On Tuesday the House Subcommittee on Oversight held a hearing to discuss the challenges the Internal Revenue Service (IRS) will face in implementing and administering many of the Affordable Care Act’s (ACA) new tax-related provisions. As outlined in a hearing advisory, the ACA contains 47 such provisions that have already or will take effect within the next year and a half. These new provisions include the employer shared responsibility provision, which dictates that starting in 2014, employers with 50 or more full-time or full-time equivalent employees will be required to provide “minimum essential” health care coverage for their full-time employees or pay an annual penalty. Other tax-related provisions that will take effect as of 2013 include:

  • Limits on Flexible Spending Arrangements (FSAs) and Health Savings Accounts (HSAs): Effective January 1, 2013, annual contributions to these plans will be limited to $2,500. This amount will be indexed to CPI.
  • Device Manufacturer and Importer Fee: An excise tax on manufacturers and importers of medical devices will be imposed.
  • Medicare Payroll Tax: An additional 0.9% Medicare tax will be imposed on employees with wages over $200,000 ($250,000 for joint filers).
  • Medicare Contribution on Investment Income: A 3.8% tax on unearned income will be imposed on those with income over $200,000 ($250,000 for joint filers).

Subcommittee Chairman Charles Boustany, Jr. (R-LA) claimed in his opening statement that the new tax rules and regulations created to implement these provisions “will pose significant challenges to both individuals and job creators.”

Attorney and former IRS commissioner and chief counsel Fred Goldberg, Jr. supported this claim, testifying that the ACA’s revenue provisions “will become a burdensome, costly, and administrative quagmire,” and lead to “significant noncompliance” with the nation’s tax laws. Specifically, Goldberg criticized how the ACA’s future tax credits and subsidies will be determined and administered. Under the ACA, individuals with household incomes up to 400% of the federal poverty level (currently approximately $88,000 for a family of four) may be eligible to receive federal tax credits or cost-sharing subsidies to purchase insurance through the future health insurance exchanges (“Exchanges”). Such individuals will be eligible to receive these tax credits or subsidies if their employer-sponsored coverage is deemed “unaffordable” (if contributions exceed 9.5% of their household incomes), or if the plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of such costs.

As the law stands, the Exchanges will have the task of determining the amount of the credit based on two-year-old tax return information. According to Goldberg, there is no reason why each of the future state Exchanges – and not the IRS – should be determining whether individuals are eligible for the tax credits. Because individuals will report their estimated household incomes, Goldberg anticipates “widespread noncompliance” with the law.

Under questioning, Goldberg stated that one unintended consequence of the law is that employers will have “significant incentives to discontinue group coverage.”

Kathy Pickering, Executive Director of the Tax Institute at H&R Block, echoed this concern, and noted that tax preparers will “face numerous challenges and significant demands.” Notably, Pickering estimates that the IRS will face the difficult task of reconciling ACA premium tax credit overpayments once the final household incomes are determined. She recommends that the IRS and U.S. Department of Health and Human Services (HHS) develop a system for verifying income to determine credit eligibility at the outset.

She also recommended that IRS “should ensure all regulations and other authoritative guidance related to the ACA are proposed by April 30, 2013.” One reason for doing so, she explained, is to give small businesses sufficient time to determine whether they can enroll in the Small Business Health Options Program (SHOP). The SHOP program, which is set to begin operation in each state in 2014, is designed to enable small employers to enhance their health insurance purchasing power within the Exchanges. Pickering said that businesses generally “perform strategic planning to determine their employee benefit offerings and negotiate with coverage carriers at least three to four months before the end of the calendar year,” and that open enrollment in Exchanges and the SHOP program begins October 1, 2013. This will mean that small businesses will need “at least four months to plan for 2014 and to determine if they intend to participate in a SHOP.” Given this tight timeframe, Pickering recommends that the IRS finalize its rules and related guidance by the Spring of 2013.

She noted also that the IRS and the HHS together have a “daunting” task ahead of them, and need to vastly improve tax administration to implement the ACA.

Scott A. Hodge, President of The Tax Foundation, agreed, and specifically criticized the lack of administrative efficiency involved in implementing the health care law. One area of particular concern was the fact that the HHS makes the rules and determines tax credit eligibility, but the IRS implements and enforces these rules. Among other things, Hodge called for greater tax code reform.

Seth T. Perreta, an attorney speaking on behalf of the American Benefits Council (the “Council”), commended the IRS and Treasury Department for being accessible to employers and administering guidance to help with compliance of the “large and complex statute” that is the ACA.

For example, Perreta noted that the ACA will require employers to report the cost of certain employer-provided health coverage on the Form W-2. Perreta credited the IRS for providing a one-year reprieve from this reporting requirement, as well as additional compliance guidance.

With respect to the ACA’s pay or play provisions, Perreta claimed that employers have been extremely interested in how “full-time employees” will be defined. To this end, the IRS has responded to employers’ requests for more information by issuing a series of Notices, including one issued on August 31, 2012. Perreta testified that these Notices provide more detail on safe harbors designed to simplify the full-time employee determination.

Perreta did, however, list a number of areas in which the IRS will need to provide further guidance. Perreta testified that more direction is needed on how an employer should determine a health plan’s minimum value. Employers also “urgently need guidance regarding their new reporting and disclosure obligations.” Finally, Perreta called for more information on the ACA’s treatment of employee wellness programs, including whether incentives should be taken into consideration for determining plan affordability. Such guidance should “ensure that employers continue to have the necessary flexibility to create wellness programs that improve the health of their employees while strengthening employers’ ability to continue to provide quality group health coverage to their employees.”

A complete list of panelists and links to their written testimony can be found here.