calendar years beginning after 12/31/13.
- EMPLOYER RESPONSIBILITY FOR EMPLOYEE COVERAGE
- Requires certain “large” employers (generally those with an average of at least 50 full time employees during the prior calendar year) to offer minimum essential health care coverage. Those failing to do so are generally subject to a nondeductible excise tax of $166.67 per employee per month (in excess of a 30-employee threshold).
- Also imposes a nondeductible excise tax on large employers that do offer employees the opportunity to sign up for minimal essential coverage, but one or more instead purchase coverage through an exchange that allows or pays a premium tax credit or cost-sharing reduction. The penalty for this situation is $250 per employee per month, and is limited to the amount of the first penalty noted above (which also serves as an overall limitation).
- Each of the dollar amounts above will be adjusted for inflation after 2014.
- Effective starting after 12/31/13.
- EXCISE TAX ON MEDICAL DEVICES
- Imposes a 2.3% excise tax on the sale of certain medical devices, to be borne by manufacturers, producers, or importers of covered devices. Taxable medical devices are those defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 321) that are intended for humans. This generally means the following:
- An instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, which is (1) recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them, (2) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or (3) intended to affect the structure or any function of the body of man or other animals, and which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of its primary intended purposes. (One example might be an Ultrasonic air embolism monitor used as a monitoring device in the area of Anesthesiology.)
- However, the following items are generally excluded:
- Eyeglasses, contact lenses, hearing aids, and any other items determined to be typically purchased at retail by the general public for their own personal use.
- Effective for sales after 12/31/12.
INDIVIDUALS
- ADDITIONAL HOSPITAL INSURANCE TAX ON HIGH-INCOME TAXPAYERS
- Imposes an additional 0.9% tax on wages (and self-employment income) of those earning more than a threshold amount. That threshold is $250,000 for joint (or surviving spouse) returns, $125,000 of married-filing-separate returns, and $200,000 for other returns.
- Effective for compensation received in tax years beginning after 12/31/12.
- EXCISE TAX ON INDOOR TANNING SERVICES
- Imposes (on the individual using the services) a 10% tax on the amount paid for the indoor tanning services.
- Effective for services performed on or after 7/1/10.
- INCREASE IN ADDITIONAL TAX ON DISTRIBUTIONS FROM HSAS AND ARCHER MSAS NOT USED FOR QUALIFIED MEDICAL EXPENSES
- Increases from 10% to 20% the additional tax imposed on disqualifying distributions from an HSA or Archer MSA.
- Effective for disqualifying distributions made during tax years starting after 12/31/10.
- EXCISE TAX ON INDIVIDUALS WITHOUT ESSENTIAL HEALTH BENEFITS COVERAGE
- Requires most U.S. citizens and legal residents, as well as their dependents, to maintain a minimum level of health care coverage. Those who do not will generally be subject to a penalty. This penalty is based on household income, with a maximum penalty (per month, per person) of $95 for 2014, $325 for 2015, $695 for 2016, and indexed for inflation thereafter. Penalty amounts for minors (under 18) are 50% of the adult amounts, and the maximum family penalty is 300% of the individual adult penalty (but further limited to certain national averages).
- Effective for tax years starting after 12/31/13.
- UNEARNED INCOME MEDICARE CONTRIBUTION
- Imposes 3.8% Medicare tax on individuals, trusts, and estates with unearned income and that have modified adjusted gross income in excess of certain thresholds.
- For individuals, that tax is based on the lesser of (1) net investment income or (2) modified AGI over $250,000 (for joint or surviving spouse returns; $125,000 for married filing separate; all other individuals have a threshold of $200,000).
- For trusts and estates, the tax is based on the lesser of (1) undistributed net investment income or (2) the excess of AGI over the dollar amount where the highest income tax bracket starts. Caveat: For trusts and estates, the threshold (for 2010) starts at only $11,200, far below the those applicable to individuals.
- Note that tax-free investments (e.g., certain bonds) are exempt from this tax.
- Effective for tax years beginning after 12/31/12.
NEW AND/OR EXPANDED CREDITS AND INCENTIVES
BUSINESSES
- ESTABLISHMENT OF SIMPLE CAFETERIA PLANS FOR SMALL BUSINESSES
- Provides eligible small employers with a safe harbor exemption from some of the nondiscrimination rules that otherwise apply to cafeteria plans. Eligible employers are generally those that (1) allow all employees to participate and elect any available benefit under the plan, (2) provide a minimum contribution for all non-highly-compensated employees, and (3) have no more than 100 employees (as an average for the 2 prior years).
- Effective for tax years beginning after 12/31/10.
- QUALIFYING THERAPEUTIC DISCOVERY PROJECT CREDIT
- This provision is a real sleeper and has had surprisingly little press despite its generous provisions. It provides a 50% nonrefundable investment tax credit to certain small businesses (with no more than 250 employees) that invest in qualifying “therapeutic discovery” projects in years beginning in 2009 or 2010. Covered projects are those designed to:
- Treat or prevent diseases or conditions via pre-clinical activities, clinical trials, and clinical studies, or carrying out research protocols, for the purpose of obtaining approval of a product under specific sections of the Federal Food, Drug, and Cosmetic Act or the Public Health Service Act;
- Diagnose diseases or conditions or to determine molecular factors related to diseases or conditions by developing molecular diagnostics to guide therapeutic decisions; or
- Develop a product, process or technology to further the delivery or administration of therapeutics.
- Qualified investments are the aggregate amount of costs paid or incurred for the tax year for expenses necessary for and directly related to the conduct of a qualifying therapeutic discovery project, but exclude (1) compensation paid to the CEO and the four highest paid officers other than the CEO, (2) interest expense, (3) facility maintenance expenses, (4) service costs as determined under the uniform capitalization rules, and (5) any other expense determined by the Secretary to be appropriate under the circumstances.
- Alternatively, qualifying taxpayers may generally elect to receive a grant instead of a credit with respect to their qualifying investment.
- Note: This provision is not automatic for potentially qualifying small businesses. It requires potential recipients to apply to the program which is to be established by the Secretary (in consultation with the Department of Health and Human Services) within 60 days after 3/23/10. Following the submission of an application, the Secretary will have 30 days to approve or reject the application. Selection criteria will take into consideration only those projects
- That show reasonable potential to result in new therapies to treat areas of unmet medical need, or to prevent, detect, or treat chronic or acute diseases and conditions, to reduce long-term health care costs in the United States, or to significantly advance the goal of curing cancer within 30 years, and
- That have the greatest potential to create and sustain high quality, high-paying jobs in the United States, and to advance U.S. competitiveness in the fields of life, biological, and medical sciences.
- Effective for amounts paid or incurred in tax years beginning after 12/31/08.
INDIVIDUALS
- EXCLUSION FOR ASSISTANCE PROVIDED TO PARTICIPANTS IN STATE STUDENT LOAN REPAYMENT PROGRAMS FOR CERTAIN HEALTH PROFESSIONALS
- Excludes from income amounts received by individuals under the National Health Service Corps loan repayment program (as well as certain state programs) intended to provide for increased health care availability in underserved areas.
- Effective for amounts received in tax years starting after 12/31/08.
- EXPANSION OF ADOPTION CREDIT AND ADOPTION ASSISTANCE PROGRAMS
- Raises the maximum adoption credit (as well as the income exclusion for employer-provided adoption assistance) to $13,170 for 2010, with additional changes to the inflation adjustment and income limitation threshold for post-2010 years. Also makes the credit refundable starting in 2010.
- The sunset of these provisions (which reduces the amounts to prior, lower amounts) is also delayed by 1 year (i.e., for tax years beginning after 12/31/11).
- PREMIUM ASSISTANCE TAX CREDIT
- Provides a refundable tax credit for individuals and families to help subsidize the purchase of health insurance through an exchange. The amount of the credit is based on the insured person’s income and is generally available for those with household incomes between 100% and 400% of the federal poverty level and who do not receive (or are not offered) health insurance through an employer.
- Effective for tax years ending after 12/31/13.
- REDUCED COST-SHARING FOR INDIVIDUALS ENROLLING IN QUALIFIED HEALTH PLANS
- Establishes a subsidy to help lower-income individuals and families (household incomes between 1 and 4 times the poverty level) afford health care coverage.
- Effective from 3/31/10.
CREDIT/DEDUCTION/EXCLUSION LIMITATIONS AND/OR RESTRICTIONS
BUSINESSES
- MODIFICATION OF ITEMIZED DEDUCTION FOR MEDICAL EXPENSES
- Increases the lower limit for taking an itemized deduction for unreimbursed medical expenses from 7.5% to 10% of Adjusted Gross Income (for regular tax purposes, but leaves the threshold for AMT purposes unchanged). If taxpayer (or their spouse) reaches age 65 during any of the tax years 2013 through 2016, this increase does not apply to such years.
- Effective for taxable years beginning after 12/31/12.
- LIMITATION ON EXCESSIVE REMUNERATION PAID BY CERTAIN HEALTH INSURANCE PROVIDERS
- Denies a deduction for executive compensation in excess of $500,000 to certain health insurance providers. This generally excludes employers with self-insured plans. In addition, performance-based compensation does not escape this limitation.
- Effective for compensation for tax years beginning after 12/31/12 that are attributable to services performed during years beginning after 12/31/09.
- ELIMINATION OF DEDUCTION FOR EXPENSES ALLOCABLE TO MEDICARE PART D SUBSIDY
- Reduces the deduction for expenses attributable to retiree prescription drug expenses by the amount of the subsidy (to the extent the subsidy is excluded from income).
- Effective for tax years beginning after 12/31/12.
- MODIFICATION OF SECTION 833 TREATMENT OF CERTAIN HEALTH ORGANIZATIONS
- Restricts certain special insurance company tax benefits to those entities satisfying a minimum medical loss ratio of 85% for the year (i.e., the percentage of its total premium revenue expended on reimbursement for clinical services provided to enrollees during the year).
- These rules generally allow Blue Cross, Blue Shield, and similar organizations a deduction of 25% of the year’s claims and liabilities under cost-plus contracts as well as administrative expenses related to such claims and contracts (minus the prior year’s surplus for regular tax), as well as other tax benefits.
- Effective for tax years beginning after 12/31/09.
- ELIMINATION OF UNINTENDED APPLICATION OF CELLULOSIC BIOFUEL PRODUCER CREDIT
- Changes the cellulosic biofuel producer credit so that it no longer applies to unprocessed fuels with specified percentages of water, sediment, or ash content, such as “black liquor.”
- Effective for fuels sold or used after 1/1/10.
- DISTRIBUTIONS FOR MEDICINE QUALIFIED ONLY IF FOR PRESCRIBED DRUG OR INSULIN
- Restricts allowable distributions from Health FSAs, HSAs, HRAs, and Archer MSAs to (1) prescribed drugs, including over-the-counter medicines if prescribed by a doctor and (2) insulin.
- Effective for expenses incurred after 12/31/10.
- LIMITATION ON HEALTH FLEXIBLE SPENDING ARRANGEMENTS UNDER CAFETERIA PLANS
- Imposes an upper limit on Health FSAs under cafeteria plans of $2,500 per year (indexed for future inflation).
- Effective for taxable year beginning after 12/31/12.
INFORMATION REPORTING AND DISCLOSURE
BUSINESSES
- INCLUSION OF COST OF EMPLOYER-SPONSORED HEALTH COVERAGE ON W-2
- Requires employers to disclose the value of health insurance coverage on each employee’s W-2.
- Effective for tax years beginning after 12/31/10.
- EXPANSION OF INFORMATION REPORTING REQUIREMENTS
- Requires businesses to file information returns for all payments totaling $600 or more, even if the recipient is a corporation (but not including tax-exempt corporations).
- Also expands the scope of the type of payments for which reporting is required to include all payments in consideration for property, and other gross proceeds for both property and services.
- Effective for payments made after 12/31/11.
- CODIFICATION OF ECONOMIC SUBSTANCE DOCTRINE AND PENALTIES
- Having been discussed for quite some time, places the Economic Substance doctrine into the Code. The Economic Substance doctrine generally stands for the proposition that there should be no tax benefits to the extent that there was no real financial motive aside from saving federal taxes.
- Also establishes an increase in the penalty where the transaction(s) at issue did not have economic substance (i.e., 40% instead of 20%).
- Effective from 3/31/10.
NEW AND/OR EXPANDED ADMINISTRATIVE REQUIREMENTS
BUSINESSES
- ADDITIONAL REQUIREMENTS FOR CHARITABLE HOSPITALS
- Sets new requirements for charitable hospitals, in addition to those previously established. These include (1) performance of a community health needs assessment once every 3 years, (2) creation/implementation of a written financial assistance policy, (3) limitation on charges billed for emergency or other medically necessary care for those qualifying for financial assistance, and (4) limitation on extraordinary collection efforts without first trying to determine if the responsible persons are eligible for financial assistance.
- Also imposes a penalty of up to $50,000 for failures to conduct the community health needs assessment.
- Generally effective for tax years beginning after 3/23/10, except for the community health needs assessment (effective for tax years beginning after 3/23/12) and the penalty for failure to perform the assessment (effective for failures after 3/23/10).
- TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES
- Increases the amount of the required federal estimated tax due in the 3rd quarter 2014 by 15.75 percentage points.
- Effective from 3/31/10.
As always, I look forward to your questions and comments.
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