The Tax Consequences of ObamaCare

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1 BLOG» The IRS and its 46 new powers to enforce ObamaCare June 5, 2013 The power granted to the IRS to enforce ObamaCare s mandates, taxes, penalties, reporting, and other requirements is unprecedented. Based upon Government Accountability Office data, we count 46 new responsibilities assigned to the IRS under the health law. 1 IRS officials have acknowledged the huge problems these major new responsibilities will create for the agency. On March 5, 2013, an official from the Treasury Department s Inspector General for Tax Administration, J. Russell George, testified before the House Appropriations Committee. Mr. George was asked about the tax implications of ObamaCare. It is unprecedented in recent history, the amount of responsibility the IRS is being given in an area that most people don t think of as an IRS function, George said. Americans, he added, will have more questions about their taxes because of health care penalties or credits, flooding already busy call-in and walk-in tax help centers. This is going to lead to problems, sir, he testified. Many people are especially concerned about assigning an unprecedented number of major new responsibilities to implement ObamaCare to an agency whose primary task is collecting revenues to fund the Federal government. We have used the GAO list as the basis for our list and have organized it by categories of new tasks: Collecting taxes, distributing subsidies, collecting information, and enforcing compliance. Collecting taxes 2 1. Charitable Hospital Tax: Imposes additional reporting requirements for charitable hospitals to qualify as tax-exempt under IRC 501(c)(3) and requires hospitals to conduct a community health needs assessment at least once every 3 years and to adopt a financial assistance policy and policy relating to emergency medical care. Page 1 of 6

2 2. Codification of the Economic Substance Doctrine : Clarifies and enhances the applications of the economic substance doctrine and imposes penalties for underpayments attributable to transactions lacking economic substance. 3. Black liquor tax hike: Amends the cellulosic biofuel producer credit (nonrefundable tax credit of about $1.01 for each gallon of qualified fuel production of the producer) to exclude fuels with significant water, sediment, or ash content (such as black liquor). 4. Tax on Innovator Drug Companies: Imposes a fee on each covered entity engaged in the business of manufacturing or importing branded prescription drugs. 5. Blue Cross/Blue Shield Tax Hike: Limits eligibility for deductions under section 833 (treatment of Blue Cross and Blue Shield) unless the organizations meet a medical loss ratio standard of at least 85 percent for the taxable year. 6. Tax on Indoor Tanning Services: Imposes a tax on any indoor tanning service equal to 10 percent of amount paid for service. 7. Medicine Cabinet Tax: Repeals the tax exclusion for over-the-counter medicines under a Health Flexible Spending Arrangement (FSA), Health Reimbursement Arrangement (HRA), Health Savings Account (HSA), or Archer Medical Savings Account (MSA), unless the medicine is prescribed by a physician. 8. HSA Withdrawal Tax Hike: Increases tax on distributions from HSAs and Archer MSAs not used for medical expenses. 9. Employer Reporting of Insurance on W-2: Requires employers to disclose the value of the employee s health insurance coverage sponsored by the employer on the annual Form W Surtax on Investment Income: Imposes an unearned income Medicare contribution tax of 3.8 percent on individuals, estates, and trusts on the lesser of net investment income or the excess of modified adjusted gross income (AGI + foreign earned income) over a threshold of $200,000 (individual) or $250,000 (joint). 11. Hike in Medicare Payroll Tax: Imposes an additional Hospital Insurance (Medicare) Tax of 0.9 percent on wages over $200,000 for individuals and over $250,000 for couples filing jointly. 12. Tax on Medical Device Manufacturers: Imposes a tax of 2.3 percent on the sale price of any taxable medical device on the manufacturer, producer, or importer. 13. High Medical Bills Tax: Increases the threshold for the itemized deduction for unreimbursed medical expenses from 7.5 percent of Adjusted Gross Income (AGI) to 10 percent of AGA (unless taxpayer turns 65 during and then threshold remains at 7.5 percent). 14. Flexible Spending Account Cap: Limits health FSAs under cafeteria plans to a maximum of $2,500 adjusted for inflation. Page 2 of 6

3 15. Retiree Rx Drug Coverage Tax Hike: Allows the deduction for retiree prescription drug expenses only after the deduction amount is reduced by the amount of the excludable subsidy payments received. 16. Compensation Limit: Denies the business expenses deductions for wage payments made to individuals for services performed for certain health insurance providers if the payment exceeds $500, PCORI Fee: Imposes a fee through 2019 on specified health insurance policies and applicable self-insured health plans to fund the Patient-Centered Outcomes Research Trust Fund to be used for comparative effectiveness research. 18. Individual Mandate Tax: Requires all U.S. citizens and legal residents and their dependents to maintain minimum essential insurance coverage unless exempted starting in 2014 and imposes a fine on those failing to maintain such coverage. 19. Employer Mandate Tax: Imposes a penalty on large employers (50+ FTEs) who (1) do not offer coverage for all of their full-time employees, offer unaffordable minimum essential coverage, or offer plans with high out-of-pocket costs and (2) have at least one full-time employee certified as having purchased health insurance through a state exchange and was eligible for a tax credit or subsidy. 20. Tax on Health Insurers: Imposes an annual fee on any entity that provides health insurance for any U.S. health risk with net premiums written during the calendar year that exceed $25 million. 21. Excise Tax on Health Insurance: Imposes a 40 percent excise tax on high cost employer-sponsored health insurance coverage on the aggregate value of certain benefits that exceeds the threshold amount. Distributing subsidies 1. Early Retiree Subsidy: Establishes a temporary reinsurance program to provide reimbursement for a portion of the cost of providing health insurance coverage to early retirees. 2. Nonprofit Tax Exemption: Provides tax exemption for nonprofit health insurance companies receiving federal start-up grants or loans to provide insurance to individuals and small groups. 3. Reinsurance Tax Exemption: Provides tax exemption for entities providing reinsurance for individual policies during first 3 years of state exchanges. 4. State Exchange Tax Credit: Provides premium assistance refundable tax credits for applicable taxpayers who purchase insurance through a state exchange, paid directly to the insurance plans monthly or to individuals who pay out-of-pocket at the end of the taxable year. 5. Cost-Sharing Subsidy: Provides a cost-sharing subsidy for applicable taxpayers to Page 3 of 6

4 reduce annual out-of-pocket deductibles. 6. Small Business Tax Credit: Provides nonrefundable tax credits for qualified small employers (no more than 25 full-time equivalents (FTE) with annual wages averaging no more than $50,000) for contributions made on behalf of its employees for premiums for qualified health plans. 7. Small Business Tax Exclusion: Offers tax exclusion for reimbursement of premiums for small-group exchange participating health plans offered by small employers to all full-time employees as part of a cafeteria plan. 8. Indian Tribe Tax Exclusion: Allows an exclusion from gross income for the value of specified Indian tribe health care benefits. 9. Therapeutic Discovery Tax Credit: Establishes a 50 percent nonrefundable investment tax credit for qualified therapeutic discovery projects. 10. Adoption Tax Credit: Increases the maximum adoption tax credit and the maximum exclusion for employer-provided adoption assistance for 2010 and 2011 to $13,170 per eligible child. 11. Tax Exclusion for Dependent Coverage: Extends the exclusion from gross income for reimbursements for medical expenses under an employer-provided accident or health plan to employees children under 27 years. 12. Advance Tax Credit and Cost-Sharing Reductions: Allows advance determinations and payment of premium tax credits and cost-sharing reductions. 13. Health Care Services Loan Tax Exemption: Excludes from gross income amounts received by a taxpayer under any state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in underserved or health professional shortage areas. Collecting Information 1. State Exchange Information Reporting: Requires state exchanges to send to Treasury a list of the individuals exempt from having minimum essential coverage, those eligible for the premium assistance tax credit, and those who notified the exchange of change in employer or who ceased coverage of a qualified health plan. 2. Exchange Participation Requirement: Outlines the procedures for determining eligibility for exchange participation, premium tax credits and reduced cost-sharing, and individual responsibility exemptions. 3. Taxpayer Information Disclosure: Authorizes IRS to disclose certain taxpayer information to HHS for purposes of determining eligibility for premium tax credit, costsharing subsidy, or state programs including Medicaid, including (1) taxpayer identity; (2) the filing status of such taxpayer; (3) the modified adjusted gross income of taxpayer, spouse, or dependents; and (4) tax year of information. Page 4 of 6

5 4. Insurance Provider Information Reporting: Requires every person who provides minimum essential coverage to file an information return with the insured individuals and with IRS. 5. Large Employer Information Reporting: Requires information reporting of health insurance coverage information by large employers (subject to IRC 4980H) and certain other employers. 6. Medicare Beneficiary Information Disclosure: Authorizes IRS to disclose certain taxpayer information to the Social Security Administration (SSA) regarding reduction in the subsidy for Medicare Part D for high-income beneficiaries. (Conforming amendment) Enforcing compliance 1. Health Plan Penalty: Imposes a penalty on health plans identified in an annual Department of Health and Human Services (HHS) penalty fee report, which is to be collected by the Financial Management Service after notice by the Department of the Treasury (Treasury). 2. New Group Plan Penalty: Subjects new group health plans to certain Public Health Service Act requirements and imposes the excise tax on plans that fail to meet those requirements. (Conforming amendment) 3. Group Plan Compensation Discrimination Prohibition: Prohibits group health plans from discriminating in favor of highly compensated individuals. 4. Nonprofit Indicator System: Requires the independent institute partnering with the National Academy of Sciences (NAS) to implement a key national indicator system to be a nonprofit entity under section 501(c)(3). 5. Small Business Exemption for Cafeteria Plans: Allows small businesses to offer simple cafeteria plans-plans that increase employees health benefit options without the nondiscrimination requirements of regular cafeteria plans. 6. Corporate Tax Advance: Increases the required payment of corporate estimated tax due in the third quarter of 2014 by percent for corporations with more than $1 billion in assets, and reduces the next payment due by the same amount. Credit to Ryan Ellis and Americans for Tax Reform for their research on this list Patient Protection and Affordable Care Act: IRS Should Expand Its Strategic Approach to Implementation. Government Accountability Office, June Page 5 of 6

6 The GAO report list 47 new IRS powers in ObamaCare, but one has been repealed since the report was issued the employee voucher requirement. It would have required employers to provide free choice vouchers to certain employees who contribute over 8 percent but less than 9.8 percent of their household income to the employer s insurance plan. The voucher could have been used by employees to purchase health insurance though an exchange. Another provision had been repealed a few days earlier. It would have required to IRS to enforce compliance with an onerous requirement for businesses to report purchases from any vendor of more than $600 a year, the 1099 provision. 2. Taxes are listed in order of the implementation date. The Galen Institute, Inc., is a not-for-profit, free-market research organization devoted exclusively to health policy. It was founded in 1995 by Grace-Marie Turner to promote a more informed public debate over individual freedom, consumer choice, competition, and diversity in the health sector. Galen Institute; All Rights Reserved Page 6 of 6