The U.S. House of Representatives’ health reform bill, H.R. 3962, the Affordable Health Care for America Act (House bill), and the U.S. Senate’s health reform bill, H.R. 3590, the Patient Protection and Affordable Care Act (Senate bill), both include a provision excluding medical care provided to Indians from the recipients’ gross incomes. Although these provisions are almost identical, the Senate bill provision contains double benefit language that is potentially problematic.
The House bill passed on November 7, 2009; the Senate bill passed on December 24, 2009. The two bodies still need to conference with each other to merge their respective bills into one bill that then will need to be approved by both the House and Senate before going to President Obama for his signature.
This alert offers a comparison of the two provisions, Section 545 of the House bill and Section 9021 of the Senate bill, and also discusses the Senate bill’s addition of a special excise tax on so-called “Cadillac” health plans, and whether such a tax would be applicable to tribal governmental plans.
Under current law, there is no explicit income tax exclusion for health care received by Indians from the Indian Health Service (IHS), the Indian tribe of which they are a member, or a tribal organization. Instead, the health care services received by Indians from IHS have traditionally been excluded from income under the general welfare doctrine. IHS has struggled to meet Indian Country’s health needs, leaving Indian tribal governments and other third parties to fill in the gap.
The IRS has raised questions about the taxation of these health benefits provided by Indian tribal governments and other third parties. In some cases, the IRS has challenged health benefits provided by tribes by imputing income and proposing tax penalties. This IRS audit activity has led Indian tribal governments and their supporters in Congress to propose an amendment to the Internal Revenue Code (Code) clarifying that health benefits provided by IHS or Indian tribal governments are excluded from the recipients’ gross incomes.
Similarities Between the Provisions
In most respects, the provisions in the House and Senate bills are almost identical. Both exclude from gross income:
- the value of any health care benefits provided by IHS, either directly, through a grant or through a third-party
- medical services provided by an Indian tribe to a member, including his or her spouse and dependents
- coverage under an accident or health insurance plan
- other medical care that supplements, substitutes or replaces a program or service provided by the United States to Indian tribes or Indians
Both provisions are very broad. They should cover almost all situations in which an individual receives health care services by virtue of the fact that the individual is an Indian or a tribal member.
Denial of Double Benefit
The provision in the Senate bill states that the exclusion “shall not apply to the amount of any qualified Indian health care benefit which is not includible in gross income of the beneficiary of such benefit under any other provision of this chapter, or to the amount of any such benefit for which a deduction is allowed to such beneficiary under any other provision of this chapter.”
Holland & Knight is urging the Senate and House conferees to adopt the House version, because we see the double benefit language as unnecessary. Individuals cannot exclude the value of health coverage and also deduct the value of that same coverage. Individual Indians are receiving medical care benefits, directly or indirectly, from IHS or their tribes that, arguably, could be included in the recipients’ gross incomes. The exclusion properly clarifies that the benefits are excluded from the recipients’ gross incomes. There will be no possibility for a deduction because the individual recipients are not paying for the services they receive.
In addition, it should not matter if another exclusion under the Code applies. If the medical care received by an individual Indian is excluded from income under two different Code sections, the net result is still zero income.
Further, the double benefit language could be misapplied. It is foreseeable that the exclusion for medical care provided to Indians could be denied to an individual Indian because his or her beneficiary (e.g., a child) qualifies for an exclusion under another Code section.
Lastly, the double negative contained in the provision as drafted by the Senate’s legislative counsel is confusing. The double benefit language states that the exclusion “shall not apply to the amount of any . . . benefit which is not includible in gross income. . . .”
Excise Tax on High-Cost, Employer-Sponsored Health Coverage
The Senate bill imposes an excise tax on high-cost, employer-sponsored health coverage. This provision would impose an excise tax on the value of health coverage that exceeds $23,000 for employer-sponsored group health plans. The excise tax rate would be 40 percent and would be assessed against the excess value of any amount that exceeds the $23,000 threshold ($8,500 for single plan coverage). For example, if an employer provides a group plan in which the value per employee is determined to be $25,000 each, the employer would have to pay a 40 percent tax on the excess benefit of $2,000 ($25,000 minus $23,000).
This provision does not appear to include nonemployee (e.g., tribal member health plans) plans. Senate bill Subsection (d)(1)(A) states that the “term ‘applicable employer-sponsored coverage’ means, which respect to any employee, coverage under any group health plan made available to the employee by an employer which is excludable from the employee’s gross income under section 106, or would be if it were employer-provided coverage (within the meaning of such section 106).” The only cause for concern is that the last clause – “or would be if it were employer-provided coverage (within the meaning of such section 106)” – is so vague. It appears this clause is meant to cover situations in which the employee pays a portion of the premium, as Subsection (d)(1)(C) states that “[c]overage shall be treated as applicable employer-sponsored coverage without regard to whether the employer or employee pays for the coverage.” Thus, Indian tribal member plans are most likely not subject to the excise tax.
Nonetheless, the excise tax may apply to plans sponsored by Indian tribal governments for their employees. Subsection (d)(1)(E) provides that the governmental plans included in this provision “include coverage under any group health plan established or maintained primarily for its civilian employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any such government.” Although Indian tribal governments are not explicitly mentioned, courts have interpreted the term “includes” as illustrative rather than exclusive. As a result, Indian tribal government employee plans may be subject to the excise tax if the benefits provided exceed the applicable threshold.