Health Care Reform Blog : Health Care Law Reform : McDermott Will & Emery Law Firm

Health Reform Provisions

The Internal Revenue Service (IRS) issued Notice 2010-38, which provides guidance under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, (collectively, the Act) on the tax treatment of health coverage and medical reimbursements for children under age 27.  Taxpayers may rely on Notice 2010-38, pending the issuance of amended U.S. Treasury regulations.

Section 105(b) of the Internal Revenue Code generally excludes from an employee’s gross income employer-provided reimbursements made to an employee for the medical care of the employee, the employee’s spouse or the employee’s dependents.  Coverage under an employer-provided accident or health plan is excluded from an employee’s gross income under Code Section 106.  Effective March 30, 2010, the Act extended these exclusions to coverage under an employer-provided plan and to expenses incurred for the medical care of an employee’s child who has not attained age 27 as of the end of the taxable year.

Notice 2010-38 also clarifies the tax treatment of these dependent benefits under cafeteria plans, VEBAs and Section 401(h) accounts.

Your Next Moves

Cafeteria plans must be amended by December 31, 2010, in order to cover children under age 27 for the 2010 plan year.  Amendments for the 2011 and subsequent plan years should be made prospectively.  Employer sponsors of group health plans should analyze their current benefit plan design to determine whether they will extend health coverage to children under age 27 in the 2010 plan year or wait until 2011 to implement this change.

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Among the more popular reforms included in the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, are the “immediate health insurance reforms.”  These provisions, which affect group health plans and insurers offering group or individual health insurance, become effective for plan years beginning on or after September 23, 2010.  This summary addresses the principal immediate health insurance reforms, namely expansion of dependent coverage, prohibition on excluding children based on pre-existing conditions, coverage of preventive health services, limitations on rescission practices, and regulation of annual and lifetime limits on essential health benefits.

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The Facts

President Obama signed historic health reform legislation on March 23, 2010, P.L. 111-148.  A week later, the president signed a package of amendments to health reform, the Health Care and Education Reconciliation Act of 2010, H.R. 4872.  Following are highlights of the most significant revenue raisers organized by the year in which they will begin under health reform legislation, as amended by the reconciliation package.

2010

• Imposes a 10 percent excise tax on individuals using tanning services
• Adds provision to disqualify unprocessed fuels, including so-called black liquor, from the section 40(b) cellulosic biofuel credit starting in 2010
• Codifies the economic substance doctrine and imposes penalties for transactions that lack economic substance

2011

• Imposes non-deductible annual flat fees on pharmaceutical manufacturers and importers based upon relative market share
• Conforms the definition of qualified medical expenses for health savings, health flexible spending accounts and health reimbursement arrangements to the definition used for the itemized deduction
• Increases the penalty for distributions from health savings accounts prior to age 65 not used for qualified medical expenses from 10 to 20 percent

2012

• Imposes a 2.3 percent excise tax on sales of most medical devices by manufacturers, producers or importers
• Requires information reporting for businesses that pay corporate providers of property and services any amount more than $600  

2013

• Increases the Medicare payroll tax from 1.45 percent to 2.35 percent for individuals with wages of more than $200,000 and $250,000 for joint filers
• Imposes a new 3.8 percent tax on investment income referred to as “unearned income” for individuals with wages of more than $200,000 and $250,000 for joint filers
• Imposes non-deductible annual flat fees on health insurance providers and clinical labs based upon relative market share
• Limits the amount of contributions to health flexible spending accounts to $2,500 per year
• Eliminates the deduction for the Medicare Part D subsidy for employers who maintain prescription drug plans for eligible retirees
• Increases the floor for deductible medical expenses from 7.5 percent of adjusted gross income to 10 percent
• Caps the amount of deductible executive compensation for health insurance companies at $500,000

2014

• Increases the estimated corporate tax payments for firms owing at least $1 billion in payments due in July, August and September 2014 by 15.75 percentage points

2018

• Imposes a 40 percent excise tax on insurance companies and plan administrators for health insurance plans above the threshold of $10,200 for individual coverage and $27,500 for family coverage

What’s at Stake

• Individuals earning over $200,000 and $250,000 for joint filers will pay a higher payroll tax and an excise tax on investment income.
• Insurance coverage limits may be reduced to avoid the 40 percent excise tax. 
• The costs of pharmaceutical drugs, insurance lab work and medical testing fees could increase as a result of the new fees imposed on these companies.
• Transactions must satisfy the economic substance doctrine to avoid the imposition of penalties. 

Steps to Consider

• Affected entities should carefully evaluate the impact of the proposed new taxes and fees.  
• Individuals will want to consider planning for the new taxes on “unearned income.”

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