As discussed in the September 17, 2009, issue of the Health Law Update, the Chairman's Mark of the America's Healthy Future Act of 2009 (Mark) was released by the Senate Finance Committee on September 16, 2009. While not an actual bill, the Mark summarizes the provisions of the proposed Senate Finance Committee's healthcare legislation. On September 22, 2009, the Committee released its initial "Modifications" to the Mark and also began its markup of the proposed legislation which continues this week. While the last Health Law Update highlighted many of the Mark's significant proposed changes, this issue is meant to summarize in more detail only the revenue-raising provisions proposed to help fund the many healthcare reform measures and other provisions that propose to use federal taxes as a direct means to reform healthcare.

Please note that this legislation still is being reviewed by the Senate Finance Committee and likely is to be revised further. These changes will be addressed in a future issue of the Health Law Update.

Revenue Raisers (Original Mark)

This legislation is projected to cost about $774 billion over the next ten years. While the specific revenue-raising provisions in Title VI of the Mark are projected to raise about $350 billion by 2019, the remainder of the legislation's cost is expected to be funded through various Medicare and Medicaid reforms. (For example, Medicare fraud and abuse is projected to cost about $70 billion each year, and this legislation includes provisions aimed at curbing such fraud and abuse, thereby saving billions each year.) This issue does not attempt to summarize all of these Medicare/Medicaid cost-cutting reforms, but instead concentrates only on the "new" revenue sources included in Title VI of the Mark, which are summarized as follows:

Excise Tax on High Cost Insurance

A 35 percent excise tax would be imposed on the value of each employee's "employer-sponsored health coverage" that exceeds a threshold amount (generally $8,000 for individuals and $21,000 for families). Such tax would be imposed on the issuers of the health insurance. Employer-sponsored health coverage generally would include an employee's typical major medical, dental, and vision coverage, but also would include other fairly new types of insurance such as flexible spending accounts (FSAs) and health savings accounts (HSAs). The employer would be required to calculate the value in excess of the threshold for each employee and then allocate such excess (subject to the excise tax) to each of the employee's insurers. The employer also now would be required to report the value of each employee's health insurance on Form W-2. Penalties would apply for reporting failures. This tax would apply to all tax years beginning after December 31, 2012, and would be the principal revenue-raiser of this legislation, projected to raise almost $215 billion by 2019. (This tax appears, in many ways, to be a replacement for the proposed surcharge on high-income individuals included in the house reform bill (H.R. 3200).)

Change in Definition of Medical Expenses

The definition of "medical expenses" in the context of what qualifies for tax-free reimbursements through health reimbursement arrangements and FSAs and also tax-free distributions through HSAs and Archer medical savings accounts would be revised to include expenses for drugs only if the drug is either (1) a prescription drug, (2) insulin, or (3) doctor-prescribed over-the-counter medicine. (This amendment effectively would eliminate the tax-free benefits associated with these arrangements for the purchase of non-doctor-prescribed over-the-counter drugs.) This change would apply to expenses incurred after December 31, 2009, and is similar to a provision added to H.R. 3200 by Chairman Charles Rangel (D-N.Y.) of the Ways and Means Committee.

Increased Penalty (Non-Qualified HSA Distributions)

The penalty for distributions from HSAs that are not made for "qualified medical expenses" is increased from 10 percent to 20 percent of the disbursed amount. This penalty would begin to apply to distributions made in tax years after December 31, 2009.

Limitation on FSA Salary Reductions

Elective salary reductions under a cafeteria plan for purposes of coverage under a Health FSA would be limited to $2,000/year. This limitation would take effect for taxable years beginning after December 31, 2012.

Increased Information Reporting for Payments to Corporations

Persons who make payments to corporations of $600/year or more in exchange for either property or services now would be required to file an information return with both the IRS and the corporation itself with the goal of increasing disclosure of potentially taxable payments. This increased reporting would be effective for payments made in taxable years beginning after December 31, 2011.

New Requirements for 501(c)(3) Hospital Organizations

New requirements would be placed on all section 501(3) organizations that operate a "hospital facility." Specifically, each such facility would be required to conduct a community health needs assessment at least once every three years and adopt an implementation strategy to meet the community needs identified through such assessment. Each hospital would be required to disclose in its annual Form 990 the manner in which it is addressing the needs identified in the assessment and, if all identified needs are not addressed, the reasons why. A $50,000 penalty would be assessed on each nonprofit hospital that fails to complete the required community needs assessment in an applicable three-year period, and if the hospital fails to accurately report on its annual information return, the existing penalty for an incomplete tax return would apply. In addition to the community health needs assessment, each hospital would be required to (1) adopt, implement and widely publicize a financial assistance policy; (2) bill patients who qualify for financial assistance no more than the amount generally charged to insured patients; and (3) abide by new laws with respect to collection procedures. These new requirements would take effect for tax years beginning after the date of the legislation's enactment.

Annual Fees

Beginning in 2010, the Mark would impose an annual fee, allocated by market share, on the following healthcare sectors:  

  • Pharmaceutical manufacturing companies -- $2.3 billion
  • Medical device manufacturers -- $4 billion
  • Health insurance -- $6 billion
  • Clinical laboratories (except for small businesses) -- $750 million

Elimination of Deduction for Federal Prescription Drug Subsidies

Sponsors of qualified retiree prescription drug plans that receive tax-free subsidy payments from the Secretary of the U.S. Department Health and Human Services now would be prohibited from deducting the costs reimbursed by such subsidy for federal income tax purposes. This tax deduction would be eliminated for tax years beginning after December 31, 2010.

Revenue Raisers (Modified Mark)

The following changes were made to the original Mark's revenue raisers on September 22, 2009:

Excise Tax on High Cost Insurance

The excise tax would be increased to 40 percent. The threshold amounts for both retired individuals over age 55 and employees engaged in a "high risk profession" ("high risk professions" would include such professions as law enforcement officers, firefighters and individuals engaged in construction (among others)) would be increased by $750 for individuals and $2,000 for families. All threshold amounts now would be indexed to the CPI-U + 1 percent beginning in 2014. This modification is expected to reduce the projected revenue raised through 2019 by about $10 billion.

Limitation on FSA Salary Reductions

Elective salary reductions under a cafeteria plan for purposes of coverage under a Health FSA would be limited to $2,500/year (rather than the $2,000 provided in the original Mark). The effective date for this provision also would be changed from December 31, 2010, to December 31, 2012.

Increased Penalty (Non-Qualified HSA Distributions)

The effective date of this provision would be changed to apply to distributions made in tax years beginning after December 31, 2010 (rather than 2009).

Annual Fees

The aggregate fee for the clinical laboratories sector would be eliminated, but the aggregate fee for the health insurance sector would be increased to $6.7 billion from $6 billion.

Limitation on Itemized Deduction for Medical Expenses (NEW)

This provision would increase the threshold for deducting medical expenses on Schedule A so that such expenses now would have to exceed 10 percent of a taxpayer's adjusted gross income (AGI) rather than only 7.5 percent in order to be deducted. This change would take effect for taxable years beginning after December 31, 2012.

Exclusion of Certain Indian Tribe Health Benefits from Gross Income (NEW)

Certain health benefits, medical care services and accident or health plan coverage received by members of Indian tribes now would be specifically excluded from the member's gross income. This provision would be effective for benefits provided after the date of the legislation's enactment.

Other Tax Provisions (Original Mark)

Individual Responsibility

Individuals who do not maintain certain minimal health insurance coverage would be subject to an additional excise tax. The excise tax would be $750/year for taxpayers with "modified adjusted gross income" between 100-300 percent Federal Poverty Level (FPL) and $950/year for those above 300 percent FPL. ("Modified adjusted gross income" is generally defined as AGI, plus tax-exempt income, plus income of the taxpayer's dependents.) New information returns would be required to be filed by providers of healthcare in order to properly determine who would be subject to this new tax. Exemptions would be allowed for (1) individuals below 100 percent FPL (below 133 percent FPL beginning in 2013), (2) individuals whose lowest cost option is still greater than 10 percent of their AGI, (3) individuals with sincere religious objections, (4) de minimis lapses in coverage, and (5) other hardship situations. This tax would go into effect on January 1, 2013. (H.R. 3200 contained a similar provision with one of the main differences being that its additional tax was a percentage tax rather than a flat tax.)

Employer Responsibility

Unlike H.R. 3200, the Mark does not require employers to provide health insurance coverage to its employees. However, if an employer (1) chooses not to offer health insurance coverage, (2) has more than 50 full-time employees, and (3) employs at least one person who receives a health insurance affordability tax credit (discussed later herein) for health insurance purchased from a state exchange, it would be required to pay an additional fee. This fee generally would equal the product of the average health insurance tax credit given out by the state exchanges and the number of the employer's employees receiving tax credits. (The total annual fee could not exceed $400 X the total number of employees of the employer.) This additional tax would take effect on January 1, 2013. (As mentioned, H.R. 3200 was written so that employers were required to provide health insurance coverage in order to avoid an additional eight percent payroll tax on their employees' wages. The Senate Mark appears much more lenient.)

Individual Tax Credits (Health Care Affordability Tax Credits)

The Mark provides for sliding scale tax credits for individuals and families (who are U.S. citizens and legal residents) between 134-300 percent FPL in 2013 (and between 100-300 percent FPL beginning in 2014). The refundable tax credit would be based on the percentage of income the cost of the premium represents, rising from 3 percent of income for those at 100 percent FPL to 13 percent of income for those at 300 percent FPL. Individuals between 300-400 percent FPL would be eligible for a credit based on capping an individual's share of the premium at 13 percent of income.

Small Business Tax Credits

Employers with average annual full-time wages of $20,000 or less and ten or less full-time employees would be eligible for a tax credit up to 35 percent of their contributions to their employees' healthcare premiums for the years 2011 and 2012. For years after 2012, the employer would be eligible for a tax credit of up to 50 percent of its contributions, but only for the first two years in which it purchases its health insurance coverage through its state exchange. (The credits would be available at a reduced rate for employers with average annual full-time wages between $20,000 and $40,000 and employers with between 10 and 25 full-time employees.) The credit would be part of the general business tax credit. (The provision in H.R. 3200 for small business healthcare tax credits was very similar to this provision.)

Other Tax Provisions (Modified Mark)

The following changes were made to the original Mark's other tax provisions on September 22, 2009:

Individual Responsibility

The effective date for this provision would be moved back six months to July 1, 2013.

Employer Responsibility

The effective date for this provision also would be changed to July 1, 2013.

Individual Tax Credits (Health Care Affordability Tax Credits)

The Modified Mark revises the amount of the sliding scale tax credit so that it now would be based on the percentage of income the cost of the premium represents, rising from 2 percent of income for those at 100 percent FPL to 12 percent of income for those at 300 percent FPL. Individuals between 300-400 percent FPL now would be eligible for a credit based on capping an individual's share of the premium at 12 percent of income.

Small Business Tax Credits

This credit would be available to 501(c)(3) organizations as a credit against payroll taxes. However, unlike for other small businesses, the credit would be limited to 25 percent of employer contributions for 2011-2012 and 35 percent of employer contributions for years after 2012.