TAX CHANGES IN THE HEALTHCARE REFORM ACT

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1 TAX CHANGES IN THE HEALTHCARE REFORM ACT Paul Varner 1 June 3, 2010 Jackson, Mississippi 2010 Butler, Snow, O Mara, Stevens & Cannada, PLLC. All rights reserved.

2 Tax Law Changes In Healthcare Reform THREE PRIMARY CATEGORIES OF TAX CHANGES RELATED TO UNIVERSAL HEALTH COVERAGE MANDATE HEALTH RELATED REVENUE RAISERS NON HEALTH RELATED REVENUE RAISERS Changes are effective in different years some commence in 2009; others deferred 5 or more years out. Some changes will result in new or increased taxes or penalties. Others will result in an increase in the compliance burden on employers. 2

3 Tax changes retroactively effective to 2009 Investment credit for qualifying therapeutic discovery projects Exclusion for state student loan repayment or loan forgiveness programs for health care professionals 3

4 Investment credit for qualifying therapeutic discovery projects The credit is 50% of the cost of qualifying therapeutic projects made in 2009 or 2010 The credit is only available to companies having 250 or fewer employees A qualifying therapeutic project is one designed to develop a product, process or therapy to diagnose, treat or prevent diseases by: Conducting pre clinical activities, clinical trials, clinical studies and research protocols or Developing technology or products designed to diagnose diseases and conditions or to further the delivery or administration of therapeutics 4

5 Exclusion for state student loan repayment or forgiveness programs for health professionals Forgiveness of debt normally constitutes taxable income Currently certain exceptions for amounts received under the National Health Service Corps loan repayment program and certain loan repayment programs Effective in 2009, the exception is broadened. Will include amounts received by an individual under any state loan repayment program or loan forgiveness program Intended to provide for the increased availability of health care services in underserved or health professional shortage areas 5

6 Tax changes taking effect in 2010 New requirements for charitable organizations operating hospitals 10% excise tax imposed on persons paying for indoor tanning services Small employer health insurance credit Codification of economic substance doctrine/imposition of new penalties Tax breaks are eliminated for health organizations with medical loss ratios below 85% 6

7 New requirements for charitable organizations operating hospitals For tax years beginning after March 23, 2010, organizations that are tax exempt under IRC 501(c)(3) and that operate one or more hospital facilities are subject to the following additional requirements: Conduct, implement and widely publicize a community health needs assessment Adopt and implement a written financial assistance policy Adopt and implement a non discriminatory policy to provide emergency medical treatment to individuals 7

8 Eligible small em/ers get tax credit for providing health coverage to employees Eligible small employers get an income tax credit for a portion of the cost of providing health coverage to employees An eligible small employer no more than 25 full time em/ees with average annual wage of $50,000 or less The amount of the credit is generally equal to an applicable percentage x the em/er s cost of qualifying health coverage for em/ees The applicable percentage is 35% for ; 50% for 2014 and thereafter The credit is reduced for em/ers with more than 10 but not more that 25 em/ees The credit is reduced where the average annual wage is between $25,000 $50,000 8

9 Codification of economic substance doctrine and imposition of new penalties Under current law, courts generally deny claimed tax benefits if transaction that gave rise to those benefits lacked economic substance independent of federal income tax law There was a lack of uniformity by courts regarding the application of the economic substance doctrine After March 31, 2010, transactions will be treated as having economic substance only if: the transaction changes in a meaningful way the taxpayer s economic position, and the taxpayer has a substantial non tax business purpose for entering into the transaction The penalty is increased to 40% of the tax underpayment where claimed tax benefits are disallowed in a transaction lacking economic substance The penalty is 20% of the underpayment if the transaction is disclosed on the return 9

10 Tax breaks eliminated for health organizations with medical loss ratios below 85% Eligible health insurance organizations, including Blue Cross/Blue Shield organizations, are subject to special rules for determining taxable income They are generally taxed as a regular corporation with the following modifications: They can take advantage of favorable tax provisions of IRC 833 They are entitled to claim a special deduction not allowed to regular corporations For tax years beginning after 2009, health insurance organizations whose medical loss ratio is below 85% cannot take advantage of these favorable tax provisions. 10

11 Tax changes taking effect in 2011 Cost of employer sponsored health coverage must be reported to IRS on Form W 2 The tax on non qualifying distributions from tax deferred health/medical savings accounts is increased Annual fee on drug manufacturers and importers Restricted definition of medicine for health plan reimbursements 11

12 Cost of employer sponsored health coverage must be reported to IRS on Form W-2 Under current law, employers are required to furnish each employee and the IRS with a Form W 2 that shows the wages paid to the employee and the taxes withheld Under the new law, the employer must include on the Form W 2 the value of the employee s health insurance coverage sponsored by the employer If the employee is enrolled in multiple employer sponsored health plans, the employer must disclose the aggregate value of all such health coverage 12

13 Tax increase on non-qualifying distributions from tax deferred health/medical savings acct s Under current law, a 10% tax is imposed on withdrawals from an HSA before age 65 that are not used to pay qualified medical expenses The rate of tax on non qualifying HSA withdrawals is increased from 10% to 20% Under current law, a 15% tax is imposed on withdrawals from an Archer MSA that are not used to pay qualified medical expenses The rate of tax on non qualifying withdrawals from an Archer MSA is increased from 15% to 20% 13

14 Annual fee on drug manufacturers and importers Businesses that manufacture or import prescription drugs must pay a fee that will be apportioned based on the businesses share of the market. The aggregate fee is $2.5 Billion for 2011 and increases to $4.1 Billion for 2018 and decreases to $2.8 Billion for 2019 and thereafter 14

15 Restricted definition of medicine for health plan reimbursements Under current law, the cost of both prescription and over the counter medicines may be reimbursed with excludable income from Archer MSAs and HSAs For tax years beginning in 2011, the cost of over the counter medicines cannot be reimbursed with excludable income from Archer MSAs and HSAs 15

16 Tax change taking effect in 2012 Additional information is required to be reported by corporations to the IRS Under current law, all businesses are required to report to the IRS on information returns payments made to another person in excess of $600 Payments made to corporations are generally exempt from this information reporting requirement After December 31, 2011, payments made to a corporation in excess of $600 are no longer exempt from this information reporting requirement 16

17 Tax changes taking effect in 2013 The Hospital Insurance tax is increased for high income taxpayers A surtax is imposed on the investment income of high income taxpayers The threshold for claiming income tax deductions for medical expenses is increased The income tax deduction for employers maintaining prescription drug plans for retired employees is eliminated Fees are imposed on group health plans Excise tax on medical device manufacturers Compensation deduction limit for health insurance providers 17

18 The Hospital Insurance tax is increased for high income taxpayers The employment taxes imposed on wage earners includes a Hospital Insurance ( HI ) tax at the rate of 1.45% The self employment tax imposed on the earned income of self employed persons includes an HI tax at the rate of 2.9% The HI tax rate will be increased by.9% for persons having wages or earned income in excess of the following thresholds: $200K for single filers and $250K for joint filers 18

19 A surtax is imposed on the investment income of high income taxpayers A 3.8% Medicare contribution tax is imposed on the net investment income of certain individuals, estates and trusts that have income above specified thresholds For individuals, the tax is 3.8% x the lesser of (i) net investment income or (ii) AGI in excess of $200,000 for single filers or $250,000 for joint filers Net investment income includes interest, dividends, royalties, rents and net gain from the disposition of investment assets The surtax is subject to individual estimated income tax payment requirements and is not deductible for income tax purposes 19

20 The threshold for claiming income tax deductions for medical expenses is increased Under current law, an individual may claim an income tax deduction for medical expenses only to the extent the medical expenses exceed 7.5% of the individual s AGI for that tax year. For tax years beginning in 2013, the floor for claiming the a deduction for medical expenses in increased from 7.5% to 10% of AGI 20

21 Tax deduction eliminated for em/ers maintaining prescription drug plans for retired employees Under current law, employers are entitled to an income tax deduction for the cost of providing a prescription drug plan to retirees even though it receives a tax free Medicare Part D subsidy from the federal government Under the new law, the amount allowed as a deduction for retiree prescription drug expenses will be reduced by the amount of the tax free subsidy payments received This provision caused AT&T to report a $1Billion charge to its earnings recently and prompted Congressional hearings to be scheduled after other public companies reported similar charges against earnings 21

22 Fees are imposed on group health plans A fee will be imposed on issuers of group health plans and sponsors of self insured plans per average number of lives insured under the policy The fee is $1 per insured participant for policy years ending in 2013 and $2 per insured participant for policy years ending in 2014 and thereafter 22

23 Excise tax on medical device manufacturers Beginning in 2013, a tax in the amount of 2.3% of the sales price is imposed on the sale of any taxable medical device by the manufacturer or importer of such device 23

24 Compensation deduction limit for health insurance providers For tax years beginning in 2013, a health insurance provider may not deduct compensation paid to an applicable individual in excess of $500,000 An applicable individual includes officers, directors, employees and consultants 24

25 Tax changes taking effect in 2014 Individuals are subject to tax if they fail to purchase health care coverage Large employers are subject to tax if they fail to provide affordable coverage to employees New information reporting obligations are imposed for employer provided health coverage Excise tax on health insurance providers Accelerated estimated tax payments for large corporations 25

26 Individuals are subject to tax if they fail to purchase health care coverage Individuals not enrolled in qualifying coverage (incl. qualifying em/er coverage) must pay a penalty equal to the lesser of the Penalty Amount or a national average bronze level premium cost The Penalty Amount is equal to the greater of the Dollar Amount or a % of the individual s income The Dollar Amount is $95 in 2014 ($325 in 2015 and $695 in 2016 and thereafter) x the number of uncovered adults in the family (50% for those under age 18) The percentage multiplied against the individual s income is 1% in 2014 (2% in 2015 and 2.5% in 2016 and thereafter The income is (i) the excess of the individual s household AGI over (ii) the amount of gross income required by the IRC for income tax return filing for that taxpayer ($9K for married couples in 2010) Total household penalty may not exceed 3 x per adult penalty 26

27 Large em/ers subject to tax if they fail to provide affordable coverage to em/ees Applies to employers with an average of 50 full time employees during the preceding calendar year not offering minimum essential coverage Business entities under common control must aggregate employees for purposes of the 50 full time employee test Minimum essential coverage is a plan where the (i) em/er covers at least 60% of the costs under the plan and (ii) em/ee costs do not exceed 9.5% of household income The monthly penalty is 1/12 x $2,000 x number of full time em/ees over 30 em/ees Example: Business with 55 em/ees not offering coverage must pay tax equal to 25 x 1/12 x $2,000 per month 27

28 New information reporting obligations for employer provided health coverage Insurers (including employers that self insure) that provide minimum essential coverage to any individual during a calendar year must provide the following information to the IRS and any individual covered: The name, address, and TIN of the primary insured and each other person covered under the policy The dates during with the individual was covered under the policy during the year Whether the coverage is a qualified health plan offered through an exchange The amount of any premium tax credit or cost sharing reduction received by the individual with respect to such coverage Such other information the IRS may require 28

29 Excise tax on health insurance providers Beginning in 2014, businesses that provide health insurance coverage must pay a fee that will be apportioned based on net premiums received during the preceding year. The aggregate fee is $8 Billion for 2014 and increases to $14.3 Billion in 2018 and thereafter The fee will not apply to companies having net premium income from health insurance of $25 Million or less For purposes of this fee, health insurance does not include: Coverage only for a specified disease or illness Hospital indemnity or other fixed indemnity insurance Insurance for long term care Medicare supplemental health insurance 29

30 Accelerated estimated tax payments for large corporations Under current law, for corporations having assets of at least $1 billion, the amount of any required installment of corporate estimated tax that was otherwise due in July, August or September of 2014 was increased to % of the amount due. The health care reform bill increases the amount of estimate tax payments otherwise owed by such large corporations by % to % The amount of the next required estimated tax installment is appropriately reduced 30

31 Tax change taking effect in 2018 A 40% excise tax is imposed on coverage providers for the value/cost of employer sponsored health coverage to employees that exceed specified limits Cadillac plans Employer sponsored coverage includes both fully insured and self insured plans Specified limits are $10,200 for single coverage and $27,500 for family coverage Coverage providers include the following: For fully insured plans, the health insurer For HSA or Archer MSA contributions, the employer making the contribution For self insured plans or FSAs, the person administering the plan 31

32 32

33 For more information, visit 33

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