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LexisNexis® Federal Tax Legislative Analysis Patient Protection and Affordable Care Act An Analysis

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PATIENT PROTECTION AND AFFORDABLE CARE ACT

AN ANALYSIS

(PUBLIC LAW NUMBER 111-148)

SIGNED BY PRESIDENT BARACK H. OBAMA ON MARCH 23, 2010

By

Gerald W. Paulukonis, Esq.


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Patient Protection and Affordable Care Act An Analysis


LexisNexis, Lexis and the Knowledge Burst logo are registered trademarks of Reed Elsevier Properties Inc., used under license. Matthew Bender is a registered trademark of Matthew Bender Properties I


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Table of Contents

§ 1.00 Introduction § 1.01 New Refundable Tax Credit for Coverage under a Qualified Health

Plan

§ 1.02 § 1.03 § 1.04 § 1.05 § 1.06 § 1.07 § 1.08 § 1.09 § 1.10 § 1.11 § 1.12 § 1.13 § 1.14 § 1.15 § 1.16 § 1.17

Credit for Employee Health Insurance Expenses of Small Businesses New Qualifying Therapeutic Discovery Project Credit Increased Threshold for Itemized Medical Deduction Increase in Additional Tax on Distributions from HSAs Not Used for Medical Expenses Qualified Distributions from Health Plans for Medicine Are Limited to Prescribed Drugs or Insulin Repeal of Deduction for Federal Subsidies for Certain Retiree Prescription Drug Plans Exclusion for Assistance Provided to Participants in State Student Loan Repayment Programs for Certain Health Professionals Offering of Qualified Health Plans Through Cafeteria Plans Limitation on Health Flexible Spending Arrangements under Cafeteria Plans Establishment of Simple Cafeteria Plans for Small Businesses Indian Health Care Benefits Free Choice Voucher Provisions Limitation on Deduction for Remuneration Paid by Health Insurance Providers Additional Hospital Insurance Tax on High-Income Taxpayers Patient-Centered Outcomes Research Trust Fund and Financing Additional Requirements for Charitable Hospitals

[1] Community Health Needs Assessment Requirements [2] Financial Assistance Policy Requirements [3] Limitations on Charges [4] Billing and Collection Requirements § 1.18 § 1.19 § 1.20 § 1.21 § 1.22

Inclusion of Cost of Employer-Sponsored Health Coverage on W-2 Reporting of Health Insurance Coverage Reporting of Employer Health Insurance Coverage Information Reporting on Payments to Corporations Disclosures to Carry Out Eligibility Requirements for Certain Programs


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§ 1.23 § 1.24 § 1.25 § 1.26 § 1.27 § 1.28 § 1.29 § 1.30 § 1.31

Excise Tax on Individuals Without Minimum Essential Health Care Coverage Modification of Section 833 Treatment of Certain Health Organizations New Excise Tax on Indoor Tanning Services Changes to Adoption Credit and Adoption Assistance Provisions Shared Responsibility for Employers with Respect to Health Coverage Excise Tax on High Cost Employer-Sponsored Health Coverage Imposition of Annual Fee on Branded Prescription Pharmaceutical Manufacturers and Importers Imposition of Annual Fee on Medical Device Manufacturers and Importers Imposition of Annual Fee on Health Insurance Providers


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§ 1.00 Introduction This article discusses the tax provisions of the historic health care bill, the Patient Protection and Af-fordable Care Act (H.R. 3590). The bill was signed by President Barack H. Obama on March 23, 2010 and en-rolled as Public Law 111-148. The numerous tax provisions contained in the massive health care reform bill are described in this article. Throughout the article, the legislation is referred to as the “Act.” The legislative history of the Act can be found within the 2010 Legislation and Analysis file located on lexis.com and LexisNexis Tax Center. § 1.01 New Refundable Tax Credit for Coverage under a Qualified Health Plan The Act creates a refundable tax credit for coverage under a qualified health plan. The credit is avail-able for eligible individuals and families who purchase health insurance through an exchange [IRC § 36B, added by Act § 1401]. The credit subsidizes the purchase of certain health insurance plans through an ex-change. Many details relating to the workings of the credit are in provisions of the Act outside of the Internal Revenue Code and are beyond the scope of this discussion [See Act, §§ 1411-1415]. The credit is available for individuals (single or joint filers) with household incomes [as defined in IRC § 36B(d)(2)] between 100 and 400 percent of the federal poverty level (“FPL”) for the family size involved [IRC § 36B(c)(1)(A)]. To be eligible for the credit, taxpayers who are married must file a joint return [IRC § 36B(c)(1)(C)]. Individuals who are listed as dependents on a return are ineligible for the premium assistance credit [IRC § 36B(c)(1)(D)]. The amount of the credit is equal to the sum of premium assistance amounts for months the taxpayer was covered during the year [IRC § 36B(b)(1)]. The credit amount is tied to the cost of the “second lowest-cost silver plan” as defined in the statute [IRC § 36B(b)(2)(B)(i); 36B(b)(3)(B)]. The credit is determined on a slid-ing scale basis, based on the percentage of household income the cost of premiums represents. The applicable percentage used to determine the credit varies, based on the taxpayer’s household income level vis- a-vis the FPL [IRC § 36B((b)(2), (3)(A)]. Beginning in 2014, the percentages of income are indexed to the excess of premium growth over income growth for the preceding calendar year (in order to hold steady the share of pre-miums that enrollees at a given poverty level pay over time) [IRC § 36B(b)(3)(A)(iii)]. Generally, if an employee is offered minimum essential coverage in the group market, including em-ployer-provided health insurance coverage, the individual is ineligible for the premium tax credit for health in-surance purchased through a state exchange [IRC § 36B(c)(2)(B)]. If an employee is offered unaffordable cov-erage by his or her employer or the plan’s share of provided benefits is less than 60 percent, the employee can be eligible for the premium tax credit, but only if the employee declines to enroll in the coverage and satisfies the conditions for receiving a tax credit through an exchange [IRC § 36B(c)(2)(C)].


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If the premium assistance received through an advance payment exceeds the amount of credit to which the taxpayer is entitled, the excess advance payment is treated as an increase in tax [IRC § 36B(f)(2)(A)]. For persons whose household income is below 400 percent of the FPL, the amount of the increase in tax is limited to $400 [IRC § 36B(f)(2)(B)(i)]. This amount is indexed for inflation beginning after 2010 [IRC § 36B(f)(2)(B)(ii)]. No deduction may be taken for any portion of the premiums paid by a taxpayer equal to the amount of the credit determined with respect to those premiums [IRC § 280C(g)]. The provision is effective for taxable years ending after December 31, 2013 [Act § 1401(e)]. § 1.02 Credit for Employee Health Insurance Expenses of Small Businesses The Act adds a new tax credit for a qualified small employer for non-elective contributions to purchase health insurance for its employees [IRC § 45R, added by Act § 1421(a), and amended by Act § 10105]. A qualified small business employer for this purpose generally is an employer with no more than 25 full-time equivalent employees (FTEs) employed during the employer’s taxable year, and whose employees have annual full-time equivalent wages that average no more than $50,000 [IRC § 45R(d)(1), (d)(3)(B); the wage amount will be adjusted for inflation after 2013]. The employer must also have a contribution arrangement in effect [IRC § 45R(d)(1), (4)]. Notwithstanding that an employer eligible for the credit may have 25 FTEs, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual fulltime equivalent wages from the employer of less than $25,000 [IRC § 45R(c); the wage amount will be adjusted for inflation after 2013]. An employer’s FTEs are calculated by dividing the total hours for which the employer paid wages to employees during the taxable year by 2,080. For this purpose, the maximum number of hours that are counted for any single employee is 2,080 (rounded down to the nearest whole number) [IRC § 45R(d)(2)(A), (B)]. Wages are defined in the same manner as under IRC Section 3121(a) (as determined for purposes of FICA taxes but without regard to the dollar limit for covered wages) [IRC § 45R(e)(4)], and the average wage is determined by dividing the total wages paid by the small employer by the number of FTEs (rounded down to the nearest $1,000) [IRC § 45R(d)(3)]. The number of hours of service worked by, and wages paid to, a seasonal worker are not taken into account in determining the FTEs and average annual wages of the employer unless the worker works for the employer on more than 120 days during the taxable year [IRC § 45R(d)(5)(A)]. To be eligible for the credit, the contributions must be provided under an arrangement that requires the eligible small employer to make a non-elective contribution on behalf of each employee who enrolls in certain


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defined qualifying health insurance offered to employees by the employer through an exchange equal to a uni-form percentage (not less than 50 percent) of the premium cost of the qualifying health plan [IRC § 45R(d)(4)]. The credit is only available to offset actual tax liability and is claimed on the employer’s tax return. The credit is not payable in advance to the taxpayer or refundable. Thus, the employer must pay the employees’ premiums during the year and claim the credit at the end of the year on its income tax return. The credit is a general business credit [IRC § 38(b)(36)], and is allowed against the alternative minimum tax [IRC § 38(c)(4)(B)(vi)]. The credit is initially available for any taxable year beginning in 2010, 2011, 2012, or 2013 [IRC § 45R(g)]. Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage within the meaning of section 9832, which is generally health insurance coverage purchased from an insurance company licensed under state law [IRC § 45R(g)(2)(B)]. For taxable years beginning in years after 2013, the credit is only available to a qualified small employer that purchases health insurance coverage for its employees through a state exchange and is only available for a maximum coverage period of two consecutive taxable years beginning with the first year in which the employer or any predecessor first offers one or more qualified plans to its employees through an exchange [IRC § 45R(d)(4), (e)(2)]. The maximum two-year cover-age period does not take into account any taxable years beginning in years before 2014 [IRC § 45R(g)(1)]. Thus a qualified small employer could potentially qualify for this credit for six taxable years, four years under the first phase and two years under the second phase. The amount of the credit is equal to the applicable percentage of the small business employer’s contribu-tion to the health insurance premium for each covered employee. Only non-elective contributions by the em-ployer are taken into account in calculating the credit [IRC § 45R(b)]. Therefore, any amount contributed pur-suant to a salary reduction arrangement under a cafeteria plan within the meaning of IRC Section 125 is not treated as an employer contribution for purposes of this credit. The credit is equal to the lesser of the following two amounts multiplied an applicable tax credit per-centage [IRC § 45R(b)]: (1) the amount of contributions the employer made on behalf of the employees during the taxable year for the qualifying health coverage and (2) the amount of contributions that the employer would have made during the taxable year if each employee had enrolled in coverage with a small business benchmark premium [IRC § 45R(d)(4)]. For the first phase of the credit (any taxable years beginning in 2010, 2011, 2012, or 2013), the applica-ble tax credit percentage is 35 percent [IRC § 45R(g)(2)]. The benchmark premium is the average total pre-mium cost in the small group market for employer-sponsored coverage in the employer’s state or an area within the state specified by the Secretary [IRC § 45R(g)(2)(C)]. For taxable years beginning in years after 2013, the applicable tax credit percentage is 50 percent [IRC § 45R(b)]. The benchmark premium is the average total


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premium cost in the small group market for employer-sponsored coverage in the rating area in which the em-ployee enrolls for coverage [IRC § 45R(b)(2)]. The credit is reduced for employers with more than 10 FTEs but not more than 25 FTEs [IRC § 45R(c)(1)]. The credit is also reduced for an employer for whom the average wages per employee is between $25,000 and $50,000 [IRC § 45R(c)(2)]. The amount of this reduction is equal to the amount of the credit (de-termined before any reduction) multiplied by a fraction, the numerator of which is the average annual wages of the employer in excess of $25,000 and the denominator is $25,000 [IRC § 45R(c)(2)]. For an employer with more than 10 FTEs, the reduction is determined by a fraction, the numerator of which is the number of FTEs in excess of 10 and the denominator is 15 [IRC § 45R(c)(1)]. For an employer with both more than 10 FTEs and average annual wages in excess of $25,000, the reduction is the sum of the amount of the two reductions [IRC § 45R(c)]. Otherwise qualifying tax-exempt organizations are eligible for a reduced credit [IRC § 45(f)]. The credit percentage for the credit during the first phase of the credit (any taxable year beginning in 2010, 2011, 2012, or 2013) is limited to 25 percent [IRC § 45R(g)(2)(A)], and the credit percentage for the credit during the second phase (taxable years beginning in years after 2013) is limited to 35 percent [IRC § 45R(b)]. A tax-exempt organization may apply the credit against the its liability as an employer for payroll taxes for the taxable year to the extent of: (1) the amount of income tax withheld from its employees under IRC Section 3401(a); (2) the amount of hospital insurance tax withheld from its employees under IRC Section 3101(b); (3) and the amount of the hospital tax imposed on the organization under IRC Section 3111(b) [IRC § 45R(f)(3)]. How-ever, the organization is not eligible for a credit in excess of the amount of these payroll taxes [IRC § 45R(f)(1)]. Several special rules apply with respect to the credit. An employer is entitled to a deduction under IRC Section 162 equal to the amount of the employer contribution minus the dollar amount of the credit [IRC § 280C(h)]. Aggregation rules apply to determine the employer [IRC § 45R(e)(5)]. Self-employed individuals, including partners and sole proprietors, 2-percent shareholders of an S corporation, and 5-percent owners of the employer [see IRC § 416(i)(1)(B)(i)] are not treated as employees for purposes of the credit, nor are certain in-dividuals who are related to or dependents of those individuals [IRC § 45R(e)(1)(A)]. The credit is eligible for deduction under the expiring credit provision [IRC § 196(c)(14)]. The Secretary is directed to prescribe such regulations as may be necessary to carry out the provisions of the credit, including regulations to prevent the avoidance of the two-year limit on the credit period for the sec-ond phase of the credit through the use of successor entities, and avoidance on the limit on the number of em-ployees and amount of average wages through the use of multiple entities [IRC § 45R(i)]. In general, the provision applies to amounts paid or incurred in taxable years beginning after December 31, 2009 [Act § 1421(f)(1), amended by Act § 10105(e)]. The provision allowing the use of the credit against


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the AMT applies to credits under the provision in taxable years beginning after December 31, 2009, and to car-rybacks of those credits [Act § 1421(f)(2), amended by Act § 10105(e)].

. § 1.03 New Qualifying Therapeutic Discovery Project Credit The Act establishes a new 50-percent nonrefundable investment tax credit for qualified investments in qualifying therapeutic discovery projects in 2009 or 2010 [IRC § 48D, added by Act § 9023]. The credit is part of the investment credit [IRC § 46(6)]. The credit is connected with the establishment of a $1 billion program to consider and award certifications for qualified investments that have the potential to result in therapies to treat various conditions, reduce long-term health care costs, or cure cancer [IRC § 48D(d)]. The credit is avail-able only to companies having 250 or fewer employees [IRC § 48D(c)(2)]. Companies must apply to the Secre-tary to obtain certification for qualifying investments [IRC § 48D(d)(2)]. Costs eligible for the credit include those necessary for and directly related to the conduct of a qualify-ing therapeutic discovery project, but the following costs are not eligible [IRC § 48D(b)(1), (3)]: (1) compensa-tion paid to a CEO or the 4 highest compensated officers, (2) interest expense, (3) facility maintenance expenses [see IRC § 48D(c)(3)], (4) a service cost [see Treas Reg § 1.263A-1(e)(4)], or (5) any other expenditure as de-termined by the Secretary as appropriate to carry out the purposes of the provision. Qualified therapeutic discovery project expenditures do not qualify for the research credit, orphan drug credit, or bonus depreciation [IRC § 48D(e)(2)]. If a credit is allowed for an expenditure related to property subject to depreciation, the basis of the property is reduced by the amount of the credit [IRC § 48D(e)(1)]. Ad-ditionally, expenditures taken into account in determining the credit are nondeductible to the extent of the credit claimed that is attributable to such expenditures [IRC § 48D(e)(2)(B)]. Expenditures taken into account in de-termining the credit are nondeductible to the extent of the credit claimed that is attributable to them [IRC § 280C(g)]. Taxpayers may elect to receive credits that have been allocated to them in the form of Treasury grants equal to 50 percent of the qualifying investment [IRC § 48D(f)(1)]. Any such grant is not includible in the tax-payer’s gross income [IRC § 48D(f)(3)]. Nonqualified nonrecourse financing will reduce the credit base [IRC § 49(a)(1)(A), (C)(vi)]. § 1.04 Increased Threshold for Itemized Medical Deduction The Act increases the threshold for the itemized deduction for unreimbursed medical expenses from 7.5 percent of AGI to 10 percent of AGI for regular income tax purposes [IRC § 213(a), amended by Act § 9013]. However, for the years 2013, 2014, 2015 and 2016, if either the taxpayer or the taxpayer’s spouse turns 65 be-fore the end of the taxable year, the increased threshold does not apply and the threshold remains at 7.5 percent of AGI [IRC § 213(f)]. The provision does not change the AMT treatment of the itemized deduction for medi-


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cal expenses, which remains at 10 percent. The exception for taxpayers turning 65 in 2013 through 2016 does not apply for AMT purposes [IRC § 56(b)(1)(B)]. The provision is effective for taxable years beginning after December 31, 2012 [Act § 9013(d)]. § 1.05 Increase in Additional Tax on Distributions from HSAs Not Used for Medical Expenses The additional tax on distributions from an HSA or an Archer MSA that are not used for qualified medi-cal expenses is increased to 20 percent of the disbursed amount [IRC §§ 220(f)(4)(A), 223(f)(4)(A), amended by Act § 9004]. The change is effective for distributions made after December 31, 2010 [Act § 9004(c)]. § 1.06 Qualified Distributions from Health Plans for Medicine Are Limited to Prescribed Drugs or Insulin The definition of medical expense for purposes of employer-provided health coverage (including HRAs and Health FSAs), HSAs, and Archer MSAs, is conformed to the definition for purposes of the itemized deduc-tion for medical expenses [see IRC § 213], except that the determination of whether a medicine or drug is a pre-scribed drug is made without regard to whether the drug is available without a prescription. Thus, the cost of over-the-counter medicines may not be reimbursed with excludible income through a Health FSA, HRA, HSA, or Archer MSA, unless the medicine is prescribed by a physician [IRC §§ 220(d)(2)(A), 223(d)(2)(A), amended by Act § 9003(a), (b); IRC § 106(f), added by Act § 9003(c)]. The provision regarding savings accounts ap-plies for amounts paid with respect to taxable years beginning after December 31, 2010 [Act 9003(d)(1)]. The amendment regarding reimbursements applies to expenses incurred after December 31, 2010 [Act 9003(d)(2)]. § 1.07 Repeal of Deduction for Federal Subsidies for Certain Retiree Prescription Drug Plans The Act amends IRC Section 139A to eliminate the rule that the exclusion for subsidy payments under that section is not taken into account for purposes of determining whether a deduction is allowable with respect to retiree prescription drug expenses. Thus, the amount otherwise allowable as a deduction for retiree prescrip-tion drug expenses is reduced by the amount of the excludable subsidy payments received. The provision ap-plies to taxable years beginning after December 31, 2010 [Act § 9012(b)]. § 1.08 Exclusion for Assistance Provided to Participants in State Student Loan Repayment Programs for Certain Health Professionals The gross income exclusion for amounts received under the National Health Service Corps loan repay-ment program or certain state loan repayment programs to include any amount received by an individual under any state loan repayment or loan forgiveness program that is intended to provide for the increased availability of


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health care services in underserved or health professional shortage areas (as determined by the state) [IRC § 108(f)(4), amended by Act 10908(a)]. The provision is effective for amounts received by an individual in tax-able years beginning after December 31, 2008 [Act § 10908(b)]. § 1.09 Offering of Qualified Health Plans Through Cafeteria Plans The Act Section 1515 adds a provision stating that reimbursement (or direct payment) for the premiums for coverage under any qualified health plan offered through an Exchange is generally not a qualified benefit under a cafeteria plan [IRC § 125(f)(3)(A)]. Reimbursement is a qualified benefit under a cafeteria plan, how-ever, if the employer is a qualified employer [IRC § 125(f)(3)(B)]. A qualified employer is generally a small employer that elects to make all its full-time employees eligible for one or more qualified plans offered in the small group market through an Exchange [Act 1312(f)(2)]. Thus, an employer that is not a qualified employer cannot offer to reimburse an employee for the premium for a qualified plan that the employee purchases through the individual market in an Exchange as a health insurance coverage option under its cafeteria plan. A “small employer” is with no more than 25 full-time equivalent employees for the taxable year, whose average annual wages to not exceed $50,000, and which has a non-elective contribution arrangement [IRC § 45R(d)(1)]. The provision is effective for taxable years beginning after December 31, 2013 [Act § 1515(c)].

§ 1.10 Limitation on Health Flexible Spending Arrangements under Cafeteria Plans

A Health Flexible Spending Arrangement (Health FSA) is health coverage in a cafeteria plan in the form of an unfunded arrangement under which employees are given the option to reduce their current cash compensa-tion and instead have the amount of the salary reduction contributions made available for use in reimbursing the employee for his or her medical expenses [IRC § 125; see Prop Treas Reg § 1.125-5]. Under a new provision, in order for a Health FSA to be a qualified benefit under a cafeteria plan, the cafeteria plan must provide that an employee cannot elect for any taxable year to have salary reduction contributions in excess of $2,500 made to the Health FSA. The limit is adjusted for inflation after 2011 [IRC § 125(i), added by Act §§ 9005(a), 10902]. The provision is effective for taxable years beginning after December 31, 2010 [Act 10902(b)]. § 1.11 Establishment of Simple Cafeteria Plans for Small Businesses Section 9022 of the Act adds a new provision giving eligible small employers a safe harbor from the nondiscrimination requirements for cafeteria plans. Under the safe harbor, a so-called “simple cafeteria plan” is treated as meeting specified nondiscrimination rules [see IRC §§ 79(d), 105(h), 125(b), (j)(6), 129(d)(2), (3), (4), (8)] if the plan satisfies minimum eligibility and participation requirements and minimum contribution re-quirements [IRC § 125(j)(1), (2)].


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The eligibility and participation requirements are met only if all employees (other than excludable em-ployees) are eligible to participate, and if each employee eligible to participate is able to elect any benefit avail-able under the plan (subject to the terms and conditions applicable to all participants) [IRC § 125(j)(4)(A)]. However, a cafeteria plan will not fail to satisfy this eligibility requirement merely because the plan excludes employees who (1) have not attained the age of 21 (or a younger age provided in the plan) before the close of a plan year, (2) have fewer than 1,000 hours of service for the preceding plan year, (3) have not completed one year of service with the employer as of any day during the plan year, (4) are covered under an agreement that the Secretary of Labor finds to be a collective bargaining agreement if there is evidence that the benefits cov-ered under the cafeteria plan were the subject of good faith bargaining between employee representatives and the employer, or (5) are described in IRC Section 410(b)(3)(C) (relating to nonresident aliens working outside the United States). An employer may have a shorter age and service requirements [IRC § 125(j)(4)(A)(i), (B)]. The minimum contribution requirement is met if, under the plan, the employer must—without regard to whether an employee makes a salary reduction contribution—make a minimum contribution to provide quali-fied benefits under the plan on behalf of each qualified employee. The minimum contribution is an amount equal to (1) a uniform percentage (not less than two percent) of each eligible employee’s compensation for the plan year, or (2) an amount not less than the lesser of (a) 6 percent of the employee’s compensation for the plan year, or (b) twice the amount of the salary reduction contributions of each qualified employee [IRC § 125(j)(3)(A)]. The minimum contribution requirement is met only if any matching contributions with respect to salary reduction contributions for any highly compensated employee or key employee are not made at a greater rate than the matching contributions for any non-highly compensated employee [IRC § 125(j)(3)(B)]. Subject to the matching contribution parity requirement, a small employer may provide qualified benefits under the plan in addition to the required contributions [IRC § 125(j)(3)(C)]. An eligible small employer under the provision is, with respect to any year, an employer who employed an average of 100 or fewer employees on business days during either of the two preceding years. For purposes of the provision, a year may only be taken into account if the employer was in existence throughout the year [IRC § 125(j)(5)(A)]. If an employer was not in existence throughout the preceding year, the determination is based on the average number of employees that it is reasonably expected the employer will employ on business days in the current year [IRC § 125(j)(5)(B)]. If an employer was an eligible employer for any year and main-tained a simple cafeteria plan for its employees for that year, then, for each subsequent year during which the employer continues, without interruption, to maintain the cafeteria plan, the employer is deemed to be an eligi-ble small employer until the employer employs an average of 200 or more employees on business days during any year preceding any that subsequent year [IRC § 125(j)(5)(c)]. The determination of whether an employer is an eligible small employer takes into account predecessor employers [IRC § 125(j)(5)(D)(i)], and is determined by applying the controlled group rules of IRC Section 52(a) and (b) under which all members of the controlled group are treated as a single employer. In addition, the definition of employee includes leased employees [IRC § 125(j)(5)(D)(ii); see IRC § 4141(n), (o)].


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The provision is effective for taxable years beginning after December 31, 2010 [Act § 9022(b)]. § 1.12 Indian Health Care Benefits Section 9021 of the Act adds a new IRC Section 139D, which allows an exclusion from gross income for the value of qualified Indian health care benefits [IRC § 139D(a)]. The exclusion applies to the value of: (1) health services or benefits provided or purchased by the Indian Health Service (“IHS”), either directly or indi-rectly, through a grant to or a contract or compact with an Indian tribe or tribal organization or through pro-grams of third parties funded by the IHS; (2) medical care provided or purchased by an Indian tribe or tribal or-ganization to a member of an Indian tribe, including the member’s spouse or dependents, as well as amounts paid to reimburse for that medical care; (3) accident or health insurance coverage (or an arrangement having the same effect), or an accident or health plan, provided by an Indian tribe or tribal organization for medical care to a member of an Indian tribe, including the member’s spouse or dependents; and (4) any other medical care pro-vided by an Indian tribe or tribal organization that supplements, replaces, or substitutes for the programs and services provided by the federal government to Indian tribes or Indians [IRC § 139D(b)]. This provision does not apply to any amount which is deducted or excluded from gross income under another provision of the Code [IRC § 139D(d)]. No change made by the provision is intended to create an in-ference with respect to the exclusion from gross income of benefits provided prior to March 23, 2010. In addi-tion, no inference is intended with respect to the tax treatment of other benefits provided by an Indian tribe or tribal organization not covered by this provision [Act § 9021(d)]. The provision applies to benefits and cover-age provided after March 23, 2010 [Act § 9021(c)]. NOTE: The code number assigned to the Indian health care benefits exclusion—IRC Section 139D—duplicates the number assigned to the free choice voucher exclusion provision, discussed immediately below. § 1.13 Free Choice Voucher Provisions Section 10108 of the Act adds a number of provisions relating to free choice vouchers. Employers of-fering minimum essential coverage through an eligible employer-sponsored plan and paying a portion of that coverage must provide qualified employees with a voucher whose value can be applied to purchase of a health plan through the Exchange [Act § 10108(a), (b)]. The amount is deductible as compensation [IRC § 162(a)]. Qualified employees are employees (1) whose required contribution for employer sponsored minimum essential coverage exceeds 8 percent, but does not exceed 9.8 percent of the employee’s household income for the tax-able year, (2) whose household income does not exceed 400 percent of the poverty line for the family, and (3) who do not participate in the employer’s health plan [Act § 10108(c)(1)]. The 8 percent and the 9.8 percent fig-ures are indexed to the excess of premium growth over income growth for the preceding calendar year [Act § 10108(c)(2)].


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The amount of the voucher is equal to what would have been the monthly portion of the cost of the em-ployer contribution to the employer offered health plan if the employee were covered under the plan with re-spect to which the employer pays the largest portion of the cost of the plan. The amount of the voucher is for self-only coverage unless the individual purchases family coverage in the Exchange [Act § 10108(d)(1)(A). Special rules are used to determine the cost of any health plan [Act § 10108(d)(1)(B)]. Vouchers can be used in the Exchange toward the monthly premium of any qualified health plan in the Exchange. The offering employer must pay any amounts so credited to the Exchange [Act § 10108(d)(2)]. The value of the voucher to the extent it is used for the purchase of a health plan is not includable in gross income [IRC § 139D]. If the value of the voucher exceeds the premium of the health plan chosen by the employee, the employee is paid the excess value of the voucher [Act § 10108(d)(3)], and this excess amount is includible in the employee’s gross income. If an individual receives a voucher the individual is disqualified from receiving any tax credit or cost sharing credit for the purchase of a plan in the Exchange [IRC § 36B(c)(2)(D)]. Similarly, if any employee receives a free choice voucher, the employer is not be assessed a shared responsibility payment on behalf of that employee [IRC § 4980H(c)(3)]. The provision is generally effective after December 31, 2013 [Act § 10108(f)(3), (g)(2), (h)(2), (i)(1)(B), (j)(4)]. NOTE: The code number assigned to the free choice voucher exclusion—IRC Section 139D—duplicates the number assigned to the new exclusion for Indian health care benefits, discussed above. § 1.14 Limitation on Deduction for Remuneration Paid by Health Insurance Providers Section 9014 of the Act adds new IRC Section 162(m)(6), which denies compensation deductions for certain remuneration in excess of $500,000 per year for certain health insurance providers. The restriction does not apply to certain performance-based remuneration, commissions, or remuneration under existing binding contracts [IRC § 162(m)(6)(D)]. This $500,000 deduction limitation applies without regard to whether the re-muneration is paid during the taxable year or a subsequent taxable year. In applying this rule, rules similar to those that apply to the TARP program [IRC § 162(m)(5)(A)(ii)] apply. Thus in the case of remuneration that relates to services that an applicable individual performs during a taxable year but that is not deductible until a later year, such as nonqualified deferred compensation, the unused portion (if any) of the $500,000 limit for the year is carried forward until the year in which the compensation is otherwise deductible, and the remaining un-used limit is then applied to the compensation [IRC § 162(m)(6)(A)(ii)]. In determining whether the remunera-tion of an applicable individual for a year exceeds $500,000, all remuneration from all members of any con-trolled group of corporations [see IRC § 414(b)], other businesses under common control [see IRC § 414(c)], or affiliated service group [see IRC § 414(m), (o)] are aggregated [IRC § 162(m)(6)(C)(ii)].


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For taxable years beginning after December 31, 2009, and before January 1, 2013, any employer that is a health insurance issuer and which receives premiums from providing health insurance coverage is subject to the restriction [IRC § 162(m)(6)(C)(i)(I)]. For taxable years beginning after December 31, 2012, a health insur-ance issuer is subject to the restriction only if at least 25 percent of its gross premium income from providing health insurance coverage is from minimum essential coverage [IRC § 162(m)(6)(C)(i)(II)]. The deduction restriction applies to remuneration paid for services performed by any “applicable indi-vidual” [IRC § 162(m)(6)(A)]. Applicable individuals include all officers, employees, directors, and other workers or service providers (such as consultants) performing services for or on behalf of a covered health in-surance provider [IRC § 162(m)(6)(F)]. Thus, the limitation applies broadly to remuneration of all employees and service providers. The provision applies to taxable years beginning after December 31, 2009 with respect to services performed after that date [Act § 9014(b)]. § 1.15 Additional Hospital Insurance Tax on High-Income Taxpayers The employee portion of the hospital insurance (HI) tax is increased by an additional tax of 0.9 percent on wages received in excess of the threshold amount. The threshold amount is $250,000 in the case of a joint return and $200,000 in any other case [IRC § 3101(b)(2), amended by Act §§ 9015(a) and 10906(a)]. The em-ployer is required to deduct and withhold the additional HI tax from the employee’s wages, but the employee is liable for the tax if the employer fails to do so [IRC § 3102(f)(1), (2)]. However, in determining the employer’s requirement to withhold and liability for the tax, only wages in excess of $200,000 for a year are taken into ac-count and the employer must disregard the amount of wages received by the employee’s spouse. Thus, the em-ployer is only required to withhold on wages in excess of $200,000 for the year, even though the tax may apply to a portion of the employee’s wages at or below $200,000 because of spousal income [IRC § 3102(f)(1)]. If an employer fails to deduct and withhold the additional tax from the employee’s wages and the employee later pays the tax, the employer is still liable for penalties or additions to the tax for failure to deduct and withhold [IRC § 3102(f)(3)]. The same additional 0.9 percent HI tax applies to the HI portion of tax on self-employment income in excess of the threshold amount. The threshold amount is $250,000 in the case of a joint return and $200,000 in any other case [IRC § 1401(b)(2)(A), amended by Act §§ 9015(b) and 10906(b)]. The threshold amount is re-duced (but not below zero), however, by the amount of wages taken into account in determining the FICA tax with respect to the taxpayer [IRC § 1401(b)(2)(B)]. No deduction is allowed under IRC Section 164(f) for the additional tax [IRC § 164(f)], and the deduction is determined without regard to the additional tax rate [IRC § 1402(a)(12)(B)]. The provisions apply to remuneration received and taxable years beginning after December 31, 2012 [Act §§ 9015(c), 10906(c)].


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§ 1.16 Patient-Centered Outcomes Research Trust Fund and Financing The Act adds new IRC Section 9511, which establishes the Patient Centered Outcomes Research Trust Fund (Fund) to carry out authorized research. The Fund is paid for in part from fees imposed on health plans under new IRC Sections 4375 through 4377. Under IRC Section 4375, a fee is imposed on each specified health insurance policy. The fee is equal to two dollars (one dollar in the case of policy years ending during fiscal year 2013) multiplied by the average number of lives covered under the policy [IRC § 4375(a)]. For any policy year ending in a fiscal year begin-ning after September 30, 2014, the dollar amount is equal to the sum of: (1) the dollar amount for policy years ending in the preceding fiscal year, plus (2) an amount equal to the product of (a) the dollar amount for policy years ending in the preceding fiscal year, multiplied by (b) the percentage increase in the projected per capita amount of National Health Expenditures, as most recently published by the Secretary before the beginning of the fiscal year [IRC § 4375(d)]. The issuer of the policy is liable for payment of the fee [IRC § 4375(b)]. A specified health insurance policy includes any accident or health insurance policy issued with respect to indi-viduals residing in the United States [IRC § 4375(c)(1)], including prepaid health coverage arrangements [IRC § 4375(c)(3)]. The fee is not imposed for policy years ending after September 30, 2019 [IRC § 4375(e)]. In the case of an applicable self-insured health plan, new IRC Section 4376 imposes a fee equal to $2 ($1 in the case of policy years ending during fiscal year 2013) multiplied by the average number of lives cov-ered under the plan [IRC § 4376(a)]. For any plan year ending in a fiscal year beginning after September 30, 2014, the dollar amount is equal to the sum of: (1) the dollar amount for policy years ending in the preceding fiscal year, plus (2) an amount equal to the product of (a) the dollar amount for policy years ending in the pre-ceding fiscal year, multiplied by (b) the percentage increase in the projected per capita amount of National Health Expenditures, as most recently published by the Secretary before the beginning of the fiscal year [IRC § 4376(d)]. The plan sponsor is liable for payment of the fee [IRC § 4376(b)(1)]. An applicable self-insured health plan is any plan providing accident or health coverage if any portion of the coverage is provided other than through an insurance policy and the plan is established or maintained: (1) by one or more employers for the benefit of their employees or former employees, (2) by one or more employee organizations for the benefit of their members or former members, (3) jointly by one or more employers and one or more employee organiza-tions for the benefit of employees or former employees, (4) by a VEBA, (5) by any organization described in IRC Section 501(c)(6) of the Code, or (6) in the case of a plan not previously described, by a multiple employer welfare arrangement (as defined in section 3(40) of ERISA), a rural electric cooperative (as defined in section 3(40)(B)(iv) of ERISA), or a rural telephone cooperative association (as defined in section 3(40)(B)(v) of ER-ISA) [IRC § 4376(c)(2)]. The fee is not imposed for plan years ending after September 30, 2019 [IRC § 4376(e)]. Governmental entities are generally not exempt from the above fees [IRC § 4377(b)(1), (2)]. There is an exception, however for exempt governmental programs including, Medicare, Medicaid, SCHIP, and any pro-


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gram established by federal law for proving medical care (other than through insurance policies) to members of the Armed Forces, veterans, or members of Indian tribes [IRC § 4377(b)(3)]. No amount collected from the fees on health insurance and self-insured plans are conveyed over to any possession of the United States [IRC § 4377(d)]. For purposes of the Code’s procedure and administration rules, the fees are treated as if they were taxes [IRC § 4377(c)]. § 1.17 Additional Requirements for Charitable Hospitals The Act imposes additional new requirements that must be met by charitable hospitals in order to main-tain their tax-exempt status [IRC § 501(r), added by Act § 9007(a)], including (1) community health needs as-sessment requirements [IRC § 501(r)(3)]; (2) financial assistance policy requirements [IRC § 501(r)(4)]; (3) limitations on charges [IRC § 501(r)(5)]; and (4) billing and collection requirements [IRC § 509(r)(6)]. [1] Community Health Needs Assessment Requirements Each hospital facility must conduct a community health needs assessment at least once every three tax-able years and adopt an implementation strategy to meet the community needs identified through the assessment [IRC § 501(r)(3)(A)]. The assessment must take into account input from persons who represent the broad in-terests of the community served by the hospital facility, including those with special knowledge or expertise of public health issues, and the assessment must be made widely available [IRC § 501(r)(3)(B)]. A hospital or-ganization that fails to meet the assessment requirement is subject to a penalty of $50,000 [IRC § 4959]. [2] Financial Assistance Policy Requirements Each hospital organization must establish a financial assistance policy that includes the following [IRC § 501(r)(4)(A)]: (1) eligibility criteria for financial assistance and whether that assistance includes free or dis-counted care; (2) the basis for calculating amounts charged to patients; (3) the method of applying for financial assistance; (4) if a hospital does not have a separate billing and collections policy, what actions the hospital may take in the event of non-response or nonpayment, including collections action and reporting to credit rating agencies; and (5) measures to widely publicize the policy within the community it serves. Each hospital organi-zation must also establish a written policy relating to emergency medical care [IRC § 501(r)(4)(B)]. [3] Limitations on Charges Each hospital organization must limit its charges for emergency or other medically necessary care pro-vided to individuals who qualify for financial assistance under the facility’s financial assistance policy to no more than the amounts generally billed to individuals who have insurance covering that care. Gross charges (i.e. “chargemaster” rates) are prohibited [IRC § 501(r)(5)].


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[4] Billing and Collection Requirements A hospital organization cannot engage in extraordinary collection actions (even if otherwise permitted by law) against an individual without first making reasonable efforts to determine whether the individual is eli-gible for assistance under the hospital’s financial assistance policy [IRC § 501(r)(6)]. The Act also adds new reporting and disclosure requirements. The Secretary or the Secretary’s delegate is required to review information about a hospital’s community benefit activities (currently reported on Form 990, Schedule H) at least once every three years [Act § 9007(c)]. Each organization subject to IRC Section 501(r) must file with its annual information return (i.e., Form 990) the following (1) a description of how it is addressing needs identified in each community health needs assessment, or why it is not addressing those needs; (2) a copy of its audited financial statements or consolidated financial statements [IRC § 6033(b)(15)]; (3) any tax imposed under IRC Section 4959 [IRC § 6033(b)(10)(D)]. The Secretary is also required to submit annual reports to Congress containing specified information relating to tax-exempt hospitals [Act § 9007(e)]. The above provisions generally apply to taxable years beginning after March 23, 2010 [Act § 9007(f)(1)]. The community health needs assessment requirement is effective for taxable years beginning after March 23, 2012 [Act § 9007(f)(2)]. The penalty tax under IRC Section 4959 applies to failures occurring after March 23, 2010 [Act § 9007(f)(3)]. § 1.18 Inclusion of Cost of Employer-Sponsored Health Coverage on W-2 Under current law, every employer is required to furnish each employee and the federal government with a statement of compensation information, including wages, paid by the employer to the employee, and the taxes withheld from those wages during the calendar year. There is no requirement that the employer report the total value of employer-sponsored health insurance coverage on the Form W-2, although some employers vol-untarily report the amount of salary reduction under a cafeteria plan resulting in tax-free employee benefits in box 14. The Act adds a provision requiring employers to disclose on each employee’s annual Form W-2 the value of the employee’s health insurance coverage sponsored by the employer. If an employee enrolls in em-ployer-sponsored health insurance coverage under multiple plans, the employer must disclose the aggregate value of all such health coverage (excluding the value of a health flexible spending arrangement). To determine the value of employer-sponsored health insurance coverage, the employer calculates the applicable premiums for the taxable year for the employee under the rules for COBRA continuation coverage under IRC Section 4980B(f)(4) (and accompanying Treasury regulations), including the special rule for self-insured plans. The value that the employer is required to report is the portion of the aggregate premium [IRC § 6041(a)(14), added by Act § 9002(a)].


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The provision is effective for taxable years beginning after December 31, 2010 [Act § 9002(b)].

§ 1.19 Reporting of Health Insurance Coverage The Act adds a new provision [IRC § 6055, added by Act § 1502] requiring insurers (including employ-ers who self-insure) that provide minimum essential coverage to any individual during a calendar year to report certain health insurance coverage information to both the covered individual and to the IRS [IRC § 6055(a)]. In the case of coverage provided by a governmental unit, or any agency or instrumentality thereof, the reporting requirement applies to the person or employee who enters into the agreement to provide the health insurance coverage (or their designee) [IRC § 6055(d)]. The information required to be reported includes: (1) the name, address, and taxpayer identification number of the primary insured, and the name and taxpayer identification number of each other individual ob-taining coverage under the policy; (2) the dates during which the individual was covered under the policy dur-ing the calendar year; (3) whether the coverage is a qualified health plan offered through an exchange; (4) the amount of any premium tax credit or cost-sharing reduction received by the individual with respect to that cov-erage; and (5) such other information as the Secretary may require [IRC § 6055(b)(1)]. To the extent health in-surance coverage is through an employer-provided group health plan, the return must also report the name, ad-dress and employer identification number of the employer, the portion of the premium, if any, required to be paid by the employer, and any other information the Secretary may require to administer the new tax credit for eligible small employers [IRC § 6055(b)(2); see IRC § 45R]. The insurer is required to report the above information, along with the name, address and contact infor-mation of the reporting insurer, to the covered individual on or before January 31 of the year following the cal-endar year for which the information is required to be reported to the IRS [IRC § 6055(c)]. An insurer who fails to comply with these new reporting requirements is subject to the penalties for fail-ure to file an information return and failure to furnish payee statements, respectively [IRC § 6724(d)(1)(B)(xxiv), (2)(GG)]. The IRS is required, not later than June 30 of each year, in consultation with the Secretary of HHS, to provide annual notice to each individual who files an income tax return and who fails to enroll in minimum es-sential coverage. The notice is required to include information on the services available through the exchange operating in the individual’s state of residence [Act § 1502(c)]. The provision is effective for calendar years beginning after 2013 [Act § 1502(e)].


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§ 1.20 Reporting of Employer Health Insurance Coverage The Act adds a new provision [IRC § 6056, added by Act § 1514] requiring certain employers to pro-vide information about health insurance coverage with respect to their full-time employees. Under the provi-sion, each applicable large employer subject to the employer responsibility provisions of new IRC Section 4980H and each “offering employer” must report certain health insurance coverage information to both its full-time employees and to the IRS [IRC § 6056(b), (c)]. An offering employer is any employer who offers mini-mum essential coverage to its employees under an eligible employer-sponsored plan, but only if the required contribution of any employee exceeds 8 percent of the employee’s wages paid by the employer to the employee [IRC § 6056(f)(1); the 8% is adjusted for inflation after 2014]. In the case of coverage provided by a govern-mental unit, or any agency or instrumentality thereof, the reporting requirement applies to the person or em-ployee appropriately designated for purposes of making the returns and statements required by the provision [IRC § 6056(e)]. The information required to be reported includes: (1) the name, address and employer identification number of the employer; (2) a certification as to whether the employer offers its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan; (3) the number of full-time employees of the employer for each month during the calendar year; (4) the name, address and taxpayer identification number of each full-time employee employed by the employer during the calendar year and the number of months, if any, during which the employee (and any dependents) was covered under a plan sponsored by the employer during the calendar year; and (5) such other information as the Secre-tary may require [IRC § 6056(b)(2)]. Employers who offer the opportunity to enroll in minimum essential coverage must also report: (1) in the case of an applicable large employer, the length of any waiting period with respect to such coverage; (2) the months during the calendar year during which the coverage was available; (3) the monthly premium for the lowest cost option in each of the enrollment categories under the plan; (4) the employer’s share of the total al-lowed costs of benefits under the plan; and (5) in the case of an offering employer, the option for which the em-ployer pays the largest portion of the cost of the plan and the portion of the cost paid by the employer in each of the enrollment categories under each option [IRC § 6056(b)(2)(C)]. The Secretary may review the accuracy of the information provided [IRC § 6056(b)(2)]. The employer is required to report to each full-time employee the above information required to be re-ported with respect to that employee, along with the name, address and contact information of the reporting em-ployer, on or before January 31 of the year following the calendar year for which the information is required to be reported to the IRS [IRC § 6056(c)].


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An employer who fails to comply with these new reporting requirements is subject to the penalties for failure to file an information return and failure to furnish payee statements, respectively [IRC § 6724(d)(1)(B)(xxv), (2)(HH)]. To the maximum extent feasible, the Secretary may provide that any information return or payee state-ment required to be provided under the provision may be provided as part of any return or statement required under new IRC Section 6051(a)(14) or IRC Section 6055 [IRC § 6056(d)(1)]. In the case of an applicable large employer or offering employer offering health insurance coverage of a health insurance issuer, the employer may enter into an agreement with the issuer to include information required by the provision with the informa-tion return and payee statement required under new IRC Section 6055 [IRC § 6056(d)(2)]. The provision is effective for periods beginning after December 31, 2013 [Act § 1514(d)]. § 1.21 Information Reporting on Payments to Corporations The Act adds a new reporting requirement [IRC § 6041(h), (i) added by Act § 9006(a)]. Under the Act, a business is required to file an information return for all payments aggregating $600 or more in a calendar year to a single payee (other than a payee that is a tax-exempt corporation), notwithstanding any regulation promul-gated under IRC Section 6041 prior to March 23, 2010. The payments to be reported include gross proceeds paid in consideration for property or services [IRC § 6041(a)]. The provision does not override specific provi-sions elsewhere in the Code that exempt certain payments from reporting, such as securities or broker transac-tions as defined under IRC Section 6045(a). The provision is effective for payments made after December 31, 2011 [Act § 9006(c)]. § 1.22 Disclosures to Carry Out Eligibility Requirements for Certain Programs IRC Section 6103 contains a number of exceptions to the general rule of confidentiality and nondisclo-sure of returns and return information. The Act adds a new exception allowing disclosure of return information to carry out eligibility requirements for certain health insurance programs [IRC § 6103(l)(21), added by Act § 1414(a); IRC Section 6103(a)(3), amended by Act § 1414(b)]. The exception allows the IRS, upon written re-quest of the Secretary of Health and Human Services (HHS), to disclose the following return information of any taxpayer whose income is relevant in determining the amount of the tax credit or cost-sharing reduction [see IRC § 36B, and Act § 1402], or eligibility for participation in the specified state health subsidy programs (i.e., a state Medicaid program under title XIX of the Social Security Act, a state’s children’s health insurance program under title XXI of that Act, or a basic health program under section 2228 of that Act): (1) taxpayer identity in-formation; (2) the filing status of the taxpayer; (3) the number of individuals for whom the taxpayer is allowed a dependency deduction, including the taxpayer’s spouse; (4) the modified adjusted gross income of the taxpayer, the taxpayer’s spouse, and of any dependents who are required to file a tax return; (5) such other information as


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is prescribed by Treasury regulation as might indicate whether the taxpayer is eligible for the credit or subsidy (and the amount thereof); and (6) the taxable year with respect to which the preceding information relates, or if applicable, the fact that the information is not available [IRC § 6103(l)(21)(A)]. The Secretary of HHS is permitted to disclose to an exchange or its contractors, or to the state agency administering the health subsidy programs referenced above (and their contractors) any inconsistency between the information submitted and IRS records [IRC § 6103(l)(21)(B)]. The disclosed return information may be used only for the purposes of, and only to the extent necessary in, establishing eligibility for participation in the exchange, verifying the appropriate amount of any credit or reduction, and determining eligibility for the speci-fied state health subsidy programs [IRC § 6103(l)(21)(C)]. Recipients of the confidential return information are subject to the safeguard protections [IRC § 6103(p)(4)] and civil and criminal penalties for unauthorized disclo-sure and inspection [IRC § 7213(a)(2)]. The provision is effective on March 23, 2010 [Act § 1414]. § 1.23 Excise Tax on Individuals Without Minimum Essential Health Care Coverage The Act adds a new penalty tax on individuals who fail to maintain adequate health care coverage [IRC § 5000A, added by Act § 1501]. Beginning January 2014, taxpayers are generally required to maintain speci-fied minimum essential health insurance coverage [see IRC § 5000A(f) for coverage that qualifies]. Individuals who fail to do so are subject to a penalty. Noncitizens, nonresident aliens, incarcerated individuals, and those with a religious exemption are not subject to the tax [IRC § 5000A(d)]. The penalty is equal to the lesser of the following: (1) the sum of the monthly penalty amounts determined under IRC Section 5000A(c)(2) for months in the taxable year during which 1 or more failures occurred, or (2) an amount equal to the national average premium for qualified health plans which have a bronze level of coverage, provide coverage for the applicable family size involved, and are offered through Exchanges for plan years beginning in the calendar year with or within which the taxable year ends [IRC § 5000A(c)(1)]. The monthly penalty amount for a taxpayer for any month is 1/12 of the greater of the following amounts [IRC Section 5000A(c)(2)]: (1) (a) the sum of the appli-cable dollar amounts ($95 in 2014, $495 in 2015 and $750 thereafter, or half of those amounts for individuals under age 18) for all individuals with respect to the failure occurred during such month, or (b) 300 percent of the applicable dollar amount (determined without regard to the reduction for minors) for the calendar year with or within which the taxable year ends, or (2) an amount equal to the following percentage of the taxpayer's household income for the taxable year: (a) 0.5 percent for taxable years beginning in 2014, (b) 1.0 percent for taxable years beginning in 2015, or (c) 2.0 percent for taxable years beginning after 2015 [IRC § 5000A(c)(2)]. If a taxpayer files a joint return, the individual and spouse are jointly liable for any penalty payment [IRC § 5000A(b)(3)(B)]. The penalty applies to any period the individual does not maintain minimum essential coverage and is determined monthly [IRC § 5000A(a), (b)(1)]. The penalty is assessed and collected through


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Subchapter B of Chapter 68 of the Code, but no criminal penalties apply, nor do the use of liens and seizures otherwise authorized for collection of taxes [IRC § 5000A(g)]. Individuals who cannot afford coverage because their required contribution for employer-sponsored coverage or the lowest cost bronze plan in the local Exchange exceeds 8 percent of household income for the year are exempt from the penalty [IRC § 5000A(e)(1)]. Special rules apply for applying this limit for individu-als related to employees [IRC § 5000A(e)(1)(C)]. Taxpayers with income under 100 percent of the poverty line are exempt, as are members of Indian tribes [IRC § 5000A(e)(2), (3)]. No penalty is assessed for individuals who do not maintain health insurance for a period of three months or less during the taxable year. If an individ-ual exceeds the three month maximum during the taxable year, the penalty for the full duration of the gap dur-ing the year is applied. If there are multiple gaps in coverage during a calendar year, the exemption from pen-alty applies only to the first such gap in coverage. The Secretary of the Treasury is to provide rules when a coverage gap includes months in multiple calendar years [IRC § 5000A(e)(4)]. Individuals may also apply to the Secretary of HHS for a hardship exemption due to hardship in obtaining coverage [IRC § 5000A(e)(5)]. The provision is effective for taxable years ending after December 31, 2013 [Act § 1501(d)]. § 1.24 Modification of Section 833 Treatment of Certain Health Organizations IRC Section 833 provides special rules for Blue Cross and Blue Shield organizations providing health insurance. Among other things, it provides a deduction with respect to their health business equal to 25 percent of the sum of certain claims and expenses [IRC § 833(b)(1)], and an exception for such an organization from the application of the 20-percent reduction in the deduction for increases in unearned premiums that applies generally to property and casualty companies [IRC § 833(a)(3)]. The Act adds a new provision that limits eligibility for the rules of IRC Section 833 to those organiza-tions meeting a medical loss ratio standard of 85 percent for the taxable year [IRC § 833(c)(5)]. Thus, an or-ganization that does not meet the 85-percent standard is not allowed the 25-percent deduction and the exception from the 20-percent reduction in the unearned premium reserve deduction. An organization’s medical loss ratio is determined as the percentage of total premium revenue expended on reimbursement for clinical services that are provided to enrollees under the organization’s policies during the taxable year, as reported under section 2718 of the Public Health Service Act. The provision is effective for taxable years beginning after December 31, 2009 [Act § 9016(b)]. § 1.25 New Excise Tax on Indoor Tanning Services The Act imposes a new 10 percent excise tax on indoor tanning services [IRC § 5000B(a), added by Act, § 10907(b)]. The tax must be paid by the person on whom the service is performed and collected by the person receiving the payment for those services. If the tax is not collected, then the person performing the services is


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secondarily liable [IRC § 5000B(c)]. The tax applies to services performed on or after July 1, 2010 [Act § 10907(d)]. § 1.26 Changes to Adoption Credit and Adoption Assistance Provisions The Act makes several changes to the adoption credit. Perhaps most important, it redesignates the credit from IRC Section 23 to IRC Section 36C, thereby making it a refundable credit [Act § 10909(b)(1)]. Corre-sponding amendments to other credit provisions reflect that change. It also increases from $10,000 to $13,170 the amount of adoption expenses that may be taken into account in computing the credit [IRC § 36C(a)(3), (b)(1)], and provides for inflation adjustments after 2010 [IRC § 36C(h)]. The Act also expands the dollar limitation for adoption assistance programs from $10,000 to $13,170 [IRC § 137(a)(2), (b)(1)], and provides for inflation adjustments after 2010 [IRC § 137(f)(1)]. It also provides for inflation adjustments after 2010 to the income limitation for the exclusion [IRC § 137(f)(2)]. § 1.27 Shared Responsibility for Employers with Respect to Health Coverage The Act adds a new provision imposing several distinct penalties on applicable large employers who do not provide certain health care options [IRC § 4980H, added by Act § 1513, and amended by Act §§ 10106(e), (f), 10108(i)(1)(A)]. An employer is an applicable large employer with respect to any calendar year if it employed an aver-age of at least 50 full-time employees during the preceding calendar year [IRC § 4980H(d)(2)(A)]. A construc-tion industry employer qualifies if it employed an average of at least 5 full-time employees on business days during the preceding calendar year and its payroll expenses exceeded $250,000 [IRC § 4980H(d)(2)(D)]. An employer is not treated as employing more than 50 full-time employees if the employer’s workforce exceeds 50 full-time employees for 120 days or fewer during the calendar year and the employees that cause the employer’s workforce to exceed 50 full-time employees are seasonal workers [IRC § 4980H(d)(2)(B), (D); a 5-employee rule applies for construction industry employers]. A full-time employee is, for any month, an employee work-ing an average of at least 30 hours or more each week [IRC § 4980H(d)(4)(A)]. The Secretary, in consultation with the Secretary of Labor, is directed to issue, as necessary, rules, regulations and guidance to determine an employee’s hours of service, including rules that apply to employees who are not compensated on an hourly ba-sis [IRC § 4980H(d)(4)(B)]. Aggregation rules apply in determining whether an employer is an applicable large employer [IRC § 4980H(d)(2)(C)(i); see IRC § 414(b), (c), (m), (o)]. The determination of whether an em-ployer that was not in existence during the preceding calendar year is an applicable large employer is made based on the average number of employees that it is reasonably expected to employ on business days in the cur-rent calendar year [IRC § 4980H(d)(2)(C)(ii)].


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Several penalties can be imposed. First, an applicable large employer who fails to offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan for any month is subject to a penalty if at least one of its full-time employees is certified to the employer as having enrolled in health insurance coverage purchased through a state exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to that employee [IRC § 4980H(a)]. The penalty for any month is an excise tax equal to the number of full-time employees during the month multi-plied by an applicable payment amount [IRC § 4980H(a)], which for any month is one-twelfth of $750 ($62.50) [IRC § 4980H(d)(1); inflation adjustments apply after 2014]. A second penalty applies if an applicable large employer requires a waiting period of more than 30 days to enroll in a minimum essential coverage under an employer-sponsored plan. The penalty is $600 for each full-time employee to whom the extended waiting period applies [IRC § 4980H(b)]. A third penalty applies to applicable large employers who offer coverage with employees who qualify for premium tax credits or cost-sharing reductions [IRC § 4980H(c); see IRC § 4980H(d)(3) (applicable pre-mium tax credit and cost-sharing reduction)]. An employer who offers, for any month, its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan is subject to the penalty if any full-time employee is certified to the employer as having enrolled in health insurance coverage purchased through a state exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to that employee. The penalty for any month is an excise tax equal to the number of those certified employees multiplied by $3,000 (400 percent of the applicable payment amount of $750) [IRC § 4980H(c)(1)]. The penalty for each employer for any month is capped at an amount equal to the number of full-time employees during the month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by $750 (the applicable payment amount) [IRC § 4980H(c)(2)]. The penalty amounts are subject to inflation adjustments after 2014 [IRC § 4980H(d)(5)]. For months after 2013, no penalty applies with respect to any employee for whom the employer provides a free choice voucher [IRC § 4980H(c)(3)]. The excise taxes imposed under this provision are payable on an annual, monthly or other periodic basis as the Secretary of Treasury may prescribe [IRC § 4980H(e)(2)]. They are not deductible [IRC § 275(a)(6)]. The Secretary is required to prescribe rules, regulations or guidance for the repayment of any assessable pay-ment (including interest) if the payment is based on the allowance or payment of a premium tax credit or cost-sharing reduction with respect to an employee that is subsequently disallowed and with respect to which the as-sessable payment would not have been required to have been made in the absence of the allowance or payment [IRC § 4980H(e)(3)] . The provision is effective for months beginning after December 31, 2013 [Act § 1513(d)].


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§ 1.28 Excise Tax on High Cost Employer-Sponsored Health Coverage The Act imposes a new nondeductible excise tax equal to 40 percent of the excess benefit provided by certain employer-sponsored health coverage [IRC § 4980I]. The amount of any excess benefit for an employee is determined monthly based on an annual dollar limit [IRC § 4980I(b)(1), (2)]. For 2013, the dollar limit is generally $8,500 for self coverage and $23,000 for other than self coverage [IRC § 4980I(b)(3)(C)(i)]; cost of living adjustments apply to determine the limit in later years [IRC § 4980I(b)(3)(C)(iii)]. Different limits apply for certain retirees, employees in high-risk professions [IRC § 4980I(b)(3)(C)(iii), (f)(2), (3)], and for states with high coverage costs [IRC § 4980I(b)(3)(D)]. The coverage provider is liable for the tax on its applicable share of the excess benefit with respect to any employee [IRC § 4980I(c)(1)]. The employer can be the coverage provider with respect to HAS and MSA contributions [IRC § 4980I(c)(2)(B); see IRC § 106(d), (d)]. Employers are required to calculate the amount of excess benefit subject to the tax and the applicable share of that amount for each coverage provider, and to no-tify each coverage provider of that amount [IRC § 4980I(c)(4)]. Coverage subject to the tax includes coverage under any group health plan made available to the em-ployee by an employer which is excludable from gross income under IRC Section 106, or would be if it were employer-provided coverage under that section [IRC § 4980I(d)(1)]. Qualified coverage is subject to the tax without regard to whether the employer or the employee pays for it [IRC § 4980I(d)(1)(C)]. Coverage under any group health plan provided to self-employed individuals is subject to the tax if the self-employed person may deduct any portion of its cost [IRC § 4980I(d)(1)(D); see IRC § 162(l)]. Government plans are also in-cluded [IRC § 4980I(d)(1)(E)]. Detailed rules are used to calculate the cost of employer-sponsored coverage to determine if excess benefits have been provided [IRC § 4980I(d)(2); see IRC § 4980B(f)(4)]. Cost is calculated separately for self-only and other coverage, and the tax imposed under IRC Section 4980I is not part of the cost [IRC § 4980I(d)(2)(A)]. The costs of coverage under health FSAs and Archer MSAs and HSAs is included, and meth-ods of determining those costs are specified [IRC § 4980I(d)(2)(B), (C)]. A penalty is imposed on the employer or plan sponsor for failure to properly calculate the excess benefit [IRC § 4980I(e)]. The penalty is equal to the amount of the excess plus interest at the underpayment rate until the excess is paid [IRC § 4980I(e)(1)(B)]. The penalty can be excused if the employer didn’t know of the fail-ure to make proper calculations, could not have known of it even if exercising reasonable diligence, or if the failure was due to reasonable cause and is corrected within 30 days of its discovery [IRC § 4890I(e)(2)(B)]. The penalty can also be waived for equitable reasons or if it is excessive [IRC § 4890I(e)(2)(C)]. No penalty is imposed on the coverage provider, but it must pay the tax on its properly determined share [IRC § 4980I(e)(1)(A)].


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The provision applies to taxable years beginning after December 31, 2012 [Act § 9021(c)]. § 1.29 Imposition of Annual Fee on Branded Prescription Pharmaceutical Manufacturers and Importers The Act—in provisions that are not codified into the Internal Revenue Code—imposes an annual fee on each covered entity engaged in the business of manufacturing or importing branded prescription drugs [Act § 9008]. The fees are transferred to the Medicare Part B Trust Fund [Act § 9008(c)]. The annual payment date for a calendar year is to be determined, but cannot be later than September 30 of that year [Act § 9008(a)(2)]. The aggregate annual fee for all covered entities is $2.3 billion [Act § 9008(b)(1)]. The fee for each covered entity is based on the ratio of its branded prescription drug sales for the prior year compared to the ag-gregate branded prescription drug sales of all covered entities for that period [Act § 9008(b)(1)]. Branded pre-scription drug sales are sales (other than orphan drug sales [see IRC § 45C]) of those drugs [see Act § 9008(e)(2) for definition of branded prescription drugs] to any specified government program or pursuant to coverage under any such program [Act § 9008(e)(1)]. The Secretary of the Treasury is to calculate the amount of each covered entity’s fee [Act § 9008(b)(3)]. The sales that are taken into account for purposes of determining a covered entity’s fee are subject to dollar thresholds. A covered entity’s sales that are not more $5 million are not taken into account. Ten percent of the sales between $5 million and $125 million are taken into account, 40 percent of sales between $125 mil-lion and $225 million are taken into account, 75 percent of sales between $225 million and $400 million are taken into account, and 100 percent of sales in excess of $400 million are taken into account [Act § 9008(b)(2)]. The fee is treated as an excise tax with respect to which only civil actions for refund under Subtitle F [IRC §§ 6001 et seq] apply [Act § 9008(f)(1)]. The fee is considered to be a nondeductible tax described in IRC Section 275(a)(6) [Act § 9008(f)(2)]. The provision applies to branded prescription drug sales after December 31, 2008 [Act § 9008(j)], and the tax is imposed after 2009 [Act § 9008(a)(1)]. § 1.30 Imposition of Annual Fee on Medical Device Manufacturers and Importers

The Act—in provisions that are not codified into the Internal Revenue Code—imposes an annual fee on any manufacturer or importer with gross receipts from medical device sales [Act § 9009, as amended by Act § 10904]. The term medical device sales is specifically defined [Act § 9009(d)]. The provisions apply to medical device sales after December 31, 2009 [Act § 9009(i)]. The annual payment date for a calendar year is to be de-termined, but cannot be later than September 30 of that year [Act § 9009(a)(2)].


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The aggregate annual fee for all covered entities is $2 billion ($3 billion after 2017) [Act § 9009(b)(1)]. The fee for each covered entity is based on the ratio of its gross receipts from medical device sales for the prior year compared to the aggregate gross receipts of all covered entities for that period [Act § 9009(b)(1)]. The Secretary of the Treasury is to calculate the amount of each covered entity’s fee [Act § 9009(b)(3), amended by Act § 10905(a)]. The gross receipts that are taken into account for purposes of determining a covered entity’s fee are sub-ject to dollar thresholds. A covered entity’s gross receipts during the calendar year that are not more $5 million are not taken into account. Fifty percent of the gross receipts between $5 million and $25 million are taken into account, and 100 percent of gross receipts excess of $25 million are taken into account [Act § 9009(b)(2)]. The fee is treated as an excise tax with respect to which only civil actions for refund under Subtitle F [IRC §§ 6001 et seq] apply [Act § 9009(e)(1)]. The fee is considered to be a nondeductible tax described in IRC Section 275(a)(6) [Act § 9009(e)(2)]. Each covered entity must report its annual gross receipts from medi-cal device sales to report to the Secretary of the Treasury [Act § 9009(f)(1)]. A penalty applies for failure to report, unless it is shown that the failure is due to reasonable cause. The amount of the penalty is $10,000 plus the lesser of (1) $1,000 per day while the failure continues, or (2) the amount of the fee imposed for which the report was required [Act § 9000(f)(2)(A)]. The penalty is treated as a penalty for purposes of subtitle F of the Code, must be paid on notice and demand by the Treasury Department and in the same manner as tax, and with respect to which only civil actions for refund under procedures of subtitle F [Act § 9009(f)(2)(B)] apply. The provision applies to medical device sales after December 31, 2009 [Act § 9009(i)], and the tax is imposed beginning in 2011 [Act § 9009(a)(1)]. § 1.31 Imposition of Annual Fee on Health Insurance Providers The Act—in provisions that are not codified into the Internal Revenue Code—imposes an annual fee on any covered entity engaged in the business of providing health insurance as defined [see Act § 9010(h)(3), amended by Act § 10905(d)] with respect to U.S. citizens, residents, and other individuals located in the United States [Act § 9010, as amended by Act § 10905; see Act § 9010(d)]. The fee applies for calendar years begin-ning after 2010 [Act § 9010(a)(1)]. The aggregate annual fee for all covered entities is the applicable amount--$2 billion for 2011, $4 billion for 2012, $7 billion for 2013, $9 billion for 2014-1016, and $10 billion for later years [Act § 9101(e), amended by Act § 10905(b)]. The annual payment date for a calendar year is to be deter-mined, but cannot be later than September 30 of that year [Act § 9010(a)(2)]. The aggregate annual fee is apportioned among the providers based on a ratio designed to reflect relative market share of U.S. health insurance business. For each covered entity, the fee for a calendar year is an amount that bears the same ratio to the applicable amount as (1) the covered entity’s net premiums written dur-ing the preceding calendar year with respect to health insurance for any United States health risk, bears to (2)


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the aggregate net written premiums of all covered entities during that preceding calendar year with respect to that health insurance [Act § 9010(b), amended by Act § 10905(a)]. The Secretary of the Treasury is to calculate the amount of each covered entity’s fee [Act § 9010(b)(3), amended by Act § 10905(a)]. The amount of net premiums written that are taken into account for purposes of determining a covered entity’s market share is subject to dollar thresholds. A covered entity’s net premiums written during the calen-dar year that are not more $25 million are not taken into account. Fifty percent of the net premiums between $25 million and $50 million are taken into account, and 100 percent of net premiums in excess of $50 million are taken into account [Act § 9010(b)(2), amended by Act § 10905(a)]. Various non-profit entities are exempt from the fee [Act § 9010(c)(2), amended by Act § 10905(c)]. A covered entity subject to the fee generally is broadly defined to include any entity that provides health insurance with respect to United States health risks during the calendar year [Act § 9010(c)(1)]. Numerous ex-clusions apply, including any employer to the extent that it self-insures its employees’ health risks, governmen-tal entities, and certain nonprofit entities [Act § 9010(c)(2)]. The fee is treated as an excise tax with respect to which only civil actions for refund under Subtitle F [IRC §§ 6001 et seq] apply. The Secretary of the Treasury may redetermine the amount of a covered entity’s fee under the provision for any calendar year for which the statute of limitations remains open [Act § 9010(f)(1)]. The fee is considered to be a nondeductible tax described in IRC Section 275(a)(6) [Act § 9010(f)(2)]. A reporting rule applies under the provision. A covered entity is required to report to the Secretary of the Treasury the amount of its net premiums written during any calendar year with respect to covered health insurance [Act § 9010(g)(1), amended by Act § 10905(f)(4)]. A penalty applies for failure to report, unless it is shown that the failure is due to reasonable cause. The amount of the penalty is $10,000 plus the lesser of (1) $1,000 per day while the failure continues, or (2) the amount of the fee imposed for which the report was re-quired [Act § 9010(g)(2)(A)]. The penalty is treated as a penalty for purposes of subtitle F of the Code, must be paid on notice and demand by the Treasury Department and in the same manner as tax, and with respect to which only civil actions for refund under procedures of subtitle F [Act § 9010(g)(2)(B)] apply. The Secretary of the Treasury is authorized to publish guidance necessary to carry out the purposes of the fee and to prescribe regulations necessary or appropriate to prevent its avoidance, including inappropriate actions taken to qualify as an exempt entity [Act § 9010(i), amended by Act § 10905(e)]. The provision applies to net premiums written after December 31, 2009 [Act § 9010(j), amended by Act § 10905(f)(5)].


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