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You’ve more than likely heard about the Affordable Care Act. But are you aware of the many tax provisions which are part of the new legislation? Here are summaries, obtained from the IRS website, of various components of the Affordable Care Act along with the tax provisions affecting each.
The Affordable Care Act was enacted on March 23, 2010. It contains some tax provisions that are in effect and more that will be implemented during the next several years. The following is a list of provisions for which the IRS has issued proposed and/or final guidance; additional information will be added as it becomes available.
On April 26, 2012, the Department of the Treasury and IRS issued Notice 2012-31, which provides information and requested public comment on an approach to determining whether an eligible employer-sponsored health plan provides minimum value. Starting in 2014, whether such a plan provides minimum value will be relevant to eligibility for the premium tax credit and application of the employer shared responsibility payment.
Information Reporting on Health Insurance Coverage
On April 26, 2012, the Department of the Treasury and IRS issued Notices 2012-32 and 2012-33, which invited comments to help inform the development of guidance on annual information reporting related to health insurance coverage. The information reporting is to be provided by health insurance issuers, certain employers that sponsor self-insured plans, government agencies and certain other parties that provide health insurance coverage.
Disclosure of Return Information
On April 27, 2012, the Department of the Treasury and the IRS issued proposed regulations with rules for disclosure of return information to be used to carry out eligibility determinations for advance payments of the premium tax credit, Medicaid and other health insurance affordability programs. The proposed regulations solicit public comments.
Small Business Health Care Tax Credit
This new credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. Learn more by browsing our page on the Small Business Health Care Tax Credit for Small Employers and our news release.
Health Flexible Spending Arrangements
Effective Jan. 1, 2011, the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements (FSAs) or health reimbursement arrangements unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. This standard applies only to purchases made on or after Jan. 1, 2011. A similar rule went into effect on Jan. 1, 2011, for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs). Employers and employees should take these changes into account as they make health benefit decisions. For more information, see news release IR-2010-95, Notice 2010-59, Revenue Ruling 2010-23 and our questions and answers. FSA and HRA participants can continue using debit cards to buy prescribed over-the-counter medicines, if requirements are met. For more information, see news release IR-2010-128 and Notice 2011-5.
In addition, starting in 2013, there are new rules about the amount that can be contributed to an FSA. Notice 2012-40 provides information about these rules and flexibility for employers applying the new rules and requests comments about other possible administrative changes to the rules on FSA contributions. The Notice provides instructions on how to submit comments.
Proposed Regulations Issued on Medical Device Excise Tax
On Feb. 3, 2012, the IRS and the Treasury Department issued proposed regulations on the new 2.3-percent medical device excise tax (IRC §4191) that manufacturers and importers will pay on their sales of taxable medical devices starting in 2013. Additional information is available in the Medical Device Excise Tax FAQs.
Health Insurance Premium Tax Credit
Starting in 2014, individuals and families can take a new premium tax credit to help them afford health insurance coverage purchased through an Affordable Insurance Exchange. Exchanges will operate in every state and the District of Columbia. The premium tax credit is refundable so taxpayers who have little or no income tax liability can still benefit. The credit also can be paid in advance to a taxpayer’s insurance company to help cover the cost of premiums. On May 18, 2012, the IRS issued final regulations which provide guidance for individuals who enroll in qualified health plans through Exchanges and claim the premium tax credit, and for Exchanges that make qualified health plans available to individuals and employers.
The portion of the law that will allow eligible individuals to use tax credits to purchase health coverage through an Exchange is not effective until 2014.
Exchanges will offer individuals a choice of health plans that meet certain benefit and cost standards. The Department of Health and Human Services (HHS) administers the requirements for the Exchanges and the health plans they offer. Additional information about the Exchange can be found at www.healthcare.gov and in IRS REG-131491-10 issued on Aug. 12, 2011.
Health Coverage for Older Children
Health coverage for an employee’s children under 27 years of age is now generally tax-free to the employee. This expanded health care tax benefit applies to various work place and retiree health plans. These changes immediately allow employers with cafeteria plans –– plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return. Learn more by reading our news release or this notice.
Excise Tax on Indoor Tanning Services
A 10-percent excise tax on indoor UV tanning services went into effect on July 1, 2010. Payments are made along with Form 720, Quarterly Federal Excise Tax Return. The tax doesn’t apply to phototherapy services performed by a licensed medical professional on his or her premises. There’s also an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee. For more information on the tax and how it is administered, see the Indoor Tanning Services Tax Center.
Reporting Employer Provided Health Coverage in Form W-2
The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan on an employee’s Form W-2, Wage and Tax Statement, in Box 12, using Code DD. Many employers are eligible for transition relief for tax-year 2012 and beyond, until the IRS issues final guidance for this reporting requirement.
The amount reported does not affect tax liability, as the value of the employer excludible contribution to health coverage continues to be excludible from an employee’s income, and it is not taxable. This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers.
The Affordable Care Act raises the maximum adoption credit to $13,360 per child, up from $13,170 in 2010 and $12,150 in 2009. The adoption tax credit is refundable for tax year 2011, meaning that eligible taxpayers can get it even if they owe no tax for that year. In general, the credit is based on the reasonable and necessary expenses related to a legal adoption, including adoption fees, court costs, attorney’s fees and travel expenses. Income limits and other special rules apply. In addition to attaching Form 8839, Qualified Adoption Expenses (see instructions), eligible taxpayers must include with their 2011 paper tax return one or more adoption-related documents to avoid delaying their refund. Taxpayers may also be asked, after filing their returns, to substantiate any qualified adoption expenses they paid.
Medicare Shared Savings Program
The Affordable Care Act establishes a Medicare shared savings program (MSSP) which encourages Accountable Care Organizations (ACOs) to facilitate cooperation among providers to improve the quality of care provided to Medicare beneficiaries and reduce unnecessary costs. More information can be found in Notice 2011-20, which solicited written comments regarding what additional guidance, if any, is needed for tax-exempt organizations participating in the MSSP through an ACO. This guidance also addresses the participation of tax-exempt organizations in non-MSSP activities through ACOs. Additional information on the MSSP is available on the Department of Health and Human Services website.
The Centers for Medicare and Medicaid Services has released final regulations describing the rules for the Shared Savings Program and accountable care organizations. Fact Sheet 2011-11 confirms that Notice 2011-20 continues to reflect IRS expectations regarding the Shared Savings Program and ACOs, and provides additional information for charitable organizations that may wish to participate.
Qualified Therapeutic Discovery Project Program
This program was designed to provide tax credits and grants to small firms that show significant potential to produce new and cost-saving therapies, support U.S. jobs and increase U.S. competitiveness. Applicants were required to have their research projects certified as eligible for the credit or grant. IRS guidance describes the application process.
Submission of certification applications began June 21, 2010, and applications had to be postmarked no later than July 21, 2010, to be considered for the program. Applications that were postmarked by July 21, 2010, were reviewed by both the Department of Health and Human Services (HHS) and the IRS. All applicants were notified by letter dated October 29, 2010, advising whether or not the application for certification was approved. For those applications that were approved, the letter also provided the amount of the grant to be awarded or the tax credit the applicant was eligible to take.
The IRS published the names of the applicants whose projects were approved as required by law. Listings of results are available by state.
Group Health Plan Requirements
The Affordable Care Act establishes a number of new requirements for group health plans. Interim guidance on changes to the nondiscrimination requirements for group health plans can be found inNotice 2011-1, which provides that employers will not be subject to penalties until after additional guidance is issued. Additionally, TD 9575 and REG-4003810, issued by DOL, HHS and IRS, provide information on the summary of benefits and coverage and the uniform glossary. Notice 2012-59provides guidance to group health plans on the waiting periods they may apply before coverage starts. Other information on group health plan requirements is available on the websites of the Departments of Health and Human Services and Labor and in additional guidance.
Tax-Exempt 501(c)(29) Qualified Nonprofit Health Insurance Issuers
The Affordable Care Act requires the Department of Health and Human Services (HHS) to establish the Consumer Operated and Oriented Plan program (CO-OP program). It also provides for tax exemption for recipients of CO-OP program grants and loans that meet additional requirements under section 501(c)(29). IRS Notice 2011-23 outlined the requirements for tax exemption under section 501(c)(29) and solicited written comments regarding these requirements as well as the application process. Revenue Procedure 2012-11, issued in conjunction with temporary regulationsand a notice of proposed rulemaking, sets out the procedures for issuing determination letters and rulings on the exempt status of organizations applying for recognition of exemption under 501(c)(29).
Medicare Part D Coverage Gap “donut hole” Rebate
The Affordable Care Act provides a one-time $250 rebate in 2010 to assist Medicare Part D recipients who have reached their Medicare drug plan’s coverage gap. This payment is not taxable. This payment is not made by the IRS. More information can be found at www.medicare.gov.
Additional Requirements for Tax-Exempt Hospitals
The Affordable Care Act added new requirements for charitable hospitals. (See Notice 2010-39 andNotice 2011-52.) On June 22, 2012, the IRS issued proposed regulations which provide information on the requirements for charitable hospitals relating to financial assistance and emergency medical care policies, charges for emergency or medically necessary care provided to individuals eligible for financial assistance, and billing and collections. Comments on the proposed regulations are requested by Sept. 24, 2012.
Form 990, Schedule H, for tax year 2010 was revised to include a new Part V, Section B, to gather information on hospitals’ compliance with the new requirements and on related policies and practices. To give the hospital community time to familiarize itself with the types of information the IRS is requesting, Part V, Section B of Schedule H was made optional for the 2010 tax year (seeAnnouncement 2011-37).
The IRS considered public input and made revisions to Part V, Section B for tax year 2011 (see theForm 990, Schedule H and instructions). Hospitals are required to complete all parts and sections of Schedule H for tax year 2011, with the exception of lines 1-7 of Part V, Section B, which relate to community health needs assessments (see Notice 2012-4). These lines are optional for 2011. The IRS continues to welcome public input on the new requirements for charitable hospitals under the Affordable Care Act.
Annual Fee on Branded Prescription Pharmaceutical Manufacturers and Importers
The Affordable Care Act created an annual fee payable beginning in 2011 by certain manufacturers and importers of brand name pharmaceuticals. On Aug. 15, 2011, the IRS issued temporary regulations and a notice of proposed rulemaking on the branded prescription drug fee. The temporary regulations describe the rules related to the fee, including how it is computed and how it is paid.
On Nov. 4, 2011, the IRS issued Notice 2011-92 which provides additional guidance on the branded prescription drug fee for the 2012 fee year.
Modification of Section 833 Treatment of Certain Health Organizations
Medical Loss Ratio (MLR)
Beginning in 2011, insurance companies are required to spend a specified percentage of premium dollars on medical care and quality improvement activities, meeting a medical loss ratio (MLR) standard. Insurance companies that are not meeting the MLR standard will be required to provide rebates to their consumers beginning in 2012. For information on the federal tax consequences to an insurance company that pays a MLR rebate and an individual policyholder who receives a MLR rebate, as well as information on the federal tax consequences to employees if a MLR rebate stems from a group health insurance policy, see our frequently asked questions.
Limitation on Deduction for Compensation Paid by Certain Health Insurance Providers
The Affordable Care Act amended section 162(m) of the Code to limit the compensation deduction available to certain health insurance providers. The amendment goes into effect for taxable years beginning after Dec. 31, 2012, but may affect deferred compensation attributable to services performed in a taxable year beginning after Dec. 31, 2009. Initial guidance on the application of this provision can be found in Notice 2011-2, which also solicited comments on the application of the amended provision.
Employer Shared Responsibility Payment
Starting in 2014, certain employers must offer health coverage to their full-time employees or a shared responsibility payment may apply. Information may be found in news releases IR-2011-92and IR-2011-50 and Notices 2011-73, 2011-36 and 2012-17. Additionally, Notice 2012-58 expands upon and modifies previous guidance and describes safe harbors that employers may use to determine whether certain workers are full-time employees and to establish that coverage is affordable at least through the end of 2014. Notice 2012-59 provides related guidance for group health plans on the waiting periods they may apply before starting coverage.
Patient-Centered Outcomes Research Institute
The Affordable Care Act establishes the Patient-Centered Outcomes Research Institute. Funded by the Patient-Centered Outcomes Research Trust Fund, the institute will assist patients, clinicians, purchasers and policy-makers in making informed health decisions by advancing clinical effectiveness research. The trust fund will be funded in part by fees paid by issuers of health insurance policies and sponsors of self-insured health plans.
On April 12, 2012, the IRS and the Treasury Department issued proposed regulations on this fee. The IRS and Treasury request comment on the proposed regulations by July 16, 2012. Comments may be submitted electronically, by mail or hand delivered to the IRS. Additionally, a public hearing is scheduled for August 8, 2012. The preamble to the proposed regulations provides instructions on how to submit comments and participate in the public hearing.
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