AHLA. G. The Affordable Care Act and Tax Issues. Douglas M. Mancino Hunton & Williams LLP Los Angeles, CA

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1 AHLA G. The Affordable Care Act and Tax Issues Douglas M. Mancino Hunton & Williams LLP Los Angeles, CA Melissa Sampson McMorrow Nutter McClennen & Fish LLP Boston, MA Tax Issues for Health Care Organizations October 19-21, 2014

2 The Affordable Care Act and Tax Issues Douglas Mancino and Melissa Sampson McMorrow October 20 21, 2014 Issues to Cover Section 501(r) Developments Health Insurance Providers Fee 162(m)(6) Deduction Limitation 1

3 SECTION 501(R) DEVELOPMENTS Section 501(r) Background A hospital organization will not be described in section 501(c)(3) unless the organization: (1) conducts a community health needs assessment ( CHNA ) at least once every three years and adopts an implementation strategy to meet the community needs identified in the assessment; (2) maintains a written financial assistance policy and an emergency medical care policy; (3) limits the amounts it charges for emergency or medically necessary care, and refrains from using its gross charges in such cases; and (4) complies with certain billing and collection procedures *Requirements must be met for each hospital facility 2

4 Section 501(r) Background Notice June 14, 2010 Notice July 25, 2011 Proposed Regulations June 26, 2012 ( 2012 Proposed Regulations ) Proposed Regulations April 5, 2013 ( 2013 Proposed Regulations ) Temporary/ Proposed Regulations August 15, 2013 Notice December 30, 2013 Notice December 30, 2013 August 2013 Regulations Section 5949: Organizations that do not conduct a CHNA as required are subject to a $50,000 excise tax TD 9629: Temporary and final regulations specify that a hospital organization not meeting the CHNA requirements is obligated to file Form Return is due 5 ½ months after the close of the taxable year during which the liability was incurred. 3

5 Notice Hospitals can rely on all of the provisions of: 2012 Proposed Regulations and 2013 Proposed Regulations until final or temporary regulations are published, or other applicable guidance is provided Hospital organizations may rely on section 1.501(r)(3) of the 2013 Proposed Regulations for any CHNA conducted or implementation strategy adopted on or before 6 months after final or temporary regulations are published. Notice The 2012 Proposed Regulations: provided guidance on subsections 501(r)(4), (5) and (6) proposed definitions for hospital organization, hospital facility and other key terms used The 2013 Proposed Regulations: addressed the 501(r)(3) CHNA requirements, the related excise tax set forth in section 4959, and the section 6033 reporting obligations related to the legislation revised the proposed definitions of hospital organization and hospital facility in 2012 Proposed Regulations provided guidance on the consequences of failing to satisfy any of the requirements of section 501(r) 4

6 Notice Under 2013 Proposed Regulations, hospital facility s failure to meet requirements will be excused if: Neither willful nor egregious Failure is corrected Disclosure is made in accordance with guidance to be published Minor, inadvertent errors due to reasonable cause that are corrected are not failures Notice Proposed revenue procedure Is the additional guidance referenced in the 2013 Proposed Regulations Provides correction and disclosure procedures in order to allow the Service to excuse certain failures to meet section 501(r) requirements. 5

7 Notice The Service will excuse a tax exempt hospital organization s failure to meet a section 501(r) requirement if such failure: 1. falls within the scope of allowable excuses set forth in the Notice; 2. is corrected in accordance with the Notice; and 3. is properly disclosed But, a failure to meet section 501(r)(3) may still subject a hospital to excise tax as described in section Notice Scope Hospital organization must begin correcting failure before it is first contacted by the IRS about an examination If return not yet due, correction needs to begin before being contacted by IRS about an examination Following procedures does not guarantee that not willful nor egregious, but may help 6

8 Notice Correction When correcting, the hospital: must strive to restore each person affected by the failure to the position they would have occupied had the failure not occurred; should take all other reasonable and appropriate corrective actions; should make the correction as quickly as possible after its discovery; and should create new or modify existing internal policies and procedures to prevent similar failures from occurring in the future. Notice Disclosure A failure is disclosed if hospital organization reports the following on Schedule H and describes the: failure, including type, affected facility, dates, number of occurrences, number of people affected, dollars involved discovery, including how and timing correction, including method, date, and whether restoration has been made Practices and procedures revised or newly established to minimize a repeat occurrence or why no change needed Reporting is for tax year in which it discovers such failure 7

9 HEALTH INSURANCE PROVIDERS FEE Health Insurance Providers Fee Section 9010 of Affordable Care Act, and subsequent amendments Fee is imposed on: each covered entity engaged in the business of providing health insurance for US health risks Effective Date: January 1, 2014 (for net premiums written as of January 1, 2013) 8

10 Health Insurance Providers Fee First filings due April 15, 2014 First fees due September 30, 2014 Amount of Fee: $8 billion in 2014 $11.3 billion in 2015 and 2016 $14.3 billion in 2017 $14.3 billion in 2018 thereafter, pegged to premium growth Fee amount allocated among covered entities Fee is treated as a non deductible excise tax Health Insurance Providers Fee Premiums Included: $25 million and less, not included More than $25 million, up to $50 million: 50% More than $50 million, 100% Partial Premium Inclusion (50%) for the exempt activities of: 501(c)(3)s charitable 501(c) (4)s social welfare 501(c)(26)s high risk health insurance pool, and 501(c)(29)s consumer operated and oriented plan Calculations performed in above order 9

11 Health Insurance Providers Fee Covered Entity Any entity with net premiums written for health insurance for US health risks that is: A health insurance issuer within the meaning of section 9832(b)(2) (required to be licensed by state) A health maintenance organization within the meaning of section 9832(b)(3) An insurance company subject to tax under subchapter L, Part I or II (or subject, but for 501(a)) An insurer that provides health insurance under Medicare Advantage, Medicare Part D, or Medicaid A non fully insured multiple employer welfare arrangement (MEWA) Health Insurance Providers Fee Covered Entity Exclusions Self Insured employer the self insurance for employees Governmental entity including instrumentalities Nonprofit corporations meeting certain criteria Certain Voluntary employees beneficiary associations (VEBAs) 10

12 Health Insurance Providers Fee Nonprofit Exclusion The nonprofit exclusion applies to an entity: Incorporated as a nonprofit under state law Meets 501(c)(3) like tests: No part of the earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to, influence legislation (but for 501(h)), and does not participate, or intervene in political campaigns That receives more than 80% of its gross revenue from Medicare, Medicaid, and CHIP, and dual eligible plans Health Insurance Providers Fee Nonprofit Exclusion Comments on Exclusion in Proposed Regs: Exclude for profit entity that meets the 501(c)(3) like and 80% revenue tests Allow entities other than corporations to be eligible for the exclusion Allow entities that target similar populations as the programs listed in the Act Clarify disregarded entity rules All rejected in Final Regs Do not have to be exempt under 501(a) to be eligible, but 501(c)(3) standards apply 11

13 Health Insurance Providers Fee Health Insurance Same meaning as health insurance coverage in section 9832(b)(1)(A) Benefits consisting of medical care under any hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract offered by a covered entity. Includes stand alone dental and vision benefits under section 9832(c)(2)(A) and retiree only health insurance Health Insurance Providers Fee Health Insurance Health Insurance does not include: Coverage only for accident, or disability income insurance, or any combination thereof Coverage only for a specified disease or illness and hospital indemnity or other fixed indemnity insurance Long term care insurance Medicare supplemental health insurance 12

14 Health Insurance Providers Fee US Health Risk The health risk of any individual who is: A United States citizen A United States resident (as defined in section 7701(b)(1)(A) Located in the United States Health Insurance Providers Fee Reporting Reporting occurs on Form 8963 Required reporting applies to covered entities only (not exempt entities) Form 8963 is due April 15 Error notifications submitted to IRS by July 15 Payment due September 30 Special rules for control groups Late filing and accuracy related penalties apply 13

15 SECTION 162(M)(6) LIMITATION Section 162(m)(6) Limitation Section 9014 of Affordable Care Act Guidance Notice Proposed regulations (April 2, 2013) Final Regulations (effective September 23, 2014) Addresses application of $500,000 deduction limitation for remuneration provided by certain health insurance providers that receive premiums from providing health insurance coverage 14

16 162(m)(6) Limitation Payments to applicable individuals in excess of $500,000 not deductible by covered health insurance providers Applicable to: compensation attributable to taxable years beginning after 12/31/12 Compensation attributable to services performed for a covered health insurance provider post 12/31/09 and pre 1/1/13 that becomes otherwise deductible, also subject limitation Limitation applies to any taxable year for which an employer is a covered health insurance provider 162(m)(6) Limitation Applicable Individual = any individual (i) who is an officer, director or employee, (ii) who provides services for, or on behalf of, the covered health insurance provider during the taxable year Certain independent contractors excluded Covered Health Insurance Provider ( CHIP )= any health insurance issuer described in 162(m)(6)(C)(i) and certain persons treated as a single employer (162(m)(6)(C)(ii)) Health Insurance Issuer = defined in section 9832(b)(2); becomes a CHIP for a taxable year if 25% or more of the gross premium sit receives from providing health insurance coverage (as defined by section 9832(b)(1)) are from minimum essential coverage (section 5000A(f)) Single Employer = refers to rules in sections 414(b), (c), (m) or (o), except the rules for brother sister controlled groups and combined groups are disregarded 15

17 162(m)(6) Limitation Biggest change from proposed regulations to final regulations Attribution rules: deduction limitation applies to year compensation is earned, regardless of when paid Rule in final regulations adopts proportional rule for attributing deferred compensation Transition rules exist for those relying on rules in proposed regulations 16

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