The cost of non-prescription medication cannot be paid for with income excluded through HSAs, Archer MSAs, health FSAs or HRAs. Applies to expenses incurred after 12/31/10. (PPACA § 9003)
FSA Contribution Limits
Health FSAs that are part of a cafeteria plan must limit employees’ salary reduction contributions to $2,500 annually.
- Applies to taxable years beginning after 12/31/12.
- The $2,500 limit is subject to a cost of living adjustment for taxable years beginning after 12/31/13.
- Increases not a multiple of $50 must be rounded to the next lowest multiple of $50. (PPACA §§ 9005, 10902; HCERA § 1403)
HSA/MSA Penalties for Nonqualified Distributions
The additional tax on distributions from an Archer MSA or an HSA not used for qualified medical expenses is increased to 20% of the amount of the distributions.
Applies to distributions made after 12/31/11.
(PPACA § 9004)
Tax on High-Cost Insurance Plans
Imposes excise tax of 40% on health insurers and self-insured plans on the aggregate value of employer-sponsored health coverage for an employee that exceeds threshold amounts, $10,200 self only, $27,500 other than self only, indexed for inflation to CPI + 1% in 2019 and to CPI for tax years beginning 2020 and after, rounded to the nearest multiple of $50. Applicable to tax years after 2017.
(PPACA §§ 9001, 10901; HCERA § 1401)
- Insurers pay taxes on insured plans, employer pays taxes on plans under which employer makes HSA or MSA contributions and person administering plan pays taxes on self-insured plans.
- Thresholds are adjusted by:
- Multiplying by health adjustment percentage: 100% plus excess (if any) of (1) the percentage by which the per employee cost of BCBS standard plan under FEHBP for plan year 2018 (determined using benefit package for coverage in 2010) exceeds the cost for plan year 2010, over (2) 55%;
- Adding an age and gender adjustment percentage: Thresholds calculated with health adjustment percentage are increased by the excess (if any) of (1) the premium cost of BCBS standard benefit plan under FEHBP for the type of coverage provided an individual in a taxable period, if priced for the age and gender characteristics of all employees of the individual’s employer, over (2) that premium cost for the provision of coverage under this option in the taxable period if priced for the age and gender characteristics of the national workforce.
- Thresholds increased by $1,650 (self only) and $3,450 (other than self only) for certain occupations identified as high risk, indexed for inflation at the same rates that apply to the general thresholds.
- High risk professions mean: Law enforcement officers (as defined in 42 U.S.C. § 3796b), employees in fire protection activities (as defined in 29 U.S.C. § 203(y)), individuals who provide out-of-hospital emergency medical care (including emergency medical technicians, paramedics and firstresponders), individuals whose primary work is longshore work (as defined in 8 U.S.C. § 1288(b), determined without regard to paragraph (2) thereof) and individuals engaged in the construction, mining, agriculture (not including food processing), forestry and fishing industries; this includes retirees from a high-risk profession if the employees met the definition for a period of not less than 20 years during the employee’s employment.
- Accident only;
- Workers’ compensation;
- Automobile medical payment insurance,
- Credit only;
- Long-term care;
- Stand-alone dental and vision; and
- Specified disease or indemnity if purchased on an after-tax basis.
- Determination of plan cost used as aggregate value of employer-sponsored coverage:
- Cost of employer-sponsored coverage is determined using rules used to calculate premium for purposes of COBRA continuation coverage (except that the new high value plan tax is not considered in the calculation).
- For an employer that covers active employees and retirees, the employer has the option to combine pre-65 and post-65 retiree groups when calculating the value of coverage.
- Salary reduction contributions to a health FSA plus any additional amounts that are reimbursed.
- Employer contributions to HSA or an Archer MSA (including employee salary deferrals paid on a pre-tax basis via a cafeteria plan).
- Government plans are included.
- JCT states that the government plans that are included are those primarily for civilian employees. (JCT, Technical Explanation of the Revenue Provisions of the “Reconciliation Act of 2010,” as Amended, in Combination with the “Patient Protection and Affordable Care Act,” 3/21/10, p. 62)
- Self-employed individuals’ coverage under a group health plan is subject to the tax if a deduction is permitted for any or all of the coverage.
- Failure to pay subject to penalty equal to amount due plus interest, except if the failure to pay not discovered using reasonable diligence or is corrected within 30 days.
- Tax is nondeductible.
Health Insurance Provider Tax
Imposes aggregate annual tax apportioned among health insurers of “United States health risks” based on relative market share.
(PPACA §§ 9010, 10905; HCERA § 1406)
- “United States health risks” mean the health risk of any individual who is a U.S. citizen, a resident of the U.S. (IRC § 7701(b)(1)(A)), or located in the U.S. as to the period the individual is located in the U.S.
- Insurers required to pay the tax are those providing health insurance during the calendar year in which the tax is due.
- IRS will set payment date, no later than 9/30 of each year.
- Annual tax burden shared by health insurers:
- 2014: $8 billion;
- 2015: $11.3 billion;
- 2016: $11.3 billion;
- 2017: $13.9 billion; and
- 2018: $14.3 billion.
- After 2018: The applicable tax is indexed to the rate of premium growth of the prior year’s premium, defined as “the applicable amount for the preceding calendar year increased by the rate of premium growth for such preceding calendar year.”
- Market share is calculated based on net premiums written as reported to the IRS by insurers (reporting date to be set by IRS) or gathered by the IRS from some other source.
- “Net premiums written” is not defined in the statute, but JCT states that it is “…intended to mean premiums written, including reinsurance premiums written, reduced by reinsurance ceded, and reduced by ceding commissions. Net written premiums do not include amounts arising under arrangements that are not treated as insurance (i.e., in the absence of sufficient risk shifting and risk distribution for the arrangement to constitute insurance).” (JCT, Technical Explanation of the Revenue Provisions of the “Reconciliation Act of 2010,” as Amended, in Combination with the “Patient Protection and Affordable Care Act,” 3/21/10, p. 89)
- Tax exempt insurers consider only 50% of premium arising from tax-exempt business in calculating market share. The tax exempt insurers identified in the statute are those in IRC § 501(c)(3) (charitable organization), (c)(4) (civic organization), (c)(26) (high risk pools), or (c)(29) (health insurance coops created by PPACA).
- In calculating market share, premiums less than $25 million are not taken into account, $25 million to $50 million are considered at 50% and more than $50 million are considered at 100%.
- Applies to all health insurers subject to federal income tax as well as nonprofit insurers exempt from federal income taxes (except as specified).
- Governmental entities;
- Self-insured employers;
- Nonprofit corporations that receive more than 80% of gross revenues from government programs that target low income, elderly or disabled under
- Medicare, Medicaid or SCHIP;
- Voluntary employee benefit associations established by non-employers;
- Disability, accident, indemnity, specified disease;
- Long term care insurance; and
- Medicare supplement insurance.
- Penalty for failure to report to IRS (unless reasonable cause is shown) is $10,000 plus the lesser of $1,000/day or amount of the tax.
- Understatement of insurer’s net premium written to IRS is also subject to a penalty of the excess of the amount of tax the IRS says is due over the amount of tax paid.
- All persons treated as a single entity for purposes of the tax are jointly and severally liable for the tax.
- Information submitted to the IRS by insurers for the tax is not subject to IRC § 6103 confidentiality requirements.
- Tax is nondeductible.
- “Anti-avoidance” regulations required to prevent “inappropriate actions taken to qualify as an exempt entity.”
- Applicable to calendar years beginning after 12/31/13.
Annual fee imposed on each manufacturer or importer of branded prescription drugs (including foreign corporations) for sale to specified government programs
or pursuant to coverage under these programs (Medicare Parts B and D, Medicaid, VA, DoD and TRICARE).
(PPACA § 9008; HCERA § 1404)
- Due date set by the IRS, but no later than 9/30 of each year.
- Fee amounts are based on the ratio of each manufacturer’s preceding year’s branded drug sales to the preceding year’s aggregate branded prescription drug sales by all manufacturers, multiplied by the annual amount due from all manufacturers as follows:
- 2011: $2.5 billion;
- 2012: $2.8 billion;
- 2013: $2.8 billion;
- 2014: $3 billion;
- 2015: $3 billion;
- 2016: $3 billion;
- 2017: $4 billion;
- 2018: $4.1 billion; and
- 2019 and after: $2.8 billion.
- In calculating each manufacturer’s annual share of the tax, the branded prescription drug sales taken into account are:
- 0% of sales of $5 million or less;
- 10% sales of more than $5 million but not more than $125 million;
- 40% of sales of more than $125 million but not more than $225 million;
- 75% of sales of more than $225 million but not more than $400 million; and
- 100% of sales of more than $400 million.
- Fee amounts are calculated based on sales as reported to the IRS by HHS, VA and DoD (reporting date to be set by IRS) or gathered by the IRS from any other source.
- HHS reports on:
- Medicare Part B (per unit average sales or per unit Part B payment rate for separately paid branded prescription drug without a reported average sales price and number of units paid for under Part B). CMS must establish process for determining units and allocated prices for branded prescription drugs that are not separately payable or for which National Drug Codes are not reported;
- Medicare Part D (per unit ingredient cost reported to HHS by prescription drug plans and Medicare Advantage prescription drug plans, minus price concessions, and number of units paid for under Part D); and
- Medicaid (per unit ingredient cost paid to pharmacies for branded prescription drugs dispensed to Medicaid beneficiaries, minus any per unit rebate paid by manufacturers, and number of units paid for under Medicaid).
- VA reports, for each manufacturer and each branded prescription drug, the total amount paid for each branded prescription drug procured by VA.
- DoD reports, for each manufacturer and each branded prescription drug, the sum of:
- Amount paid by DoD for each prescription drug for its beneficiaries;
- For each branded prescription drug dispensed under the TRICARE retail pharmacy program, per unit ingredient cost minus per unit rebate paid by the manufacturer times number of units dispensed.
- Fees collected under the provision are credited to the Medicare Part B trust fund.
- All persons treated as a single entity for purposes of the tax are jointly and severally liable for the tax.
- Fees are nondeductible.
- A “prescription drug” means any drug which is subject to the Federal Food, Drug and Cosmetic Act (21 U.S.C. § 353(b)).
- A “branded prescription drug” is a prescription drug the application for which was submitted under the Federal Food, Drug and Cosmetic Act (21 U.S.C. §
- 355(b)), or any biological product the license for which was submitted under the Public Health Service Act (42 U.S.C. § 262(a)).
- “Branded prescription drug sales” are sales of branded prescription drugs to any specified government program or sales made pursuant to any such program.
- “Branded prescription drug sales” do not include sales of any drug or biological product for which the “orphan drug” credit was allowed for any taxable year under IRC § 45C, so long as the drug or biological product has not been subsequently approved by the FDA for marketing for any indication other than the treatment of the rare disease or condition with respect to which such credit was allowed.
- Effective for calendar years beginning in 2011.
Imposes a tax of 2.3% on the sale of any taxable medical device sold by the manufacturer, producer or importer of the device.
(PPACA §§ 9009, 10904; HCERA § 1405)
- Defines a “taxable medical device” as any device as defined in the Federal Food, Drug and Cosmetic Act (21 U.S.C. § 321(h)) intended for humans, but does not include:
- Contact lenses;
- Hearing aids; and
- Any other medical device determined by the IRS to be of a type which is generally purchased by the general public at retail for individual use.
- Tax exemptions for sales by manufacturers for use as supplies for vessels or aircraft, and for sales to state or local governments, nonprofit educational organizations and qualified blood collector organizations are not applicable to this tax (IRC § 4221(a)(3),(4),(5), and (6) inapplicable to this new tax).
- Current manufacturers excise tax exemptions for further manufacture and for export apply to this new tax (IRC § 6416(b)(2)(B), (C), (D), and (E) do not apply to this new tax).
- Applies to sales after 12/31/12.
- NOTE: The tax on medical devices imposed by § 9009 and amended by § 10904 of H.R. 3590 was repealed by § 1405 of H.R. 4872 effective on the date of enactment of H.R. 3590.
Health Insurer Executive Compensation
Limits deductibility of compensation for officers, directors, employees and service providers of health insurers to $500,000.
(PPACA § 9014)
- “Covered health insurance provider” defined:
- Tax years beginning after 12/31/09: “Health insurance issuers” (as defined in IRC § 9832(b)(2)) that provide “health insurance coverage” as defined in IRC § 9832(b)(1) (“…benefits consisting of medical care (provided directly, through insurance or reimbursement, or otherwise) under any hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract offered by a health insurance issuer”).
- Tax years beginning after 12/31/12: “Health insurance issuers” (as defined in IRC § 9832(b)(2)) with respect to which not less than 25% of gross premiums received is from providing “minimum essential coverage” as defined in IRC § 5000A(f) (created by H.R. 3590).
- All compensation from entities within a “controlled group” is subject to the limitation: Compensation paid to the individual from any member of the controlled group of the covered health insurance provider as determined by applying rules applicable to qualified retirement plans is considered.
- The deduction limits apply to both current and deferred compensation: The limit that applies to deferred compensation earned in a year is equal to the $500,000 limit for that year, reduced by the amount of current compensation paid.
- NOTE: While based on existing IRC provisions limiting the deductibility of executive compensation to $1 million, there are some differences in this new provision:
- No exceptions for certain performance-based compensation and commission compensation;
- The limit applies to compensation to any individual service provider, including independent contractors as well as all employees, rather than just the chief executive officer and highest 3 officers, as disclosed in SEC filings;
- The deduction limitations apply to “covered health insurance providers,” regardless of whether the insurer is a “publicly held corporation” that is subject to SEC registration requirements; and
- The limit is based on the year in which compensation is earned, rather than the year in which the deduction is claimed. A limit based on when compensation is earned requires determination of the period to which compensation is attributable, and has the effect of limiting deductions for both current and former service providers. It will also have the effect of limiting deductions for compensation earned when the company is considered a health insurance provider, even if the company ceases to be a health insurance provider by the time the compensation is paid.
- Applies to current compensation paid in taxable years beginning after 12/31/12 and to deferred compensation paid in taxable years after 12/31/12 for services performed after 12/31/09.
IRC § 833 deduction and other provisions would no longer be available for BCBS Plans that do not have a medical loss ratio of 85% or more.
(PPACA § 9016)
- MLR is calculated in accordance with PHSA § 2718, created by §§ 1001, 10101(f) of PPACA.
- As enacted, BCBS Plans must compute an MLR for IRC § 833 status by dividing the total of “clinical services” (not taking into account activities that improve health care quality) by the total of premium revenue.
- Applies to taxable years beginning after 12/31/09.
- The MLR calculation for IRC § 833 purposes is a higher threshold than the standard all insurers must meet for the reporting and premium refund requirements in PHSA § 2718 because IRC § 833 does not appear to allow activities that improve health care quality to be considered part of “clinical services.”
- Sen. Baucus’ floor statement (156 Cong. Rec. S1989 (daily ed. 3/24/10)) says that § 833 treatment is determined year to year, that activities that improve health quality are considered part of “clinical services” and that BCBS Plans are taxed as P & C stock companies.
- HHS, IRS and DOL issued a request for information on implementing the MLR requirements in PHSA § 2718 and IRC § 833, with responses due 5/14/10 (75 Fed. Reg. 19297, 4/14/10).
Employers must disclose the aggregate cost of benefits provided by employers for each employee’s health insurance coverage on the employee’s annual Form W-2.
(PPACA § 9002)
- Reporting not required:
- Contributions to Archer MSAs and HSAs; and
- Salary reduction contributions to FSAs as defined in IRC § 125.
- How Plan Value Determined: Use the same calculation as is currently used in determining the employer-provided portion of the applicable premiums for the taxable year for the employee determined under the rules for COBRA continuation coverage, including the special rule for self-insured plans.
- Applies to taxable years beginning after 12/31/11.
IRS Releases Draft W-2 Form for 2011
Recent documents released by the IRS regarding relief for employers:
News release from IRS
Requires information reporting to the IRS (on Form 1099) for payments to any person, including any corporation that is not an exempt organization under IRC §
501(a), regardless of Treasury regulations prescribed before enactment. Clarifies that reports must be submitted for “amounts in consideration for property”
and “gross proceeds.” Effective for payments made after 12/31/11. (PPACA § 9006)
Simple Cafeteria Plans for Small Business
Allows small employers to adopt new “simple cafeteria plans,” and by meeting minimum participation and contribution requirements, these plans will be treated
as meeting the nondiscrimination requirements that would otherwise apply to the cafeteria plan.
(PPACA § 9022)
- An “eligible employer” is one that has an average of 100 or fewer employees on business days during either of the preceding 2 years; if an employer was not in existence during the last year, the number of employees is based on the average number of employees the employer is reasonably expected to employ on business days in the current year.
- An “eligible employer” who establishes a simple cafeteria plan retains its status as an “eligible employer” in subsequent years unless more than 200 employees were employed on average on business days during any preceding subsequent year.
- An employer is defined to include all predecessors of the employer. Additionally, persons treated as single employers for purposes of controlled group definitions (IRC § 52(a) or (b)) or the retirement plan aggregation rules in IRC § 414(n) or (o) are treated as one person.
- A “simple cafeteria plan” is one that is established and maintained by an “eligible employer” and meets contribution and participation requirements as
- Contribution Requirements: Regardless of employee salary reduction contributions, the employer is required to make contributions to qualified benefits under the plan on behalf of each qualified employee (i.e., an employee who is not a highly compensated (as defined in IRC§ 414(q)) or key employee (as defined in IRC § 416(i))). The employer must contribute a uniform percentage (not less than 2%) of an employee’s compensation for the plan year, or an amount equal to the lesser of 6% of an employee’s compensation for the plan year or twice the amount of an employee’s salary reduction contributions of each qualified employee (but the rate of an employer’s contributions for highly compensated employees or key employees must not be greater than that for other employees). Subject to the preceding limitation on the rate of employer contributions, employers are permitted to make additional contributions to provide qualified benefits greater than the minimum contributions required.
- Eligibility and Participation Requirements: Generally, eligibility is met if all employees with at least 1,000 hours of service may participate and all all eligible employees may, subject to terms and conditions applicable to all participants, elect any benefit under the plan.
- An employer may exclude employees who: have not attained age 21 before the end of a plan year; have less than one year of service as of any day during the plan year; are covered under an agreement that the DOL finds to be a collective bargaining agreement if there is evidence that cafeteria plan benefits were the subject of good faith bargaining between employee representatives and an employer; or if the employee is a nonresident alien working outside the U.S. (see IRC § 410(b)(3)(C)). A plan may also provide for an age younger than 21 or a service period shorter than 1,000 hours.
- Effective for taxable years beginning after 12/31/10.
Medical Expense Deduction
Increases the threshold for claiming an itemized deduction for unreimbursed medical expenses for regular tax purposes from 7.5% of a taxpayer’s adjusted gross income (AGI) to 10% of AGI. Effective for taxable years beginning after 12/31/12, but for taxpayers age 65 and older or whose spouses are 65 or older, the threshold for regular tax purposes remains at 7.5% of AGI until 2017.
(PPACA § 9013)
Increased Health Insurance Tax on High-Income
An additional 0.9% Medicare Hospital Insurance (HI) tax on self-employed individuals and employees as to earnings and wages received during the year above certain thresholds.
(PPACA §§ 9015, 10906; HCERA § 1402)
- The additional tax applies to earnings of self-employed individuals or wages of an employee received in excess of $200,000, or $250,000 in the case of a joint return.
- If the employer does not withhold the tax, the employee must pay the tax, but an employer is not relieved of penalties or additions to tax applicable to its failure to deduct and withhold any amount subject to employer withholding. Note that for purposes of employer’s withholding obligation, only wages that the employee receives in excess of $200,000 are taken into account; the employer may disregard the amount of wages received by the employee’s spouse.
- For a self-employed individual, the threshold amount is reduced (but not below zero) by the amount of wages taken into account in determining the FICA tax with respect to an individual.
- Self-employed individuals are not permitted to deduct any portion of the additional tax.
- There is no change the employer HI tax, which remains at 1.45%.
- Also adds 3.8% tax on unearned income (e.g., from interest, dividends, annuities, royalties and rents) with respect to those with income over $200,000, or $250,000 in the case of a joint return.
- Effective for taxable years beginning after 12/31/12.
- Requirements for Charitable Hospitals. Creates 4 new requirements that a hospital must satisfy to be tax-exempt: (1) Periodic preparation of a community health needs assessment; (2)Maintenance of a qualified financial assistance policy; (3) Limitations on charges to individuals eligible for assistance; and (4) Avoidance of certain billing and collections activities. The provisions are generally effective for taxable years beginning after the date of enactment, but the community health needs assessment only applies to taxable years beginning 2 years after the date of enactment. (PPACA §§ 9007, 10903)
- Excise Tax on Cosmetic Procedures. Dropped by Manager’s Amendment to PPACA. (PPACA §§ 9017, 10907)
- Excise Tax on Indoor Tanning. Creates a 10% tax on amounts paid for indoor tanning services, to be collected from the person receiving the service at the time the service is rendered. If that person does not pay the tax, the person providing the service remains liable for the tax. Applies to services performed on or after 7/1/10. (PPACA § 10907)
- Exclusion of Health Benefits of the Indian Health Service or Indian Tribal Governments. Excludes from gross income the value of qualified health benefits received directly or indirectly from the Indian Health Service or from an Indian tribe or tribal organization. Effective as to benefits and coverage provided after the date of enactment. (PPACA § 9021)
- Tax Credit for Therapeutic Discovery. Provides a credit of 50% of a qualified investment in acute and chronic disease research for businesses with 250 or fewer employees. Applicable to amounts paid or incurred after 12/31/08. (PPACA § 9023)
- Expansion of Adoption Tax Credit. Increases the amount of child adoption tax credit and adoption assistance exclusion to $13,170 and provides for inflationindexing. Also extends the adoption credit through 2011 and makes the credit refundable. Generally applies to taxable years beginning after 12/31/09. (PPACA § 10909)
- Study on Impact of Taxes on Veterans’ Health Care. Study by VA includes the impact of new taxes on branded prescription drug manufacturers, medical device manufacturers and health insurance on the cost of medical care provided to veterans and veterans’ access to medical devices and branded prescription drugs. VA must report to Congress by 12/31/12 (note that the annual insurance tax and tax on medical device sales will not be in effect on that date). (PPACA § 9011)