Health Care Legislation Contains Numerous Tax Provisions
Addressed at last fall’s tax schools were the tax provisions in the Health-Care legislation that is working its way through the Congress. We had previously sorted through them in an earlier article and updated the list when the text of the Sen. Harry Reid’s manager’s amendment to H.R. 3590 (Patient Protection and Affordable Health Care Act), became available. The bill was approved in the Senate in late 2009, as was a different bill in the House. But, the health care train got derailed when the Democrats lost their super-majority in the Senate in January. So, the President stepped in and proposed “Unified Health Care Legislation” and both Senator Reid and Speaker Pelosi have said they will try the “nuclear option” if they can’t get the necessary 60 votes in the Senate to pass the legislation.
The new proposal has new tax provisions in it that are different from both the House and Senate versions. For that matter, one could make the argument that the House, Senate and “Unified” proposals are essentially tax bills. Some of the House and Senate tax provisions are retained in the “Unified” legislation. Of course all that has been made public concerning the “Unified” legislation is the general framework, and the details will have to be hammered out. In addition, the Congressional Budget Office has announced that it is unable to determine what the proposal costs, and we won’t really know for sure what’s in the proposal until there is legislative language. But, the White House has estimated the cost at $1 trillion.
So, here’s a quick and dirty run-down of the tax provisions in the House Bill, the Senate Bill and the “Unified” proposal (to the best that I can tell).
- An increase in the Medicare payroll tax to 2.35 percent on AGI over $200,000 (single); $250,000 (married filing jointly) . The “Unified” proposal includes an additional 0.9 percentage point Hospital Insurance tax on AGI exceeding $200,000 (single) or $250,000 (MFJ).
Note: The House and Senate versions sever the link between Medicare payroll tax and Medicare benefits. In other words, the new revenue flows to the general fund. It is unclear whether the “Unified” proposal also does that. If so, that effectively turns social insurance into welfare.
- 40 percent (nonrefundable) excise tax to be paid by health insurers on the annual premiums associated with “Cadillac” health care plans (those where the premiums exceed $8,500 for an individual and more than $23,000 for couples) (effective for tax years beginning after 2012) . The “Unified” proposal changes the cuts to $10,200 and $27,500 respectively, indexes the amounts to the CPI and moves the start date to the beginning of 2018.
Note: This excise tax will not likely set well with House conferees, where some believe the tax inordinately impacts union members
- 20 percent penalty (up from 10 percent) on non-qualified withdrawals from a health savings account (HSA) and 20 percent (up from 15 percent on non-qualified withdrawals from a Medical Savings Account (MSA). This provision is in the “Unified” proposal.
Note: The Act also changes the rules governing HSAs, FSAs, MSAs and HRAs to eliminate the deduction for over-the-counter medicines – except insulin (in other words, they will no longer be qualified medical expenses) prescribed by a physician, and disallows the use of FSA funds for nonprescription drugs (effective for distributions and reimbursements made after 2010. This provision is believed to have been a concession to pharmaceutical companies to help win their support for the legislation. This provision is in the “Unified” proposal.
- $2,500 cap on contributions to FSAs (effective beginning in 2011 with the amount indexed for inflation after 2011). This is in the “Unified” proposal.
- $2.3 billion annual (non-deductible) “fee” imposed on manufacturers and importers of “branded” drugs (brand-name pharmaceuticals) (beginning in 2010). This tax is retained in the “Unified” proposal, without specification of the amount.
- Annual (non-deductible) fee imposed on companies that manufacture or import medical devices (amount is $2 billion for 2011, $4 billion for 2012, $7 billion for 2013 and $9 billion annually for 2014 through 2016 and $10 billion thereafter) (effective for tax years after 2012). This tax is in the “Unified” proposal.
- Increase in the floor of I.R.C. §213 medical expense deductions to 10 percent (up from 7.5%) of AGI (except for individuals age 65 and over and their spouses through 2016) (effective for tax years beginning after 2010). It is not clear whether this provision is in the “Unified” proposal.
- Elimination of the Medicare Part D deduction (prescription drugs) (effective for tax years beginning after 2010). This provision is retained in the “Unified” proposal.
- $500,000 salary cap on the tax deduction (via I.R.C. §162(m)) for salaries of employees of health insurance companies – except for deferred compensation (effective for remuneration paid in tax years beginning after 2012 with respect to services performed after 2009). While the “Unified” proposal doesn’t mention this provision, it is likely that the Administration favors it.
- Mandate that companies with 50 or more “employees” provide “acceptable” health coverage or pay a $750 penalty tax per employee for those that get insurance through the newly established health insurance exchange. This tax is retained in the “Unified” proposal.
- Mandate on individuals to obtain “acceptable” health insurance or pay a penalty tax. This tax is retained in the “Unified” proposal.
- Employers must file a W-2 reporting the value of health benefits for each employee (effective for tax years beginning after 2010) . This appears to be retained in the “Unified” proposal under the general statement that the proposal “closes loopholes.”
- Additional requirements for I.R.C. §501(c)(3) hospitals (such as a requirement to conduct periodic “community health needs assessments”) (effective upon enactment) . It is not clear whether this is in the “Unified” proposal.
- Excise tax of $50,000 on each charitable hospital that fails to meet Department of Health and Human Services regulations. It is not clear whether this tax is in the “Unified” proposal.
- Additional 10 percent tax on indoor tanning services (effective for services rendered after July 1, 2010) [the tax is to be paid by the customer and the service provider is to collect the tax and remit it to IRS on a quarterly basis] . This provision is included in the “Unified” proposal.
- Make the adoption credit refundable, increase the qualifying expense threshold and extend the credit through 2011 (effective for tax years beginning after 2009)
- Require information reporting (Form 1099) for payments to corporations that total more than $600 (beginning in 2012). This is in the “Unified” proposal, but the start date is not certain.
- Annual (nondeductible) fee imposed on health insurance providers.
- The “Unified” proposal creates a new tax of 2.9 percent for those with AGI in excess of $200,000 (single) $250,000 (MFJ) on unearned income such as interest, dividends, annuities, royalties and rents. However, the proposal does not include income from derived from the active participation in S corporations.
- Elimination of the tax deduction for Blue Cross and Blue Shield companies if they don’t spend at least 85 percent of premiums on clinical services. This provision may be in the “Unified” proposal, but it is not clear at this point.
Major Hurdles Ahead
As noted above, the House passed its health care bill earlier (H.R. 3962 – Affordable Health Care for America Act)), and there are major difference between the House bill and the Senate bill. But, when the political landscape changed in January, the White House jumped in. Ultimately, the differences will have to be worked out in conference committee. One of the big differences is that the House bill includes a 5.4% surtax on incomes that are already taxed at the highest rate. Keep in mind that, under present law, higher marginal tax rates (pre-2001 levels) are automatically restored in 2011 on the top two marginal income tax brackets, and the Administration has already proposed increasing the top two brackets to 36 percent and 39.6 percent beginning in 2011. Add to that higher capital gain rates that will kick-in beginning in 2011. When the 5.4 percent additional surtax is tacked on, rates in the highest tax brackets will be much higher than at the present time. As we discussed at the Tax Schools, there are planning strategies that need to be utilized if it is anticipated that tax rates are going to rise. In addition, history shows that when the top end gets taxed at confiscatory rates, revenues drop. That will certainly be a point of contention in the conference committee.
While both the House and Senate versions mandate that an individual must purchase “acceptable” health insurance (this provision will likely be challenged on constitutional grounds), except for low income persons – they can use other taxpayer’s dollars to help obtain their required health insurance via credits or vouchers. The House version also contains the so-called “public option,” but the Senate version does not. In general, employer-provided health insurance will satisfy the requirement (so long as the government approves). Also, the House version extends the existing income exclusion for employer-provided health insurance for employees’ spouses and dependent children to homosexual partners. The Senate bill does not. The House bill also specifies that “Black Liquor” (a byproduct of the paper-milling process) does not qualify for the cellulosic biofuel tax credit. The Senate bill does not contain such a provision, but the provision is included in the “Unified” proposal. Also the “Unified” proposal contains a provision that beefs up the economic substance rules.
So, there remains some “bumps” in the road to getting the legislation passed. Stay tuned. As the tax provisions change, we will keep you updated.
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.