Supreme Court Upholds Health Care
Law; All Tax Measures Preserved
The U. S. Supreme Court has upheld
the constitutionality of the 2010
health care reform legislation, including
its linchpin individual mandate that
requires individuals to pay a penalty if they
fail to carry minimum essential health insurance
(National Federation of Independent
Business, et al. v. Sebelius, SCt, 2012-2 USTC
¶50,423). In its landmark 5 to 4 decision
handed down on June 28, 2012, the Court
cleared the path for President Obama’s signature
health care law, the Patient Protection
and Aff ordable Care Act (PPACA) and
the Health Care and Education Reconciliation
Act (HCERA), to move forward on
schedule. However, the mechanism used to
force states to expand Medicaid eligibility
did not pass constitutional muster.
Th is special Briefi ng describes the tax measures
preserved by the Court’s decision along with the
related guidance issued by the Treasury Department,
the IRS, United States Department of
Health and Human Services (HHS), and the
United States Department of Labor (DOL).
IMPACT. Th e PPACA was passed by Congress
and signed into law by President
Obama in March 2010. Since then, the
IRS and other federal agencies have issued
fi nal regulations, temporary regulations,
proposed regulations, and other guidance
on many of the tax provisions in the
PPACA (also known as the ACA). Many
businesses and employers have waited to
fully implement these regulations until the
Supreme Court determined the fate of the
health care reform law. Now that the Court
has spoken, all taxpayers—businesses large
and small, as well as individuals—must
prepare in earnest for implementation of
the PPACA. Some requirements have been
eff ective since 2010 and 2011, others have
been in force only this year, and many
other major provisions apply starting in
2013, 2014 or later.
COMMENT. Uncertainty over the health
care legislation has been abated by the
Supreme Court’s decision, but clearly not
eliminated. Concerns remain over how
the IRS will interpret parts of the law as it
continues issuing guidance to implement
it. Also adding to uncertainty are renewed
pledges made by the presumptive GOPnominee
for president Mitt Romney to
repeal the PPACA if elected, and by GOP
leaders on Capitol Hill to dismantle the
health care legislation. In the meantime,
however, employers and taxpayers must assume
that key provisions will go into eff ect
in 2013, 2014, and beyond, or risk being
unprepared to fully comply in time for the
law’s complex provisions.
SUPREME
COURT’S ANALYSIS
Th e Supreme Court heard three days of oral
arguments in March 2012 on whether the
Anti-Injunction Act (Code Sec. 7421) applies,
whether the individual mandate (Code
Sec. 5000A) is a proper exercise of Congress’
taxing power or its power under the Constitution’s
Commerce or Necessary and Proper
Clauses; and whether the PPACA’s expansion
of Medicaid exceeds the government’s
spending authority. Th e Court also heard
arguments on the viability of the PPACA
without the individual mandate.
Writing for the majority, Chief Justice John
Roberts said that the government’s reading
CCH Tax Briefi ng ©2012 CCH. All Rights Reserved.
2
2012 Health Care Update
of the statute – that it imposes a tax on individuals
without insurance – is a reasonable
one. “Under the mandate, if an individual
does not maintain health insurance, the only
consequence is that he must make an additional
payment to the IRS...” Th e Chief Justice
continued, “our precedent demonstrates
that Congress had the power to impose the
exaction in Section 5000A under the taxing
power, and that Section 5000A need not be
read to do more than impose a tax. Th at is
suffi cient to sustain it.” Chief Justice Roberts
was joined by Justices Ginsburg, Breyer,
Sotomayor, and Kagan in upholding the law
under Congress’ power to tax.
COMMENT. Th e majority acknowledged
that Congress did not label Code Sec.
5000A as a tax but held that labels do
not control. Th e majority used the following
example: “Suppose Congress enacted
a statute providing that every taxpayer
who owns a house without energy effi
cient windows must pay $50 to the
IRS. Th e amount due is adjusted based
on factors such as taxable income and
joint fi ling status, and is paid along with
the taxpayer’s income tax return. Th ose
whose income is below the fi ling threshold
need not pay. Th e required payment is
not called a ‘tax,’ a ’penalty,’ or anything
else. No one would doubt that this law
imposed a tax, and was within Congress’s
power to tax. Th at conclusion should not
change simply because Congress used the
word ‘penalty’ to describe the payment.”
In their dissent, Justices Scalia, Kennedy,
Th omas, and Alito said, “We have never
held that any exaction imposed for violation
of the law is an exercise of Congress’
taxing power—even when the statute calls
it a tax, much less when (as here) the statute
repeatedly calls it a penalty.” Th e dissent
noted that “eighteen times in Section
5000A itself and elsewhere throughout the
Act, Congress called the exaction in Section
5000A(b) a ‘penalty.’” Th e dissent would
have struck down the entire law.
COMMENT. In addressing the unconstitutionality
of denying Medicaid funding
to states that refuse to implement PPACA’s
Medicaid expansion, the majority found:
“Nothing in our opinion precludes Congress
from off ering funds under the Aff ordable
Care Act to expand the availability of
health care, and requiring that States accepting
such funds comply with the conditions
on their use. What Congress is not free
to do is to penalize States that choose not
to participate in that new program by taking
away their existing Medicaid funding.”
Since an estimated 17 million currently
uninsured individuals would benefi t from
the Medicaid expansion, the impact that
this part of the Court’s decision will have on
PPACA’s overall goals remains to be seen.
CAUTION. Several PPACA cases remain
outstanding and need to be resolved. For
example, a case pending in the Fifth Circuit
Court of Appeals, Physician Hospitals
v. Sebelius, challenges the constitutionality
of PPACA Section 6001, which imposes
restrictions on physician-owned hospitals.
Another case, Coons v. Geithner, currently
pending in the district court of Arizona,
raises several other issues, including
the constitutionality of the Independent
Payment Advisory Board, which PPACA
created to fi nd savings in Medicare. As a
result of the Supreme Court’s decision, the
core of the PPACA remains intact, and
other challenges to the law based on those
same grounds will not continue. However,
other issues are still playing out, and one of
them may provide the vehicle for invalidating
signifi cant PPACA provisions that
are not related to the individual mandate
or the Medicaid expansion.
HIGHLIGHTS OF PPACA/
HCERA AND IRS GUIDANCE
Th e Supreme Court has left standing all tax
provisions within PPACA and HCERA.
Th is decision, which was unexpected by
many Court-watchers, brings with it a sense
of urgency to employers, individuals and
other stakeholders that time is now growing
short both to prepare for those major changes
soon to take place in 2013 and 2014 and
also to implement provisions or benefi ts that
are already eff ective and available.
Th e PPACA and HCERA add to or amend
numerous sections of the Internal Revenue
Code, resulting in the largest set of tax law
changes in more than 20 years. Th e IRS has
been working on many fronts to issue guidance
on these provisions, to fl esh out certain benefi ts
and requirements, and to set up procedures
necessary for compliance.
Th e remainder of this Briefi ng highlights the
major tax provisions of PPACA and HCERA,
and the guidance that has been developed
since enactment.
COMMENT. In June 2012, the Treasury
Inspector General for Tax Administration
(TIGTA) reported that overall, the IRS
has developed appropriate plans to implement
most tax-related provisions in the
PPACA. TIGTA reported that the IRS
would benefi t from estimating resources
beyond fi scal year (FY) 2013. Th e IRS
agreed with TIGTA and announced that
it would complete an evaluation of the
major PPACA provisions for which implementation
has not been completed and
evaluate the resources needed for implementation.
Nevertheless, many observers
contend that the IRS is signifi cantly underfunded
at current levels to handle its
expected multi-faceted role in implementing
the health care law over the 2013-
2018 period.
INDIVIDUAL TAX
PROVISIONS
Individual Mandate
Th e PPACA requires applicable individuals
to carry minimum essential health coverage
for themselves and their dependents (also
known as the individual mandate) or otherwise
pay a shared responsibility penalty for
each month of noncompliance. Th e individual
mandate provision is scheduled to be
eff ective beginning in calendar year 2014.
“Th e individual mandate requires most
Americans to maintain ‘minimum essential’
health insurance coverage,” Chief Justice
Roberts wrote. “For individuals who are not
exempt and do not receive health insurance
CCH Tax Briefi ng
June 29, 2012
3
through a third party, the means of satisfying
the requirement is to purchase insurance
from a private company.”
IMPACT. Chief Justice Roberts, writing
for the majority, recognized the tremendous
impact of the individual mandate:
“By requiring that individuals purchase
health insurance, the mandate prevents
cost-shifting by those who would otherwise
go without it. In addition, the
mandate forces into the insurance risk
pool more healthy individuals, whose
premiums on average will be higher than
their health care expenses. Th is allows insurers
to subsidize the costs of covering the
unhealthy individuals the reforms require
them to accept.”
Individuals who are exempt. Some individuals
are exempt from the individual
mandate. Th ey include (not an exhaustive
list) individuals covered by Medicaid and
Medicare, incarcerated individuals, individuals
not lawfully present in the United
States, health care ministry members, members
of an Indian tribe, and members of a
religion conscientiously opposed to accepting
benefi ts. No penalty will be imposed on
individuals without coverage for fewer than
90 days (with only one period of 90 days
allowed in a year). Generally, individuals
with employer-provided health insurance, if
it satisfi es minimum essential coverage and
aff ordability requirements, are also exempt.
Additionally, no penalty will be imposed on
individuals who are unable to aff ord coverage
(generally, an individual will be treated
as unable to aff ord coverage if the required
contribution for employer-sponsored coverage
or a bronze-level plan on an Exchange
exceeds eight percent of the individual’s
household income for the tax year). Th ose
applicable individuals whose household income
is below their income thresholds for
fi ling income tax returns are also exempt.
Minimum essential coverage. Under the
PPACA, minimum essential coverage generally
includes (not an exhaustive list) coverage
under an eligible employer-sponsored
plan, an individual market plan, a grandfathered
health plan (discussed below), coverage
under Medicaid and Medicare, and other
government-sponsored coverage, subject
to some exceptions.
Calculating the penalty. Th e penalty is
generally calculated by taking the greater of
a fl at dollar amount and a calculation based
on a percentage of the taxpayer’s household
income, and is imposed on a monthly basis
(one-twelveth per month of this ‘greater of ’
amount). Th e annual fl at dollar amount is
assessed per individual or dependent without
coverage and is scheduled to be phased
in over three years ($95 for 2014; $325 for
2015; and $695 in 2016 and subsequent
years, indexed for infl ation after 2016; onehalf
of these amounts for individuals under
the age of 18). Th e fl at dollar amount is
compared to a percentage of the extent to
which the taxpayer’s household income exceeds
the income tax fi ling threshold. Th e
applicable percentage is 1 percent for 2014,
2 percent for 2015, and 2.5 percent for
2016 and subsequent years. Th e taxpayer’s
penalty is equal to the greater of the fl at dollar
amount or the percentage of household
income. Th e amount cannot exceed the national
average of the annual premiums of a
“bronze level” health insurance plan off ered
through a health exchange.
IRS guidance pending. In March 2012,
IRS Chief Counsel William Wilkins said
that guidance on the individual mandate
would wait until after the Supreme Court
hands down its decision.
Premium Assistance Tax Credit
Beginning in 2014, eligible lower-income
individuals who obtain coverage under a
qualifi ed health plan through an insurance
exchange may qualify for a premium assistance
tax credit under Code Sec. 36B unless
they are eligible for other minimum essential
coverage, including employer-sponsored
coverage that is aff ordable and provides
minimum value.
COMMENT. Th e 3% Withholding
Repeal and Job Creation Act of 2011
amended the Code Sec. 36B credit to
include Social Security benefi ts in a taxpayer’s
modifi ed adjusted gross income
(MAGI) for purposes of the credit.
Minimum value. A plan fails to provide
minimum value if the plan provides less
than 60 percent coverage of the total allowed
costs. If employer-sponsored coverage fails
to provide minimum value, an employee
may be eligible for the Code Sec. 36B credit.
In Notice 2012-31, the IRS requested comments
on how to determine if health coverage
under an employer-sponsored plan
provides minimum value. Th e IRS described
several approaches: An actuarial value calculator
(AV calculator) or a minimum value
calculator (MV calculator); design-based
safe harbors in the form of checklists; and
for plans with nonstandard features that
preclude the use of the AV calculator or the
MV calculator without adjustments, an appropriate
certifi cation by a certifi ed actuary
that the plan provides minimum value.
Eligibility. In fi nal regulations (TD 9590,
5/18/12), the IRS explained that eligibility
for the Code Sec. 36B credit is determined
by the relationship of the taxpayer’s household
income to the federal poverty level
(FPL). A taxpayer’s household income for
the tax year must be at least 100 percent but
not more than 400 percent of the FPL for
the taxpayer’s family size. A taxpayer’s family
includes the individuals for whom the
taxpayer claims a deduction for a personal
exemption under Code Sec. 151 for the
tax year. Th e fi nal regulations clarify that a
family may include individuals who are not
subject to the penalty for failing to maintain
minimum essential coverage.
Employer-sponsored coverage. Th e fi nal
regulations treat an employer-sponsored
“The Supreme Court
has left standing all tax
provisions within PPACA
and HCERA.”
CCH Tax Briefi ng ©2012 CCH. All Rights Reserved.
4
2012 Health Care Update
plan as aff ordable for an employee and related
individuals if the portion of the annual
premium the employee must pay for
self-coverage does not exceed the required
contribution percentage (9.5 percent for tax
years beginning before January 1, 2015) of
the taxpayer’s household income.
IMPACT. Th e credit is fully refundable.
Th e Congressional Budget Offi ce estimates
that the credit will provide an average
subsidy of about $5,000 per year for
individuals and families.
EXAMPLE. Kate has household income
of $47,000 in 2014. She is an employee
of ABC Co., which off ers its employees a
health insurance plan that requires her
to contribute $3,450 for self-only coverage
for 2014. Th is represents 7.3 percent
of Kate’s household income. Th e IRS explained
that because Kate’s required contribution
for self-only coverage does not
exceed 9.5 percent of household income,
ABC’s plan is aff ordable for Kate, and
Kate is eligible for minimum essential
coverage for all months in 2014.
IMPACT. A large employer may be liable
for an assessable payment if any full-time
employee receives a premium assistance
tax credit. Th e assessable payment is discussed
later in this Briefi ng.
COMMENT. In the fi nal regulations, the
IRS advised that additional guidance
will be issued on determining aff ordability
for related individuals, treatment
of health reimbursement arrangements
(HRAs), and how wellness programs affect
aff ordability.
Advance credit payments. Th e PPACA
provides that advance payments of the premium
assistance tax credit may be made directly
to the insurer. Advance payments are
reconciled against the amount of the family’s
actual premium tax credit, as calculated
on the family’s federal income tax return.
Any excess payment must be repaid as additional
tax but is subject to a cap for taxpayers
with household income under 400
percent of FPL.
IMPACT. Taxpayers receiving an advance
payment must fi le a return.
Medical Deduction Threshold
Th e PPACA increases the threshold to claim
an itemized deduction for unreimbursed
medical expenses from 7.5 percent of adjusted
gross income (AGI) to 10 percent of
AGI for tax years beginning after December
31, 2012. However, individuals (or their
spouses) age 65 and older before the close of
the tax year are exempt from the increased
threshold, and the 7.5 percent threshold
continues to apply until after 2016.
IRS guidance pending. Th e IRS has not
(as of the date of this Briefi ng) issued guidance
on the medical deduction threshold as
amended by the PPACA.
COMMENT. Th e PPACA did not change
the alternative minimum tax (AMT)
treatment of the itemized deduction for
medical expenses. For changes in the rules
governing health fl exible spending arrangements
(health FSAs), see the discussion
later in this Briefi ng.
COMMENT. On June 7, 2012, the
House approved the Health Care Cost Reduction
Act of 2012 (HR 436). Among
other provisions, the bill would repeal
disqualifi cation of expenses for over-thecounter
drugs for health FSAs, Archer
MSAs and HRAs. Th e provision would
apply to expenses incurred after December
31, 2012. Th e cost of HR 436 would
be off set by recapturing in full any overpayments
of refundable Code Sec. 36B
healthcare exchange subsidies. At the time
this Briefi ng was prepared, it was unclear
if the Senate would take up HR 436.
Debit/credit cards. Debit cards, credit
cards, and stored value cards may be used to
reimburse participants in an FSA. In Notice
2010-59, the IRS indicated that it will not
challenge the use of FSA and HRA debit
cards for expenses incurred through January
15, 2011. In Notice 2011-5, the IRS
modifi ed Notice 2010-59, explaining that
after January 15, 2011, FSA and HRA debit
cards may continue to be used to purchase
prescribed over-the-counter medicines from
vendors (other than drug stores and pharmacies,
non-health care merchants that have
pharmacies, and mail order and web-based
vendors that sell prescription drugs) having
health care related Merchant Codes. Health
FSA and HRA debit cards may be used to
purchase over-the-counter medicines at “90
percent pharmacies” but only as provided
in Notice 2010-59. For all other providers
and merchants, other than those described
in this notice, health FSA and HRA debit
cards may not be used to purchase over-thecounter
medicines or drugs after January
15, 2011.
Additional Tax On
HSA/MSA Distributions
Distributions from a health savings account
(HSA) or Archer medical savings account
(Archer MSA) not used for the benefi ciary’s
HEALTH CARE TAX CREDIT
The Health Care Tax Credit (HCTC) was extended and enhanced by the
Trade Adjustment Assistance Act of 2011 (TAA 2011). The HCTC is refundable
and can also be advanced. Individuals eligible for the HCTC include
individuals receiving Trade Adjustment Allowances; individuals receiving
wage subsidies in the form of Reemployment Trade Adjustment Assistance
(RTAA) benefi ts; and individuals between the ages of 55 and 64 receiving
payments from the Pension Benefi t Guaranty Corporation (PBGC). The
HCTC is scheduled to sunset after 2013.
CCH Tax Briefi ng
June 29, 2012
5
qualifi ed medical expenses are generally included
in the benefi ciary’s gross income.
Distributions included in gross income are
subject to an additional tax of 10 percent of
the included amount, unless made after the
benefi ciary’s death, disability, or attainment
of the age of Medicare eligibility. Eff ective for
distributions made after December 31, 2010,
the additional tax on HSAs and Archer MSAs
increases from 10 percent to 20 percent, in
the case of HSAs, and from 15 percent to 20
percent, in the case of Archer MSAs, of the
amount included in gross income.
Additional Medicare Tax
For tax years beginning after December 31,
2012, an additional 0.9 percent Medicare
tax is imposed on wages and self-employment
income of higher-income individuals.
Th e additional Medicare tax applies to
individuals with remuneration in excess of
$200,000; married couples fi ling a joint return
with incomes in excess of $250,000;
and married couples fi ling separate returns
with incomes in excess of $125,000.
IRS guidance pending. Th e IRS has not
issued formal guidance on the additional
Medicare tax as of the date of this Briefi ng.
IMPACT. Unlike the general 1.45 percent
Medicare tax, the additional 0.9 percent
tax is on the combined wages of the employee
and the employee’s spouse, in the
case of a joint return.
COMMENT. Employers must withhold
on the higher rate if the employee receives
wages in excess of $200,000. Th e
employer may disregard the amount of
wages received by the employee’s spouse. If
the Medicare tax is not withheld by the
employer, the employee is required to pay
the tax.
Medicare Tax On
Investment Income
Th e PPACA imposes a 3.8 percent Medicare
contribution tax on unearned income eff ective
for tax years beginning after December
31, 2012. Th e tax is imposed on the lesser of
an individual’s net investment income for the
tax year or modifi ed adjusted gross income
in excess of $200,000 ($250,000 for married
couples fi ling a joint return and $125,000 for
married couples fi ling a separate return).
Net investment income is the excess of the
sum of the following items less any otherwise
allowable deductions properly allocable
to such income or gain:
Gross income from interest, dividends,
annuities, royalties and rents unless such
income is derived in the ordinary course
of any trade or business (excluding a
passive activity or fi nancial instruments/
commodities trading);
Other gross income from any passive
trade or business; and
Net gain included in computing taxable
income that is attributable to the disposition
of property other than property
held in any trade or business that is not
a passive trade or business.
IMPACT. Investors will be scrambling to
determine the parameters of this additional
3.8 percent tax, especially within
the context of passive investment income.
Th e IRS has not issued formal guidance
as of the date of this Briefi ng, although
IRS offi cials had said in April 2012 that
proposed regulations would be released
soon. However, they said not to expect
resolution at that time of the relationship
between this tax and the Code Sec.
469 rules governing passive activity losses,
which has been an area that continues to
generate confusion.
IMPACT. Th is 3.8 percent tax would be
on top of any increase in the dividends/
capital gains/ordinary income rates that
some lawmakers are currently considering
upon expiration of the Bush-era tax cuts
at the end of 2012.
Home sales. A home sale may result in a
capital gain that increases net investment
income. Net investment income includes
interest, dividends, annuities, royalties, certain
rents, and certain other passive business
income as well as the amount of capital gain
on a home sale that exceeds the amount
that can be excluded from taxation. Under
current law, single individuals may exclude
up to $250,000 in capital gain, and married
couples may exclude up to $500,000
in capital gain. A home sale may also generate
a capital gain that increases a taxpayer’s
modifi ed adjusted gross income above the
general threshold for the 3.8 percent tax.
Adoption Credit
Th e PPACA made the adoption credit refundable
for 2010 and 2011. Th e PPACA
also increased the amount of the credit to
$13,360 for 2011. Th e IRS issued guidance
on the temporary enhancements to the
adoption credit in Notice 2010-66.
COMMENT. Th e PPACA’s enhancements
to the adoption credit have expired.
Pending legislation would permanently
extend the enhancements (HR 4373).
Indoor Tanning Excise Tax
Amounts paid for indoor tanning services
performed after June 30, 2010, are subject
to a 10 percent excise tax. Tanning salons
are responsible for collecting the excise tax
and paying over the tax on a quarterly basis.
Tanning salons that fail to collect the tax
from patrons are liable for the excise tax.
IMPACT. Th e excise tax does not apply
to phototherapy performed by a licensed
medical professional.
Th e IRS quickly issued fi nal regulations
(TD 9486, 6/14/10) on the indoor tanning
“Employers and others
must assume that key
provisions will go into
effect in 2013 and 2014 or
risk being unprepared to
fully comply in time.”
CCH Tax Briefi ng ©2012 CCH. All Rights Reserved.
6
2012 Health Care Update
tax only weeks before its starting date. Th e
fi nal regulations explain that payment for
indoor tanning services is treated as made,
and liability for the tax is imposed, at the
time it can be reasonably determined that
payment is made specifi cally for indoor tanning
services. Th e regulations also address
“bundled services,” where indoor tanning
is bundled with other goods and services,
membership fees to a qualifi ed physical fi tness
facility, and payment by gift card for
indoor tanning services.
In 2012, the IRS followed up on the fi nal
regulations with more guidance. Th e IRS
released fi nal, temporary and proposed
regulations adding the Code Sec. 5000B
indoor tanning services excise tax to the
list of excise taxes for which disregarded
entities are treated as separate entities effective
for taxes imposed on amounts paid
on or after July 1, 2012 (TD 9596, NPRM
REG-125570-10 06/25/12). Th e temporary
regulations also treat a single-owner
eligible entity that is disregarded as an entity
separate from its owner for any purpose
under Reg. §301.7701-2 as a corporation
with respect to the indoor tanning services
excise tax.
IMPACT. Tanning services providers
report the tax on Form 720, Quarterly
Federal Excise Tax Return, and pay the
excise tax on a quarterly basis: April 30
to report tax collected in January, February
and March; July 31 to report tax collected
in April, May and June; October
31 to report tax collected in July, August
and September; and January 31 to report
tax collected in October, November
and December.
As a result of the 2012 temporary regulations,
Form 720, Quarterly Federal Excise
Tax Return, reporting of indoor tanning
services excise taxes imposed on amounts
paid on or after July 1, 2012, must be fi led
under the name and employer identifi cation
number (EIN) of the entity rather
than under the name and EIN of the disregarded
entity’s owner. Th is aff ects returns
of this tax that are due on or after October
31, 2012.
Dependent Coverage Until Age 26
Th e PPACA also requires group health plans
and health insurance issuers providing dependent
coverage for children to continue
to make the coverage available for an adult
child until turning age 26. Th e coverage requirement
is eff ective for the fi rst plan year
beginning on or after September 23, 2010.
COMMENT. For plan years beginning
before January 1, 2014, grandfathered
group plans do not have to off er dependent
coverage as amended by the PPACA
if a young adult is eligible for group coverage
outside his or her parent’s plan.
Th e IRS issued temporary regulations in TD
9482 (5/10/10). Th e IRS explained that,
with respect to a child who has not attained
age 26, a plan or issuer may not defi ne dependent
for purposes of eligibility for dependent
coverage for children other than in
terms of a relationship between a child and
the participant. A plan or issuer may not
deny or restrict coverage for a child who has
not attained age 26 based on the presence or
absence of the child’s fi nancial dependency
(upon the participant or any other person),
residency with the participant or with any
other person, student status, employment,
or any combination of those factors.
EXAMPLE. A group health plan off ers a
choice of self-only or family health coverage.
Dependent coverage is provided
under family health coverage for children
of participants who have not attained
age 26. Th e plan imposes an additional
premium surcharge for children who are
older than age 18. Th e IRS explained
that the group health plan violates the
regulations because the plan varies the
terms for dependent coverage of children
based on age.
Medical Benefi ts For
Children Under 27
Th e PPACA amended Code Sec. 105(b) to
extend the exclusion from gross income for
medical care reimbursements under an employer-
provided accident or health plan to
any employee’s child who has not attained
age 27 as of the end of the tax year. Th e
amendment was eff ective March 30, 2010.
Th e IRS issued guidance in Notice 2010-
38, which explains that the exclusion applies
for reimbursements for health care of
individuals who are not age 27 or older at
any time during the tax year. Th e tax year
is the employee’s tax year (generally a calendar
year). Th e IRS also explained that a
child for purposes of the extended exclusion
is an individual who is the son, daughter,
stepson, or stepdaughter of the employee. A
child includes an adopted individual and an
eligible foster child.
IMPACT. Th e exclusion applies only for
reimbursements for medical care of individuals
who are not age 27 or older at
any time during the tax year. Th e IRS explained
in Notice 2010-38 that employers
may assume that an employee’s tax year is
the calendar year: a child attains age 27
on the 27th anniversary of the date the
child was born. For example, an individual
born on May 1, 1986 attains age 27
on May 1, 2013, and is therefore covered
under this provision through 2012. Employers
may rely on the employee’s representation
as to the child’s date of birth.
IMPACT. Th ere is no requirement that a
child generally qualify as a dependent for
tax purposes. Th ere is also no requirement
that an employer provide this coverage (as
opposed to dependent coverage under age
26, described above).
Student Loan
Repayment Programs
Th e PPACA provides for exclusion of assistance
provided to participants in state student
loan repayment programs for health
professionals. Th e assistance is intended to
increase the availability of health care in areas
traditionally underserved by health professionals.
As of the date of this Briefi ng,
the IRS has not issued offi cial guidance on
the exclusion.
CCH Tax Briefi ng
June 29, 2012
7
Indian Tribes
Th e PPACA excludes from gross income
qualifi ed health care benefi ts provided to
the member of an Indian tribe, the member’s
spouse or the member’s dependents.
Th e exclusion applies to benefi ts and coverage
provided after March 23, 2010.
BUSINESS
TAX PROVISIONS
Shared Responsibility
For Employers
Th e PPACA’s employer shared responsibility
provisions (also known as the “employer
mandate”) specify that an applicable large
employer may be subject to a shared responsibility
payment (also known as an “assessable
payment”) if any full-time employee is certifi
ed to receive an applicable premium tax
credit or cost-sharing reduction payment.
Generally, this may occur where either:
Th e employer does not off er to its fulltime
employees (and their dependents)
the opportunity to enroll in minimum
essential coverage under an eligible employer-
sponsored plan; or
Th e employer off ers its full-time employees
(and their dependents) the
opportunity to enroll in minimum
essential coverage under an eligible
employer-sponsored plan that either is
unaff ordable relative to an employee’s
household income or does not provide
minimum value (that pays at least 60
percent of benefi ts).
COMMENT. Th e provision applies to months
beginning after December 31, 2013.
For purposes of the employer shared responsibility
payment, an applicable large
employer is an employer that on average
employed 50 or more full-time equivalent
employees on business days during the preceding
calendar year. A full-time employee
is an employee who is employed on average
at least 30 hours per week.
COMMENT. By January 1, 2014, each
State must establish an American Health
Benefi t Exchange and a Small Business
Health Options Program (SHOP Exchange)
to provide qualifi ed individuals
and qualifi ed small business employers, respectively,
access to qualifi ed health plans,
thus rounding out coverage from the large
employer down to the self-employed individual,
and all workers in-between.
In Notice 2011-36, the IRS requested comments
on the issue of who is a full-time employee,
including a potential “look-back/
stability period safe harbor” method for
determining full-time status of an employee.
In Notice 2012-17, the IRS posted
frequently asked questions about employer
shared responsibility, noting that the “lookback/
stability safe harbor” is expected to
allow look-back and stability periods not
exceeding 12 months. In Notice 2011-73,
the IRS described a safe harbor allowing
employers to use an employee’s Form W-2
wages (as reported in Box 1) instead of
household income in determining whether
coverage off ered is aff ordable.
IMPACT. In Notice 2012-17, the IRS
reported that future guidance is expected
to provide that, at least for the fi rst three
months following an employee’s date of hire,
an employer that sponsors a group health
plan will not, by reason of failing to off er
coverage to the employee under its plan
during that three-month period, be subject
to the employer shared responsibility. Th e
guidance is also expected to provide that,
in certain circumstances, employers have
six months to determine whether a newlyhired
employee is a full-time employee and
will not be subject to a shared responsibility
payment during that six-month period
with respect to that employee.
Small Employer Health
Insurance Tax Credit
Th e PPACA created the temporary Code
Sec. 45R small employer health insurance
tax credit. For tax years 2010 through 2013,
the maximum credit is 35 percent of health
insurance premiums paid by small business
employers (25 percent for small taxexempt
employers). Th e credit is scheduled
to increase to 50 percent for small business
employers (35 percent for small tax-exempt
employers) after 2013 (but will terminate
after 2015). However, in tax years that begin
after 2013, an employer must participate
in an insurance exchange in order to
claim the credit, and other modifi cations
and restrictions on the credit apply.
In Notice 2010-44, the IRS provided guidance
on the small employer health insurance
tax credit, including transition relief for tax
years beginning in 2010 with respect to the
requirements for a qualifying arrangement.
Th e IRS expanded on the guidance in Notice
2010-82. Th e IRS explained in Notice 2010-
82 that a qualifi ed employer must have:
Fewer than 25 full-time equivalent employees
(FTEs) for the tax year;
EXCHANGES
The PPACA requires each state to establish an American Health Benefi t
Exchange and Small Business Health Options Program (SHOP Exchange) to
provide qualifi ed individuals and qualifi ed small business employers access
to health plans. Exchanges will have four levels of coverage: bronze, silver,
gold, or platinum. In early 2012, HHS reported that 34 states and the District
of Columbia have received grants to fund their progress toward building
Exchanges. HHS also provided an Exchange blueprint that states may
use. If a state decides not to operate an Exchange for its residents, HHS will
operate a federally-facilitated Exchange (FFE).
CCH Tax Briefi ng ©2012 CCH. All Rights Reserved.
8
2012 Health Care Update
Average annual wages of its employees
for the year of less than $50,000 per
FTE; and
A “qualifying arrangement” that is
maintained.
Th e IRS also described in Notice 2010-82
how to calculate the Code Sec. 45R credit.
IMPACT. Th e Code Sec. 45R credit has
been heavily promoted by the Obama
administration but appears to be underutilized.
Th e Government Accountability
Offi ce (GAO) has reported that 170,300
small employers claimed the credit in tax
year 2010 out of a pool estimated at between
1.4 million and 4 million eligible
fi rms. One reason may be the perceived
complexity of calculating the credit.
COMMENT. Sole proprietors, partners in
a partnership, shareholders owning more
than two percent of the stock in an S corp,
and any owners of more than fi ve percent
of other businesses are not counted as employees
for purposes of the credit. Family
members of these owners and partners are
also not considered employees.
Free Choice Vouchers
Th e PPACA, beginning in 2014, would generally
have required employers off ering qualifi
ed health insurance to provide a free choice
voucher to employees with incomes of less than
400 percent of federal poverty guidelines whose
share of the premium exceeded 8 but was less
than 9.8 percent of their income, and who
chose to enroll in a plan in an Exchange. Th e
amount of the free choice voucher generally
would have been excluded from the employee’s
gross income. However, the Department of
Defense and Full-Year Continuing Appropriations
Act, 2011 (P.L. 112-10) repealed the free
choice voucher provisions of the PPACA.
Exchange-Participating Qualifi ed
Health Plans Offered Through
Cafeteria Plans
For tax years beginning after December 31,
2013, a cafeteria plan cannot off er a qualifi
ed health plan off ered through an American
Health Benefi t Exchange.
Health FSAs Offered In
Cafeteria Plans
Eff ective for tax years beginning after December
31, 2012, the PPACA limits contributions
to health fl exible spending arrangements
(health FSAs) to $2,500, down from
an overall $5,000 FSA limit. Th e $2,500 limitation
is adjusted annually for infl ation for
tax years beginning after December 31, 2013.
Over-the-Counter Medicines
Th e PPACA revises the defi nition of medical
expenses for health fl exible spending
arrangements (health FSAs), health reimbursement
arrangements (HRAs), health
savings accounts (HSAs) and Archer Medical
Savings Accounts (Archer MSAs). After
December 31, 2010, expenses incurred for a
medicine or drug are treated as a reimbursement
for a medical expense only if the medicine
or drug is a prescribed drug or insulin.
IMPACT. Th e limitation does not apply to
items for medical care that are not medicines
or drugs. Items such as crutches, supplies
such as bandages, and diagnostic devices,
such as blood sugar test kits, qualify
for reimbursement by a health FSA or
HRA if purchased after December 31,
2010. A distribution from an HSA or
Archer MSA for the cost of such items will
still be tax-free, regardless of whether the
items are purchased using a prescription.
Th e IRS issued guidance in Notice 2012-40.
Th e IRS explained that the $2,500 limit on
health FSA salary reduction contributions
applies on a plan year basis and is eff ective
for plan years beginning after December 31,
2012. Th us, employers with non-calendar
year plans will not be required to comply
until plan year renewal in 2013. Th e IRS
also reported that it is considering possible
modifi cation of the “use-or-lose rule” to
provide a diff erent form of administrative
relief (instead of, or in addition to, the current
2½ month grace period rule).
IMPACT. Th e $2,500 limit on salary
reduction contributions to a health FSA
applies on an employee-by-employee basis.
Th e IRS explained that $2,500 (as indexed
for infl ation) is the maximum salary
reduction contribution each employee
may make for a plan year, regardless of the
number of other individuals (for example,
a spouse, dependents, or adult children
whose medical expenses are reimbursable
under the employee’s health FSA.
IMPACT. Th e $2,500 limit applies only
to salary reduction contributions and not
to employer non-elective contributions,
sometimes called fl ex credits, which are
subject to certain limitations. Generally,
an employer may make fl ex credits available
to an employee who is eligible to participate
in the cafeteria plan, to be used
(at the employee’s election) only for one or
more qualifi ed benefi ts.
COMMENT. On June 7, 2012, the
House approved the Health Care Cost Reduction
Act of 2012 (HR 436). Among
other provisions, the bill would amend
the rules for taxable distributions of unused
balances under health FSAs. Generally,
up to $500 of unused balances under
a health FSA could be distributed; the
amount distributed would be included in
the recipient’s gross income in the tax year
in which distributed and would be taken
into account as wages or compensation.
Th is provision would apply to plan years
beginning after December 31, 2012.
Th e cost of HR 436 would be off set by
recapturing in full any overpayments of
refundable Code Sec. 36B healthcare exchange
subsidies. At the time this Briefi ng
was prepared, it was unclear if the Senate
would take up HR 436.
Simple Cafeteria Plans
For tax years beginning after December 31,
2010, the PPACA establishes a simple cafeteria
plan for small businesses. Th e PPACA
provides a safe harbor from nondiscrimination
requirements to qualifi ed small businesses.
Generally, the employer must have
employed an average of 100 or fewer emCCH
Tax Briefi ng
June 29, 2012
9
ployees on business days during either of the
two preceding years.
IMPACT. Th e provisions allow small
employers to retain potentially discriminatory
benefi ts for highly compensated
and key employees while allowing other
employees to enjoy the benefi ts of a cafeteria
plan.
COMMENT. A cafeteria plan is a separate
written plan maintained by an employer
for employees under Code Sec. 125.
A cafeteria plan provides participants
with an opportunity to receive certain
benefi ts on a pretax basis.
Retiree Prescription Drug Subsidy
Th e Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 provides
a subsidy of 28 percent of covered
prescription drug costs to employers that
sponsor group health plans with drug benefi
ts to retirees. PPACA requires the amount
otherwise allowable as a business deduction
for retiree prescription drug costs to be reduced
by the amount of the excludable
subsidy-payments received, eff ective for tax
years beginning after December 31, 2012.
Guidance status. As of the date of this Briefing,
the IRS has not issued formal guidance
on the treatment of the retiree prescription
drug subsidy under the PPACA.
Limitation on Employee
Remuneration
Th e PPACA limits the allowable deduction
to $500,000 for applicable individual remuneration
and deferred deduction remuneration
attributable to services performed
by applicable individuals that is otherwise
deductible by a covered health insurance
provider in taxable years beginning after
December 31, 2012.
In Notice 2011-2, the IRS explained that
the provision may aff ect deferred compensation
attributable to services performed
in a tax year beginning after December
31, 2009. Th e IRS also provided a de minimis
rule.
Economic Substance Doctrine
HCERA codifi ed the economic substance
doctrine. A transaction is treated as having
economic substance under a conjunctive
two prong test only if the transaction
changes in a meaningful way the taxpayer’s
economic position (not including federal,
state, or local tax eff ects), and the taxpayer
has a substantial business purpose for the
transaction. Codifi cation of the economic
substance doctrine, and its related penalty
of either 20 percent or 40 percent designed
to enforce it, apply to transactions entered
into or after March 30, 2010, the eff ective
date of HCERA.
In Notice 2010-62, the IRS explained that
it will continue to rely on relevant case law
under the common-law economic substance
doctrine in applying the two-prong
conjunctive test. Th e IRS subsequently issued
several directives to its personnel about
application of the economic substance doctrine.
In LB&I Directive 4-0711-015, the
IRS identifi ed various factors that examiners
must consider to determine if application
of the economic substance doctrine is
appropriate. In CC-2012-008, IRS Chief
Counsel provided instructions to its personnel
on the economic substance doctrine in
examinations, reviews of proposed defi ciency
notices (or notices of fi nal partnership
administrative adjustment (FPAAs)), litigation,
and administrative pronouncements.
IMPACT. In Notice 2010-62, the IRS
rejected calls to publish an “angel list”
of transactions. Th e IRS emphasized
that it does not intend to issue general
administrative guidance regarding the
types of transactions to which the economic
substance doctrine either applies
or does not apply.
COMMENT. HCERA imposes a strict
liability penalty of 20 percent (40 percent
for undisclosed transactions) of any
underpayment attributable to the disallowance
of claimed tax benefi ts by reason
of the application of the economic
substance doctrine or failing to meet the
requirements of any similar rule of law.
Th e IRS has explained in LB&I Directive
4-0711-015 that until further guidance
is issued, the related penalty provisions
are limited to the application of the
economic substance doctrine and may not
be imposed due to the application of any
other “similar rule of law” or judicial
doctrine, (for example, the step transaction
doctrine, substance over form, or
sham transaction).
EFFECTIVE DATES OF SELECTED
PPACA/HCERA PROVISIONS
Small Employer Sec. 45R Credit Tax years beginning in 2010
Economic Substance Doctrine After 03/30/2010
OTC Limitations For Health Accounts Tax years beginning after 12/31/2010
Indoor Tanning Services Excise Tax On or after 07/01/2010
Itemized Deduction For Medical Expenses Tax years beginning after 12/31/2012
Additional 0.9% Medicare Tax: After 12/31/2012
3.8% Medicare Contribution Tax: After 12/31/2012
Medical Device Excise Tax Sales after 12/31/2012
Employer Shared Responsibility After 12/31/2013
Branded Prescription Drug Fees Calendar years beginning after 12/31/2010
Sec. 36B Premium Assistance Credit Tax years ending after 12/31/2013
Excise Tax On High Dollar Insurance Tax years beginning after 12/31/2017
CCH Tax Briefi ng ©2012 CCH. All Rights Reserved.
10
2012 Health Care Update
Excise Tax on High-Cost
Health Coverage
Employer-sponsored health coverage that exceeds
a threshold amount is scheduled to be
subject to a 40-percent excise tax starting in
2018. Th e dollar limits for determining the
tax thresholds are $10,200 (for 2018) multiplied
by the health cost adjustment percentage
for an employee with self-only coverage;
and $27,500 (for 2018) multiplied by the
health cost percentage for an employee with
coverage other than self-only coverage.
COMMENT. Th e IRS has not issued
offi cial guidance on the excise tax on
high-cost health coverage as of the date
of this Briefi ng.
Branded Prescription Drug Fee
Th e PPACA imposes an annual fee on each
covered entity engaged in the business of
manufacturing or importing branded prescription
drugs. A covered entity is any
manufacturer or importer with gross receipts
from branded prescription drug sales.
A branded prescription drug is any prescription
drug whose application was submitted
under section 505(b) of the Federal Food,
Drug, and Cosmetic Act (FFDCA) or any
biological product the license for which was
submitted under section 351(a) of the Public
Health Service Act.
In TD 9544 (8/18/11), the IRS issued temporary
regulations defi ning covered entities,
the information requested from covered entities,
and how to calculate the annual fee.
Th e IRS will send each covered entity its
fi nal fee calculation no later than August 31
of each fee year and also provides that covered
entities must pay their fee by September
30 of the fee year. In Notice 2011-92,
the IRS reported that for the 2012 fee year,
the IRS would mail each covered entity a
paper notice of its preliminary fee calculation
by April 2, 2012. Th ere is no tax return
to be fi led for the fee.
COMMENT. Under the temporary regulations,
a covered entity may provide information
relevant to the determination
of the fee by annually submitting Form
8947, Report of Branded Prescription
Drug Information. Submission of Form
8947 is voluntary.
COMMENT. Th e PPACA treats the
branded prescription drug fee as an excise
tax so that only civil actions for refund
may be pursued under the procedures of
subtitle F. Th e fee may be assessed and
collected without regard to the defi ciency
procedures of Code Secs. 6211-6216. Th e
temporary regulations provide that the
IRS must assess the amount of the section
9008 fee for any fee year within three
years of September 30th of that fee year.
Medical Device Excise Tax
Th e PPACA imposes an excise tax on the sale
of certain medical devices by the manufacturer,
producer, or importer of the device in
an amount equal to 2.3 percent of the sale
price. Th e excise tax applies to sales of taxable
medical devices after December 31, 2012.
In NPRM REG-113770-10, the IRS issued
proposed regulations on the medical
device excise tax, explaining that the PPACA
links the defi nition of “taxable medical
device” to the defi nition of “device” in the
Federal Food, Drug & Cosmetic Act. Th e
IRS also described dual use devices (devices
with medical and non-medical uses) and
research-only devices.
Retail exemption. Th e PPACA exempts
certain devices from the excise tax, such as
eyeglasses, contact lenses and hearing aids.
In the proposed regulations, the IRS provided
a facts and circumstances approach to
evaluating whether a taxable medical device
is of a type that is generally purchased by
the general public at retail for individual
use. A device is considered to be of a type
generally purchased by the general public
at retail for individual use if (i) the device
is regularly available for purchase and use
by individual consumers who are not medical
professionals, and (ii) the device’s design
demonstrates that it is not primarily
intended for use in a medical institution or
offi ce, or by medical professionals.
COMMENT. Th e IRS also provided a
safe harbor in the proposed regulations
identifying certain categories of taxable
medical devices that fall within the retail
exemption.
COMMENT. On June 7, 2012, the
House approved the Health Care Cost Reduction
Act of 2012 (HR 436). Among
other provisions, the bill would repeal
the 2.3 percent medical device excise tax.
Th e cost of HR 436 would be off set by
recapturing in full any overpayments of
refundable Code Sec. 36B healthcare exchange
subsidies. At the time this Briefi ng
was prepared, it was unclear if the Senate
would take up HR 436.
Credit For Therapeutic
Discovery Projects
Eligible taxpayers may qualify for a 50-percent
tax credit for investments in therapeutic
discovery projects. Th e PPACA
also established the qualifying therapeutic
discovery project program to consider and
award certifi cations for qualifi ed investments
eligible for the credit. Th e credit was
available for qualifi ed investments made or
to be made in 2009 and 2010. Additionally,
the PPACA provides for grants in lieu
of tax credits for investments in therapeutic
discovery projects.
In Notice 2010-45, the IRS explained who
is an eligible taxpayer for the credit, how a
project will be certifi ed, application procedures,
and grants in lieu of tax credits.
COMMENT. Th e credit is part of the
investment credit. Pending legislation in
the Senate would extend the credit for
therapeutic discovery projects through
2012 (Sen. 3232).
Tax Treatment Of Certain
Health Organizations
Under the PPACA, certain health organizations
that previously qualifi ed for Code
Sec. 833 tax treatment will not qualify unCCH
Tax Briefi ng
June 29, 2012
11
less the health organization’s medical loss
ratio during the tax year is not less than 85
percent. An organization’s medical loss ratio
is equal to the amount expended on reimbursement
for clinical services provided
to enrollees under its policies during the tax
year divided by the organization’s total premium
revenue.
In Notice 2010-79, the IRS provided transition
relief and interim guidance on the computation
of an organization’s medical loss
ratio. In Notice 2011-51, the IRS extended
the transition relief and interim guidance
for another year to any tax year beginning
in 2010 and the fi rst tax year beginning after
December 31, 2010. In Notice 2012-37,
the IRS extended the transition relief and
interim guidance in Notice 2010-79 and
Notice 2011-51 through the fi rst tax year
beginning after December 31, 2012.
REPORTING
Forms W-2
Th e PPACA generally requires employers
to disclose the aggregate cost of applicable
employer-sponsored coverage on an employee’s
Form W-2 for tax years beginning
on or after January 1, 2011. Reporting is for
informational purposes only.
In Notice 2010-69, the IRS made reporting
optional for all employers for 2011. In
Notice 2012-9, the IRS provided transition
relief for small employers. For 2012 Forms
W-2 (and W-2s issued in later years, unless
and until further guidance is issued), an
employer is not subject to reporting for any
calendar year if the employer was required
to fi le fewer than 250 Forms W-2 for the
preceding calendar year, the IRS explained.
Whether an employer is required to fi le
fewer than 250 Forms W-2 for a calendar
year is determined based on the Forms W-2
that it would be required to fi le if it fi led
Forms W-2 to report all wages paid by the
employer and without regard to use of an
agent under Code Sec. 3504.
COMMENT. Certain types of coverage,
such as major medical, must be reported.
Other types of coverage are optional. Th e
IRS identifi ed the types of optional coverage
in Notice 2012-9.
Health Care Coverage Reporting
Th e PPACA requires every health insurance
issuer, sponsor of a self-insured health
plan, government agency that administers
government-sponsored health insurance
programs and other entity that provides
minimum essential coverage to fi le an annual
return reporting information for each
individual for whom minimum essential
coverage is provided (Code Sec. 6055 reporting).
Additionally, every applicable
large employer (within the meaning of
Code Sec. 4980H(c)(2)) that is required to
meet the shared employer responsibility requirements
of the PPACA during a calendar
year must fi le a return with the IRS reporting
the terms and conditions of the health
care coverage provided to the employer’s
full-time employees for the year (Code Sec.
6056 reporting). Th e reporting requirements
apply to calendar years beginning on
or after January 1, 2014.
In Notice 2012-32, the IRS requested comments
on how to implement reporting. Th e
IRS asked for comments on how to determine
when an individual’s coverage begins
and ends for purposes of reporting the dates
of coverage; how to minimize duplicative
reporting, and more.
COMMENT. Reporting under Code Secs.
6055 and 6056 is separate from reporting
of health care coverage on an employee’s
Form W-2.
Disclosures
Because the PPACA is being implemented
by multiple federal agencies, the statute
authorizes the IRS to disclose return information
to HHS and other agencies.
Return information is scheduled to be
disclosed for, among other purposes, eligibility
for the Code Sec. 36B premium
assistance tax credit.
In NPRM REG-119632-11, the IRS explained
that it will disclose taxpayer identity
information, fi ling status, the number of individuals
for which a deduction under Code
Sec. 151 was allowed (“family size”), modifi
ed adjusted gross income, and the tax year
to which the information relates or, alternatively,
that the information is not available.
Where modifi ed adjusted gross income is
not available, the IRS will disclose adjusted
gross income.
COMMENT. Th e proposed regulations
further provide where some or all of the
IRS GUIDANCE FOR SELECTED
PPACA/HCERA PROVISIONS
Branded Prescription Drug Fees: TD 9544
Code Sec. 36B Credit: TD 9590
Code Sec. 45R Credit: Notice 2010-44/Notice 2010-82
Disclosure Of Return Information: NPRM REG-119632-11
Grandfathered Plans: TD 9506
Health Coverage Information Reporting: Notice 2012-32/Notice 2012-33
Health FSA $2,500 Limitation Notice 2012-40
Indoor Tanning Services Excise Tax TD 9486
Medical Device Excise Tax: NPRM REG-113770-10
Minimum Value: Notice 2012-31
OTC Limitations For Health Accounts: Notice 2010-59/Rev. Rul. 2010-23
Summary Of Benefi ts: TD 9575
CCH Tax Briefi ng ©2012 CCH. All Rights Reserved.
12
2012 Health Care Update
items of return information prescribed by
statute or regulation is unavailable, the
IRS will provide information indicating
why the particular item of return information
is not available.
Nonprofi t Health
Insurance Issuers
Th e PPACA establishes the Consumer Operated
and Oriented Plan (CO-OP) Program.
Th e CO-OP Program is intended to
encourage the creation of qualifi ed nonprofit
health insurance issuers to off er competitive
health plans in the individual and small
group markets. Th e PPACA also enacted
Code Sec. 501(c)(29) to provide requirements
for tax exemption under Code Sec.
501(a) for qualifi ed nonprofi t health insurance
issuers (QNHIIs).
In Notice 2011-23, the IRS requested comments
on Code Sec. 501(c)(29) and followed
up with temporary regulations (TD
9574). Th e IRS explained that a QNHII
which has received a loan through the COOP
program may be recognized as exempt
from taxation under Code Sec. 501(a) only
if, among other things, the QNHII gives
notice to the agency. In Rev. Proc. 2012-11,
a QNHII seeking recognition of exemption
under Code Sec. 501(c)(29) must submit a
letter application (rather than a form) with
Form 8718, User Fee for Exempt Organization
Determination Letter Request.
Tax-Exempt Charitable Hospitals
Th e PPACA imposes additional requirements
on Code Sec. 501(c)(3) charitable
hospitals. Tax-exempt hospitals must conduct
a community health needs assessment
(CHNA) and adopt a fi nancial assistance
policy. Th e PPACA also places limitations
on charges to individuals who qualify for
fi nancial assistance and prohibits certain
collection actions. Tax-exempt hospitals
must satisfy these additional requirements
to maintain their exempt status.
In Notice 2011-52, the IRS described
which organizations must conduct a
CHNA and related requirements. Th e
IRS also cautioned that it will impose the
$50,000 excise tax under Code Sec. 4959
on any hospital organization that fails to
satisfy the CHNA requirements.
Th e IRS also revised Form 990, Return
of Organization Exempt From Taxation,
Schedule H, Hospitals, to refl ect compliance
with the new requirements. Th e IRS
issued Ann. 2011-37 which made fi ling Part
V, Section B of Schedule H optional for tax
year 2010. In Notice 2012-4, the IRS explained
that for tax year 2011, hospitals are
required to complete all parts and sections
of Schedule H, with the exception of lines
1–7 of Part V, Section B, which relate to
community health needs assessments.
In proposed regulations, the IRS provided
guidance on the PPACA’s fi nancial assistance
policy for tax-exempt charitable
hospitals, describing how a hospital should
determine the maximum amounts it may
charge individuals eligible for fi nancial assistance
for emergency and other medically
necessary care (NPRM REG-130266-11,
06/25/12). Th e proposed regulations also
set limits on various collection actions.
Patient-Centered Outcomes
Research Trust Fund
Th e PPACA establishes the Patient-Centered
Outcomes Research Institute. Th e
Institute is funded by the Patient-Centered
Outcomes Research Trust Fund. Th e Trust
Fund is to be fi nanced, in part, by fees to
be paid by issuers of specifi ed health insurance
policies (Code Sec. 4375) and sponsors
of applicable self-insured health plans
(Code Sec. 4376).
In NPRM REG-136008-11 (4/17/12),
the IRS explained that the Code Sec. 4375
fee is calculated using the applicable dollar
amount in eff ect for the policy year and one
of the permitted methods for determining
the average number of lives covered under
the policy during the policy year. Th e Code
Sec. 4376 fee is calculated using the applicable
dollar amount in eff ect for the plan year.
CLASS Program
Th e PPACA created the Community Living
Assistance Services and Supports (CLASS)
Program, which was intended to be a
consumer-funded, voluntary long-term insurance
program. In October 2011, HHS
announced that it could not implement a
fi nancially sustainable, voluntary, and selffi
nanced CLASS Program.
ADDITIONAL PROVISIONS
Grandfathered Plans
Certain plans or coverage existing as of
March 23, 2010 (the date of enactment of
the PPACA) are subject to only some provisions
of the PPACA. Th ese plans are known
as “grandfathered plans.”
Th e IRS, HHS and DOL issued interim fi nal
regulations in 2010 and subsequently amended
the interim fi nal regulations (TD 9506).
Th e agencies explained that a group health
plan or group or individual health insurance
coverage is a grandfathered health plan with
respect to individuals enrolled on March 23,
2010 regardless of whether an individual later
renews the coverage. Additionally, a group
health plan that provided coverage on March
23, 2010 generally is also a grandfathered
health plan with respect to new employees
(whether newly hired or newly enrolled) and
their families that enroll in the grandfathered
health plan after March 23, 2010.
IMPACT. In the IRS/HHS/DOL guidance,
the agencies explained that there are
circumstances where a group health plan
may need to make administrative changes
that do not aff ect the benefi ts or costs of a
plan. For example, an insurer may stop
off ering coverage in a market or a company
may change hands. In those cases,
the employer can maintain grandfathered
status for their employee plan.
Automatic Enrollment
Under the PPACA, an employer with more
than 200 full-time employees must autoCCH
Tax Briefi ng
June 29, 2012
13
matically enroll new full-time employees in
one of the employer’s health benefi ts plans
(subject to any waiting period authorized by
law), and to continue the enrollment of current
employees in a health benefi ts plan offered
through the employer. Employees may
opt out of any coverage in which he or she
was automatically enrolled.
In 2010, the IRS, HHS and DOL announced
that employers would not need to
comply with the automatic enrollment requirement
until regulations are issued. Th e
agencies have indicated in frequently asked
questions (FAQs) on the DOL website that
regulations are expected by 2014.
Summary Of
Benefi ts/Uniform Glossary
Th e PPACA directed the IRS, HHS and
DOL to develop standards for use by a
group health plan and a health insurance
issuer off ering group or individual health
insurance coverage in compiling and providing
a summary of benefi ts and coverage
(SBC) that accurately describes the benefi ts
and coverage under the applicable plan or
coverage. Th e PPACA also required the development
of standards for the defi nitions
of terms used in health insurance coverage.
In TD 9575 (2/9/12), the IRS described
the required elements for the SBC including
a description of coverage, cost-sharing
requirements, exceptions or limits under
the plan, and coverage examples. Th e IRS
explained that an SBC must be provided
by a group health insurer to a group
health plan; by a group health insurer and
a group health plan to participants and
benefi ciaries; and by a health insurer to
individuals and dependents in the individual
market. An SBC must be provided
on application for coverage, upon renewal
or reissuance, and upon request. Th e IRS
also provided a glossary of terms used in
health insurance coverage.
IMPACT. Th e SBC requirements apply
to both grandfathered and non-grandfathered
health plans. Employers reportedly
have been preparing their SBCs for the
Fall 2012 health plan enrollment period.
Internal Appeals/External Reviews
Th e PPACA generally requires non-grandfathered
health plans to provide internal and
external claims and appeals processes for
adverse determinations. Adverse determinations
include denials, reductions, or terminations
of coverage.
In 2010, the IRS, HHS and DOL issued
interim fi nal regulations, RIN 1545-BJ63/
TD 9494 (7/22/10), subsequently amended
in 2011, RIN 1210-AB45, to implement
the requirements regarding internal
claims and appeals and external review
processes for group health plans and health
insurance coverage in the group and individual
markets under the PPACA. Th e
interim fi nal regulations describe internal
appeals’ processes and external reviews of
adverse determinations.
COMMENT. Notices of adverse determinations
must be provided in a culturally
and linguistically appropriate manner.
Th e DOL has posted model notices of adverse
determinations on its website.
Preventive Services
Th e PPACA requires that non-grandfathered
group health plans and health insurance
issuers off ering non-grandfathered
group or individual health insurance coverage
provide benefi ts for certain preventive
health services without cost sharing.
Th e IRS, HHS and DOL issued interim
fi nal regulations in 2010, followed by fi nal
rules for women’s health services in 2012.
Th e IRS, HHS and DOL subsequently requested
comments on accommodating religious
organizations while ensuring contraceptive
coverage.
Patient’s Bill Of Rights
Th e PPACA generally provides that a group
health plan and a health insurance issuer offering
group or individual health insurance
coverage may not impose any preexisting
condition exclusion. Th e PPACA also prohibits
group health plans and health insurance
issuers off ering group or individual
health insurance coverage from imposing
lifetime or annual limits on the dollar value
of health benefi ts. Additionally, a group
health plan, or a health insurance issuer offering
group or individual health insurance
coverage, must not rescind coverage except
in the case of fraud or an intentional misrepresentation
of a material fact.
COMMENT. A group health plan or
group health insurance coverage must
comply with the prohibition against preexisting
condition exclusions; however, a
grandfathered health plan that is individual
health insurance coverage is not
required to comply with the prohibition.
Th e IRS, HHS and DOL issued interim
fi nal regulations in 2010. Th e agencies explained
that the prohibition against preexisting
condition exclusions generally is
eff ective with respect to plan years (in the
individual market, policy years) beginning
on or after January 1, 2014. However, the
prohibition became eff ective for enrollees
who are under 19 years of age for plan years
(in the individual market, policy years) beginning
on or after September 23, 2010.
Th e agencies also explained that the annual
limits do not apply to health fl exible spending
accounts (health FSAs), Archer medical
savings accounts (Archer MSAs) and health
savings accounts (HSAs); and plans and issuers
cannot rescind coverage unless an individual
was involved in fraud or made an intentional
misrepresentation of material fact.
Business Information Reporting
Th e PPACA requires businesses, charities
and government entities to fi le an information
return (Form 1099) when they would
make annual purchases aggregating $600
or more to a single vendor, other than to
a vendor that is a tax-exempt organization,
for payments made after December 31,
2011 and reported in 2013 and years thereafter.
Th e PPACA also repealed the longCCH
Tax Briefi ng ©2012 CCH. All Rights Reserved.
14
2012 Health Care Update
standing reporting exception for payments
made to corporations.
Th e Comprehensive 1099 Taxpayer Protection
and Repayment of Exchange Subsidy
Overpayments Act of 2011 repealed
the expansion of business information reporting
under the PPACA as if it had never
been enacted.
COMMENT. Th e cost of repeal was off -
set by increasing the amount of any excess
Code Sec. 36B premium assistance tax
credit that must be repaid by a taxpayer,
subject to certain caps.
IRS Implementation
Of PPACA/HCERA
Since passage of the PPACA and HCERA,
the IRS has moved quickly to issue guidance
on provisions with immediate effective
dates or eff ective dates in the near
future. In June 2012, the Government
Accountability Offi ce (GAO) reviewed
the IRS’s implementation of the PPACA/
HCERA. According to GAO, more than
one half of the provisions in the PPACA/
HCERA requiring action by the IRS were
eff ective in 2010, which forced the IRS to
conduct short term implementations and
long term strategic planning simultaneously.
GAO reported that the IRS generally
followed a risk management plan for
implementing provisions of the PPACA/
HCERA, including outreach to aff ected
stakeholders. GAO also discovered that the
IRS has made progress implementing the
PPACA/HCERA; however, work remains
to be done in a number of areas, such as
design of information technology systems
and guidance for the health exchanges.
IT systems. GAO reported that the IRS
must modify existing IT systems or design
new IT systems to support the health exchanges.
Data must be transmitted from
the IRS to HHS (and vice versa) about taxpayer
income, fi ling status, family status,
and more.
Medicaid
Th e PPACA generally requires states to expand
Medicaid to qualifi ed individuals who
are under age 65 with incomes up to 133
percent of the federal poverty level (FPL).
Th e PPACA also requires states to maintain
current Medicaid coverage levels through
2013 for adults and 2019 for children. Additionally,
the PPACA requires that for states
to obtain Medicaid matching funds, a state
cannot make Medicaid eligibility standards,
methodologies, or procedures more restrictive
than those in eff ect on March 23, 2010
(the date of enactment of the PPACA). Th e
PPACA also makes some changes to the Children’s
Health Insurance Program (CHIP).
Th e Supreme Court’s health care decision restrains
the federal government’s imposition
of this program on the states. While states
are free to adopt the expanded requirements
(and to accept some federal funding), the
Court held that the federal government cannot
punish recalcitrant states by eliminating
existing Medicaid funding benefi ts to states
that choose not to expand their program.
COMMENT. HHS issued fi nal regulations
on Medicaid eligibility under the
PPACA in CMS-2011-0139-0489
(03/23/2012).
What are the Consequences… and the Opportunities for You,
Your Business and Your Clients? Do You Have the Resources You Need?
Sunset of the 2001 & 2003 Tax Relief Acts: Law, Explanation & Analysis — CCH provides the critical explanation and analysis to
help readers make sense of federal tax provisions enacted in 2001 and 2003 that are scheduled to expire December 31, 2012, so they
can plan, respond and advise with confidence.
CCH’s Law, Explanation and Analysis of the Sunset of the 2001 & 2003 Tax Relief Acts provides tax professionals with timely and
practical guidance on the impending sunset of the tax cuts and benefits originally enacted as part of the Economic Growth and Tax
Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Act of 2003 (JGTRRA), CCH editors, together with
leading tax practitioners and commentators, have created a complete practical analysis, guidance, examples and planning tips.
The Internal Revenue Code provisions impacted by the sunset provisions of EGTRRA and JGTRRA are arranged in Code section sequence with caution
language. CCH also provides several special tables and lists to facilitate quick and thorough understanding of how the sunset works, impacts the
Internal Revenue Code, and how it affects taxpayers. Pub: May 2012 • About 450 pages.


www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com