Families USA and Small Business Majority recently commissioned The Lewin Group to develop estimates of the number of small businesses that are eligible for this new tax break in tax year 2011 and how many workers could potentially benefit as a result. The Lewin Group used their widely respected Health Benefits Simulation Model for these estimates.  The analysis found that more than 3.2 million small businesses, employing 19.3 million workers across the nation, will be eligible for this tax credit when they file their 2011 taxes. In total, these small businesses are eligible for more than $15.4 billion in credits for the 2011 tax year alone, an average of $800 per employee.

The IRS temporary rule did include statutory guidance for tax exemption: in addition to notifying the Treasury Department that the group is applying for exemption recognition, no private inurement of earnings to shareholders or individuals can exist, (unless it lowers premiums, improves benefits, or improves the quality of health care delivered to the organization’s members). Additionally, no attempt to influence legislation or politics can be made.

HHS issued the CO-OP final rule in December, which discussed CO-OP Program eligibility standards. For for information on CO-OPs, click here.

For more information on tax-exempt hospital requirements, click here and here.

Background

The Affordable Care Act (ACA) established refundable premium and cost-sharing tax credits to help make health insurance more affordable to lower-and middle-income individuals without employer-sponsored health insurance or other form of “minimum essential coverage.”^[1] Under the ACA, individuals eligible for the premium tax credit must have annual incomes between 100 and 400 percent of the federal poverty level (FPL); tax credits are also available for legal immigrants with incomes below 100 percent of the FPL and not eligible for Medicaid.^[2] The refundable premium tax credits are available for the purchase of health insurance coverage offered through health insurance Exchanges.

The monthly premium assistance amount is the lesser of the premium in which the individual is enrolled through the Exchange, or the excess of the premium for the benchmark plan (second lowest cost silver plan) over the applicable percentage of the taxpayer’s household income.^[3] Premium credits are not paid for months in which individuals are eligible for “minimum essential coverage,” which includes government-sponsored coverage such as Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), TRICARE, and veterans’ health programs, as well as employer-sponsored coverage that meets certain minimum standards related to affordability and minimum value. In addition to creating challenges related to the continuity of enrollment and care, this limitation means that the failure on the part of an Exchange and a state Medicaid program to promptly change an individual’s enrollment status based on current information could result in financial liability for individuals whose annual incomes fall below the federal poverty level or who become Medicaid-eligible and yet continue to receive premium tax credits. The ACA thus appears to create the potential for repayment liability exposure for Medicaid-eligible persons with below-poverty income.

Under the ACA, an individual with employer-sponsored coverage is not considered to have “minimum essential coverage” (making the individual eligible for tax credits) if; 1) employer premiums are “unaffordable” (meaning the employee’s contribution for an individual plan exceeds 9.5 percent of household income);^[4] or 2) the employer coverage does not provide minimum value (meaning the employer contribution is less than 60 percent of the plan’s actuarial value.^[5] Where employer premiums are determined to be unaffordable, or the employer plan offers less than “minimum value,” individuals are not considered to have minimum essential coverage and can qualify for premium tax credits to purchase qualified health plan coverage. However, regardless of affordability or the fact that the employer plan offers less than minimum essential coverage, individuals who actually enroll in their employer plans are considered ineligible for premium tax credits.^[6] For detailed information regarding eligibility and the calculation of premium assistance, see the Health Reform GPS Implementation Brief, “Tax Subsidies for Individuals and Families who Purchase Coverage through State Health insurance Exchanges.”

Overview of the Premium Tax Credit NPRM

On August 17, 2011, the Department of Treasury (Treasury) issued proposed regulations on the health insurance premium tax credits.^[7] The proposed regulations provide additional guidance on implementation of the credits, including how Treasury will calculate the premium tax credit amount, as well as a reconciliation process that taxpayers must complete as part of their tax returns to address changes in income (or family circumstances affecting their income in relation to the federal poverty level) during the year. In addition, the proposed rule addresses a number of issues that have arisen since enactment of the ACA, including how the reconciliation process will apply to people who are Medicaid-eligible or whose incomes actually fall below the federal poverty level. The NPRM also addresses the question of when employer-sponsored coverage will be considered “affordable.” These and other key issues are outlined below.

Calculation of Premium Tax Credit Amounts and Reconciliation

The NPRM:

• Provides that premium assistance equals the lesser of:
  • the monthly premium paid for coverage for one or more qualified health plans; or
  • the amount by which the benchmark plan monthly premium exceeds the product of the taxpayer’s household income and the “applicable percentage”^[8] divided by 12 (to calculate monthly amount).^[9]
• Clarifies that the benchmark plan is the second lowest cost silver plan offered at the time a taxpayer or family member enrolls in a qualified health plan through the Exchange in the rating area in which the taxpayer resides, adjusted for family size, even if the benchmark plan is no long accepting enrollees.^[10]
• Requires taxpayers receiving premium tax credits to file income tax returns,^[11] which will include reconciliation for years that they receive advance premium tax credits.^[12] In years that individuals received an overpayment (i.e., premium credits in excess of the amount permissible under the formula in relation to annual family income), the NPRM requires that the taxpayer must refund the overpayment. Taxpayers whose premium credit exceeds the advance credit payments may receive the excess as an income tax refund. The taxpayers’ contribution amount is based on household income and size at the end of the taxable year, and includes provisions that address calculations based on changes in filing status.^[13]
• limits taxpayer liability for overpayments, based on income and filing status. The overpayment repayment liability under this limitation ranges from $300 to $2,500.^[14]

Premium Tax Credits and Federal Programs

The NPRM:

• establishes a safe harbor by providing that if an individual is determined to be ineligible for Medicaid or CHIP and has a subsequent change income or other status that results in Medicaid-eligibility, but the individual is not shifted into Medicaid, the individual would be treated as ineligible for Medicaid through the plan year, and would be eligible for premium tax credits.^[15]
• provides that in the event that Medicaid eligibility is established during the year, an Exchange is required to discontinue tax credit payments on the first day of the first calendar month following approval and discontinue the tax credits.^[16]
• provides a similar safe harbor for individuals whose incomes fall below 100 percent FPL for the year and who would thereby lose eligibility for premium tax credits.^[17]
• protects individuals against loss of the premium tax credit when a family member is eligible for a government program but is not receiving benefits because of administrative processing delays, while terminating credits for individuals who fail to comply reasonably promptly with requirements to obtain government coverage. Credits will be terminated as of the first day of the second calendar month following the triggering event that resulted in eligibility (such as turning 65 for Medicare).^[18] The “reasonable promptness” provision does not apply to veteran’s health programs.
• provides that the Commissioner of the IRS may define eligibility for specific programs in further guidance. For example, the rule notes that further guidance will be provided for persons who may be eligible for Medicaid based on blindness or disability or on the need for long-term care services.^[19]

Premium Tax Credits and Employer-Sponsored Coverage

The ACA bars premium tax credits for employees with access to employer-sponsored health insurance coverage for individual or family coverage, unless coverage is determined to be not “affordable.” The ACA also provides that regardless of whether coverage is deemed “affordable,” premium tax credits are unavailable if an employee actually enrolls in the employer’s plan.^[20] The ACA thus essentially provides that an employee waives premium tax credit eligibility by enrolling in an employer plan, even if unaffordable.

The NPRM:

• provides that employees eligible for employer-sponsored coverage may not decline the coverage and seek enrollment in the Exchange with premium credits unless the coverage is unaffordable.^[21]
• provides that individuals eligible for continued coverage after involuntary separation from employment under the Consolidated Omnibus Budget Reconciliation Act (COBRA), or similar state or federal continuation of coverage, may elect to decline the continued coverage and qualify for premium tax credits. However, individuals who actually enroll in continuation coverage, however, are considered to have minimum essential coverage and are ineligible for premium tax credit assistance.^[22]
• specifies that affordability is to be defined only in relation to the cost of individual coverage, thereby rendering “affordable” family coverage that nonetheless significantly exceeds the 9.5 percent threshold, as long as coverage of the individual is considered affordable.^[23]
• establishes a “safe harbor” effectively preventing recoupment of premium tax credits during the reconciliation process for an individual whose employer-sponsored coverage was considered unaffordable at the time of enrollment (employee contribution exceeded 9.5 percent of household income), but whose income ultimately rose during the year, dropping the cost of the employer plan to 9.5 percent of household income or less.^[24]

Other Provisions

The NPRM:

• clarifies that for purposes of the premium tax credit, lawfully present aliens with incomes below 100 percent of FPL, who do not qualify for Medicaid because they do not yet meet the 5-year waiting period before Medicaid coverage begins, will be treated as individuals with incomes over 100 percent of FPL, thereby qualifying for premium tax credits, with the amount of the credit based on actual household income^[25].
• specifies that while incarcerated individuals are ineligible to enroll in a qualified health plan offered through an insurance Exchange or to receive premium credits toward the cost of enrollment, eligible family members may enroll and receive credits. The NPRM specifies that for purposes of determining eligibility for family members, Treasury will take into account the income, family size and tax filing status of incarcerated individuals.
• specifies that for purposes of determining the size of tax credits, Treasury will take into account undocumented family members (who are ineligible for enrollment in a QHP offered by an Exchange as well as for premium credits) in determining household size and income.^[26]
• clarifies that Veteran’s health programs authorized under chapter 17 or 18 of Title 38 U.S.C. will be treated as constituting minimum essential coverage only if the individual is enrolled in a veteran’s health care program that is actually identified as minimum essential coverage in regulation established under section 5000A.^[27]
• requires individuals receiving premium tax credits to file a tax return for that year.
• requires an Exchange to report for each taxpayer who receives premium credits the premium and category of coverage (e.g., self-only) for the applicable benchmark plan used to calculate the advance premium credits, the total premium for the coverage without regard to the advance credit, the aggregate amount of tax credits and cost sharing reductions received, and other information needed to connect the taxpayer to the receipt of the credits.

Introduction

On July 7, 2011, the Treasury Department and the Internal Revenue Service (IRS) published a Notice and Request for Comments on a proposed policy regarding the Affordable Care Act’s new requirements related to tax exempt hospitals’ community health needs assessment (CHNA) obligations. Section 9007 of the Act added new Section 501(r) to the Internal Revenue Code, which delineates a series of statutory requirements, outlined in a previous implementation brief, applicable to nonprofit hospitals that seek tax-exempt status under Section 501(c)(3). The purpose of the Treasury/IRS Notice is to both describe the agencies’ approach to implementing hospital organizations’ CHNA obligations and to invite comments regarding their proposals. The CHNA requirements are effective for taxable years beginning after March 23, 2012. However, the Notice specifies that hospitals currently engaged in conducting CHNA-related activities — including development and wide publication of a needs assessment and adoption of an implementation strategy — can rely on the policies contained in the Notice as they move forward.

Elements of the proposed CHNA policy

The Affordable Care Act addresses a range of issues: the scope of the obligation and the hospital organizations affected, including its impact on each facility owned by an organization; the methods to be used in developing a CHNA and implementation strategy; the public consultation process that will be required; the methods used to conduct the assessment; the adoption of an implementation strategy; penalties for failing to comply with the new requirements; and reporting requirements and effective dates. The Notice indicates that the IRS rule will address policies on the full range of matters related to the law.

Hospital organizations required to meet CHNA requirements. The Notice indicates that all hospital organizations operating state-licensed health care facilities will be covered, regardless of whether they are the sole operators or operate hospitals in partnerships or joint ventures that are treated as activities of the tax-exempt partner. The policy also reaches government hospitals operated under Section 501(c)(3) while inviting comments on alternative approaches to CHNA that might be used in the case of government facilities. The Notice also indicates that should the IRS determine that other types of organizations should be covered because their principal function or purpose is the provision of hospital care, its policies will apply only after formal notice and opportunity to comment through the rulemaking process.

Hospital organizations with multiple facilities. The IRS Notice provides that in the case of hospital organizations with one or more hospital facilities, the organization will be required to satisfy the CHNA requirements for each separate hospital facility. Thus, an organization with 20 hospitals will have to satisfy CHNA requirements for each hospital. Although a hospital organization will be permitted to collaborate with other entities and organizations in conducting CHNA activities, the organization will also be expected to demonstrate CHNA compliance for each facility.

Documenting the CHNA. Under the ACA, a hospital organization must “conduct” a CHNA once every 3 years. The Notice defines a CHNA as a:

“written document developed for a hospital facility that includes a description of the community served by the hospital facility; the process used to conduct the assessment including how the hospital took into account input from community members and public health experts; identification of any persons with whom the hospital has worked on the assessment; and the health needs identified through the assessment process.”

A hospital organization will be required to prepare a written report:

(1) describing the community served and how the community was determined;

(2) describing the process and methods used to conduct the assessment including “a description of the sources and dates of the data and other information used in the assessment and the analytical methods applied to identify community health needs”;

(3) describing how the organization took into account input from persons representing the broad interests of the community served by the hospital facility, including a description of when and how the hospital consulted with these persons or the organizations they represent. The organization must “identify any individual providing input who has special knowledge of or expertise in public health by name, title, and affiliation and must provide a brief description of the person’s special knowledge.” The organization also must identify any individual providing input who is a “leader” or “representative” of certain populations;

(4) describing prioritized community health needs identified through the CHNA “as well as a description of the process and criteria used in prioritizing such needs;”

(5) describing the existing health care facilities and other resources within the community and available to meet community health needs. The organization must specify each of the community health needs identified through a CHNA for a hospital facility in its implementation strategy.

How and when a CHNA is conducted. The Notice provides that an organization must conduct a CHNA in the taxable year in which it is due or in the two immediately preceding years. A CHNA will be considered “conducted” in the taxable year that the written report of its findings, as described above, is “made widely available to the public,” as defined in the Notice. A CHNAs will be considered “conducted” only if it identifies and assesses the health needs of, and takes into account input from persons who represent the broad interests of, the community served by a specific hospital facility. Thus, while hospital organizations may base a CHNA on information collected by other organizations or to develop CHNAs in collaboration with other organizations (e.g., public health agencies, other hospital organizations), a separate CHNA report must be written for each hospital facility that covers all required information. The agencies request comments on the circumstances under which documenting CHNAs for multiple hospital facilities together in one written report “might improve the quality of the CHNAs while still ensuring that the information for each hospital facility is clearly presented and easily accessible.”

Community served by a hospital facility. The agencies propose that hospital organizations may take a “facts and circumstances” approach to the question of what community is served by a hospital. “Generally Treasury and the IRS expect that a hospital facility’s community will be defined by geographic location.” However, a hospital’s community may take into account target populations served. The agencies caution that “[n]otwithstanding the foregoing, a community may not be defined in a manner that circumvents the requirement to assess the health needs of (or consult with persons who represent the broad interests of) the community served by a hospital facility by excluding, for example, medically underserved populations, low income persons, minority groups, or those with chronic disease needs. The agencies seek comments on different geographic definitions of “community.”

Persons representing the broad interests of the community. The agencies set forth minimum criteria aimed at determining whether the persons consulted with represent the “broad interests” of the community. At a minimum, consultations must take into account input from (1) persons with special knowledge of or expertise in public health; (2) federal, tribal, regional, state or local health or other departments or agencies with current data or information relevant to the health needs of the community served by the facility; (3) leaders, representatives, or members of medically underserved, low income, and minority populations, and populations with chronic disease needs, “in the community served by the hospital facility.” The agencies also suggest categories of people and organizations including healthcare consumer advocates, academic experts, health care providers including community health centers and other providers focusing on medically underserved populations, and others.

Making a CHNA widely available to the public. In order to be considered widely available to the public, the written report documenting the CHNA must be posted on the hospital facility’s website or that of its parent organization if it does not have its own website. Hospitals may use another website if links and access instructions are clear. Individuals must be easily downloadable and must be posted in a format that “when accessed, downloaded, viewed and printed in hard copy, exactly reproduces the image of the report.” No fees may be charged. The CHNA must remain widely available until the date that a subsequent CHNA is made widely available. The agencies request additional comments on the question of how CHNAs can be made widely available.

Implementation strategy. The agencies make clear that a hospital meets its CHNA requirements only if it also has “adopted an implementation strategy to meet the community health needs identified through the CHNA.” Each hospital facility must have a separate implementation strategy, which is defined as “a written plan that addresses each of the community health needs identified through a CHNA for such facility.” For each identified health need therefore, there must be an implementation strategy. A strategy is considered as addressing a health need identified through a CHNA for a particular hospital facility “if the written plan either (1) describes how the hospital facility plans to meet the health need; or (2) identifies the health need as one the facility does not intend to meet and explains why the hospital facility does not intend to meet the health need.”

The description of how the hospital facility intends to meet a need must be “tailor[ed]” to the particular hospital facility, taking “into account its specific programs, resources, and priorities.” Hospital organizations must attach the most recent implementation strategy for each of their hospital facilities to their 990 forms, which are used to report their activities. The Notice allows an implementation strategy to be developed in collaboration with other organizations, in which case the strategy should list all collaborators. At the same time, the strategy must show the particular activities for the particular hospital facility covered by the strategy. The agencies seek comments regarding whether and under what circumstances a multi-hospital implementation strategy document might improve the quality of the strategy while “still ensuring that information for each hospital facility is clearly presented and easily accessible.”

How and when an implementation strategy is “adopted.” The agencies will consider an implementation strategy to be adopted on the date that it is approved by the hospital organization’s governing body. The strategy must be adopted “by the end of the same taxable year” in which the hospital organization conducts the CHNA.

Penalty for failure to meet CHNA requirements. The agencies will impose a $50,000 excise tax on any hospital organization that fails to satisfy the CHNA requirements with respect to “a” hospital facility. Each facility therefore will be subject to the tax in the case of a hospital organization with multiple facilities.

Reporting requirements related to CHNAs. Tax exempt organizations must file a 990 form annually and must respond to the CHNA questions already added to the form beginning March 23, 2012, attaching their “most recently adopted” implementation strategy for each hospital facility. (Government hospitals are not required to file form 990s or their implementation strategies, although the CHNA obligations apply to them).

Effective dates. The CHNA and implementation strategy requirements are effective the last day of a hospital’s first taxable year beginning after March 23, 2012. Hospitals working on CHNAs in advance of the mandatory effective date may rely on the Notice for federal policy to guide their efforts.

All three NPRMs are designed to simplify Exchange eligibility and enrollment by coordinating with state Medicaid agencies and the IRS to determine eligibility for premium tax credits and Medicaid under the new expanded eligibility rules laid out in the ACA. Also addressed in the proposed rules is the eligibility and calculation of tax credits for small businesses.

For more information on the Medicaid eligibility expansion, click here. For more information on tax credits, click here. For more information on Exchange eligibility, click here. Finally, for more information on tax credits for small businesses, click here.

Background

Section 9006 of the Affordable Care Act (ACA)^[1] would have required businesses to issue 1099 forms for transactions over $600 with other corporations, such as vendors and suppliers. This was a significant expansion of the reporting requirements and was seen by many as a huge burden on businesses, particularly small businesses.^[2] On April 14, 2011, the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 was signed into law, repealing the ACA Section 9006 reporting requirements.^[3]

Changes Made by the Health Reform Law (Pub. L. 111-148, Pub. L. 111-152)

Prior to enactment of the ACA, Section 6041 of the Internal Revenue Code (IRC) required businesses to report payments to persons over $600 in connection with the trade or business. This essentially allowed the IRS to identify income received by independent contractors and other individuals and assisted those individuals in reporting income. Section 9006 of the ACA (part of the original Senate bill that was amended to become the final law) added payments to non-tax exempt corporations, who were previously exempted,^[4] and payments for goods and other property to the transactions subject to reporting.^[5]

A separate 2010 law, the Small Business Jobs Act,^[6] expanded the requirement further by requiring individuals who receive rental income to issue 1099 forms to service providers for payments of $600 or more. This requirement would apply, for example, to a homeowner who rents out a basement apartment and pays more than $600 to a plumber for a repair job in the rental unit.

Repeal of Expanded Reporting Requirement

Section 9006 was included in the ACA as a way to help finance the cost of health reform by increasing collection of taxes owed through improved reporting and accountability. The gap between taxes owed and taxes collected was acknowledged by lawmakers.^[7] but ultimately the reporting burden was considered disproportionate to the benefit of more accurate tax collection.

The Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 repealed the ACA’s 1099 reporting requirements by striking the provisions of the IRC that had been added by Section 9006 and repealed the expansion to rental property by striking the sections of the IRC that had been added by the Small Business Jobs Act.

Because the reporting requirement would have increased tax revenue by approximately $21.9 billion over ten years,^[83] a provision was included in the 1099 Taxpayer Protection and Repayment Act that offsets the lost revenue by increasing the amount of advance premium tax credit payments that is subject to recapture in the case of overpayment.^[9] In order to make health insurance coverage more affordable, the ACA provides for refundable tax credits for individuals between 100% and 400% of the federal poverty level (based on the most recently filed tax return) who do not receive employer-sponsored health insurance, but the credits can be recouped if the taxpayer’s income increases.^[10] The amount that can be recouped is capped in the ACA based on the taxpayer’s income. The legislation repealing the 1099 requirement increases the amount that can be recovered in overpayments for taxpayers with incomes under 400% of the federal poverty level and removes the cap for taxpayers with incomes between 400% and 500% of the federal poverty level. 

The new cap structure for recouping tax credit overpayments, effective as of the 2014 tax year, is:

Conclusion

The ACA’s expanded 1099 reporting requirements were widely criticized and could have created more of a burden than benefit for the IRS as well as taxpayers. For this reason, members of Congress from both parties and President Obama supported their repeal. However, the increase in the amount of premium tax credits that can be recouped from lower income individuals, included in the 1099 Taxpayer Protection and Repayment Act to offset revenue losses as a result of the repeal, could discourage individuals from taking advantage of the credits to purchase individual health insurance through the Exchanges, especially those individuals with varying or unpredictable sources of income.