News Briefings - Federal Tax

The following article is from Federal Taxes Weekly Alert.

10/15/09 -- Senate Finance OK'd health reform bill includes many tax changes

On Oct. 13, 2009, the Senate Finance Committee, by a vote of 14-9, approved its landmark health reform bill, the "America's Healthy Future Act of 2009." Only one Republican Committee member, Sen. Olympia Snowe (R-ME), joined Democrats voting for the bill. The Senate Finance bill will now have to be reconciled with the "Affordable Health Choices Act," which was approved on July 15, 2009 by the Senate's Health, Education, Labor and Pensions (HELP) Committee.

Broad parameters of the bill. As analyzed by the Congressional Budget Office (CBO), the Senate health reform bill would, starting in July 2013, establish a requirement for U.S. legal residents to obtain insurance and would in many cases impose a financial penalty on people who don't do so. The bill also would establish new insurance exchanges and would subsidize the purchase of health insurance through those exchanges for individuals and families with income between 100% and 400% of the federal poverty level (FPL). Policies purchased through the exchanges (or directly from insurers) would have to meet several requirements. In particular, insurers would have to accept all applicants, could not limit coverage for preexisting medical conditions, and could not vary premiums to reflect differences in enrollees' health. The bill also would provide start-up funds to encourage the creation of cooperative insurance plans (co-ops) that could be offered through the exchanges; existing insurers could not be approved as co-ops.

Although it would not explicitly require employers to offer health insurance, the bill would require firms with more than 50 workers that did not offer coverage to pay a penalty for full-time workers who obtained subsidized coverage through the insurance exchanges. As a rule, full-time workers who were offered coverage from their employer would not be eligible to obtain subsidies via the exchanges. However, an exception to that "firewall" would be allowed for workers who had to pay more than a specified percentage of their income for their employer's insurance--10% in 2013, indexed over time--in which case the employer could also be penalized. Under certain circumstances, firms with relatively few employees and relatively low average wages would also be eligible for tax credits to cover up to half of their contributions toward health insurance premiums. The bill also would make numerous Medicaid-related changes.

Tax provisions. The key tax changes in the Senate Finance health reform bill are as follows:

... A 40% nondeductible excise tax would be levied on health coverage in excess of $8,000/$21,000 (indexed for inflation), effective for tax years beginning after 2012. Increased thresholds would apply for over age 55 retirees and certain high-risk professions (e.g., firefighters, construction and mining workers), and a higher threshold would apply for health insurance plans maintained in the 17 states in which health care was least affordable for the year ended Dec. 31, 2012. For employees, the employer would aggregate the coverage subject to the limit and issue an information return for insurers indicating the amount subject to the excise tax. The excise tax would be levied at the insurer level.

... Employers would be required to report the value of health benefits on employees' Forms W-2, effective for tax years beginning after 2009. For purposes of employer provided health coverage (including health reimbursement accounts (HRAs) and health flexible savings accounts (FSAs), HSAs, and Archer medical savings accounts (MSAs)), the cost of over-the-counter medicine (other than doctor prescribed) could not be reimbursed through a health FSA or HRA. In addition, the cost of over-the-counter medicines (other than doctor prescribed) could not be reimbursed on a tax-free basis through an HSA or Archer MSA. These changes would be effective for tax years beginning after 2009.

... The penalty for nonqualified HSA distributions would be increased from 10% to 20%, effective for disbursements made during tax years beginning after 2010.

... Allowable contributions to health FSAs in cafeteria plans would be capped at $2,500, effective for tax years beginning after 2010.

... Effective for tax years beginning after the enactment date, Code Sec. 501(c)(3) hospitals would be subject to new requirements, e.g., a community health needs assessment, promulgation and dissemination of a written financial assistance policy, and new reporting and disclosure rules.

... Effective for payments made after 2011, the bill would modify the general information reporting requirement by eliminating the exception for payments to corporations. The class of payments with respect to which reporting is required would be clarified to include gross proceeds for both property and services.

... The floor beneath itemized medical expense deductions would be raised from 7.5% of adjusted gross income (AGI) to 10%, effective for tax years beginning after 2012. The AGI floor for individuals age 65 and older (and their spouses) would remain unchanged at 7.5%.

... The deduction for expenses allocable to Medicare Part D subsidy would be eliminated, effective for tax years beginning after 2010. A $500,000 deduction limit would apply to the remuneration of officers, employees, directors, and service providers of covered health insurance providers. This limit would be effective for remuneration paid in tax years beginning after 2012 with respect to services performed after 2009.

... For tax years beginning after 2010, the bill would provide for a safe harbor from the nondiscrimination requirements for cafeteria plans for an eligible small employer. The safe harbor would also apply to the nondiscrimination requirements for specified qualified benefits offered under the cafeteria plan, including group term life insurance, coverage under a self insured group health plan, and benefits under a dependent care assistance program. The safe harbor would require that the cafeteria plan satisfy minimum eligibility and participation requirements and minimum flex-credit contribution requirements.

... The bill would create a temporary tax credit, subject to an overall cap of $1 billion, to encourage investments in new therapies to prevent, diagnose, and treat chronic diseases, effective for expenditures paid or incurred after 2008, in tax years beginning after 2008. The credit would sunset at the end of 2010.

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