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Health Care and Education Reconciliation Act of 2010 (P.L. 111-152)

MAR. 30, 2010

Health Care and Education Reconciliation Act of 2010 (P.L. 111-152)

DATED MAR. 30, 2010
DOCUMENT ATTRIBUTES

 

House Report--H. Rept. 111-443, Part 1

 

(for H.R. 4872)

 

 

111th Congress

 

2d Session

 

 

HOUSE OF REPRESENTATIVES

 

 

Report 111-443

 

 

THE RECONCILIATION ACT OF 2010

 

 

REPORT

 

 

of the

 

 

COMMITTEE ON THE BUDGET

 

 

HOUSE OF REPRESENTATIVES

 

 

to accompany

 

 

H.R. 4872

 

 

A BILL TO PROVIDE FOR RECONCILIATION PURSUANT TO SECTION 202 OF THE CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR 2010 TWO

 

 

together with

 

 

MINORITY VIEWS

 

 

Volume I

 

 

Division I

 

 

                   COMMITTEE ON THE BUDGET

 

 

        JOHN M. SPRATT, Jr., South Carolina, Chairman

 

 ALLYSON Y. SCHWARTZ, Pennsylvania    PAUL RYAN, Wisconsin,

 

 MARCY KAPTUR, Ohio                     Ranking Minority Member

 

 XAVIER BECERRA, California           JEB HENSARLING, Texas

 

 LLOYD DOGGETT, Texas                 SCOTT GARRETT, New Jersey

 

 EARL BLUMENAUER, Oregon              MARIO DIAZ-BALART, Florida

 

 MARION BERRY, Arkansas               MICHAEL K. SIMPSON, Idaho

 

 ALLEN BOYD, Florida                  PATRICK T. McHENRY, North Carolina

 

 JAMES P. McGOVERN, Massachusetts     CONNIE MACK, Florida

 

 NIKI TSONGAS, Massachusetts          JOHN CAMPBELL, California

 

 BOB ETHERIDGE, North Carolina        JIM JORDAN, Ohio

 

 BETTY McCOLLUM, Minnesota            CYNTHIA M. LUMMIS, Wyoming

 

 JOHN A. YARMUTH, Kentucky            STEVE AUSTRIA, Ohio

 

 ROBERT E. ANDREWS, New Jersey        ROBERT B. ADERHOLT, Alabama

 

 ROSA L. DeLAURO, Connecticut,        DEVIN NUNES, California

 

 CHET EDWARDS, Texas                  GREGG HARPER, Mississippi

 

 ROBERT C. "BOBBY" SCOTT, Virginia    ROBERT E. LATTA, Ohio

 

 JAMES R. LANGEVIN, Rhode Island

 

 RICK LARSEN, Washington

 

 TIMOTHY H. BISHOP, New York

 

 GWEN MOORE, Wisconsin

 

 GERALD E. CONNOLLY, Virginia

 

 KURT SCHRADER, Oregon

 

 DENNIS MOORE, Kansas

 

 

                            Professional Staff

 

 

             Thomas S. Kahn, Staff Director and Chief Counsel

 

 

                  Austin Smythe, Minority Staff Director

 

CONTENTS

 

 

Volume I

Introduction

Division I--Committee on Ways and Means: Health Care Reform

THE RECONCILIATION ACT OF 2010

 

 

PROVIDING FOR RECONCILIATION PURSUANT TO SECTION 202 OF THE CONCURRENT RESOLUTION ON THE BUDGET FOR FISCAL YEAR 2010

 

 

March 17, 2010.--Committed to the Committee of the Whole House on the State of the Union and ordered to be printed

 

 

Mr. Spratt, from the Committee on the Budget, submitted the following

 

 

REPORT

 

 

together with

 

 

MINORITY VIEWS

 

 

[To accompany H.R. 4872]

 

 

The Committee on the Budget, to whom reconciliation recommendations were submitted pursuant to section 202 of Senate Concurrent Resolution 13, the Concurrent Resolution on the Budget for Fiscal Year 2010, having considered the same, report the bill without recommendation.

 

BUDGET COMMITTEE INTRODUCTION

 

 

Overview

 

 

The reconciliation bill reported by the Budget Committee includes provisions for health care reform and for investing in education. The need for health care reform is clear. By most measures, we have the best medical care system in the world, but it is also by a wide margin the world's most expensive, and it is not readily accessible to millions of Americans. The rising cost of health care is not sustainable, not only in household and business budgets, but in the federal budget as well.

Making higher education more affordable and accessible without adding to the deficit is also an important goal. A productive economy requires affordable, accessible, high-quality education and the higher education provisions included in the reconciliation bill will help advance that goal.

The reconciliation process has been used 22 times in prior years. During the previous Administration and the previous Congressional majority, reconciliation was used in 2001 to pass tax cuts that worsened the bottom line by $1.35 trillion over ten years. In 2003, a second round of tax cuts passed under reconciliation added $350 billion to the deficit. By contrast, the use of reconciliation in this year's budget process requires that reconciliation legislation reduce the deficit, not add to it.

Reconciliation has been used in the recent past to invest in education in a fiscally responsible way--the College Cost Reduction and Access Act of 2007 passed using reconciliation procedures. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) gave recently separated workers the choice to temporarily continue employer-provided health coverage. When reconciliation was used in the Balanced Budget Act of 1997, the Children's Health Insurance Program (CHIP), Medicare Payment Advisory Commission (MedPAC), and Medicare Advantage were created. The use of reconciliation in the current budget process lies well within those past practices.

The Concurrent Resolution on the Budget for Fiscal Year 2010, S. Con. Res. 13, included two reconciliation instructions as part of Section 202--one for legislation on health care reform and the second for legislation investing in education.

Under the Budget Act, a concurrent resolution on the budget can include reconciliation instructions to authorizing committees. These reconciliation instructions provide a specified dollar amount of budgetary change to be accomplished by reconciliation, but the decisions about the policies to be included in the reconciliation legislation are left to the authorizing committees themselves.

The Budget Act assigns the Budget Committee the role of packaging the reconciliation bills sent to us by the authorizing committees and transmitting them to the House "without any substantive revision."

Division I of this year's reconciliation bill consists of legislative language on health care reform submitted to the Budget Committee in October by the Ways and Means Committee. Division II of the bill consists of legislative language on health care reform submitted to the Budget Committee by the Education and Labor Committee. Division III consists of legislative language on investing in education submitted to the Budget Committee by the Education and Labor Committee. The recommendations that were submitted to the Budget Committee in October were in compliance with the savings required by Section 202 of the budget resolution.

The Energy and Commerce Committee did not submit recommendations to the Budget Committee in response to the reconciliation instruction.

As noted in the following material, after reporting the reconciliation legislation to the House, the Budget Committee approved a number of non-binding motions expressing support for certain amendments being made in order by the Rules Committee when it grants a rule for floor consideration of this reconciliation bill.

 

DIVISION I

 

 

LETTER OF TRANSMITTAL

 

 

House of Representatives, Committee on Ways and Means, Washington, DC, October 15, 2009.

Hon. John Spratt, Chairman, Committee on the Budget, Cannon HOB, Washington, DC.

Dear Chairman Spratt: On July 16, 2009, the Committee on Ways and Means ordered favorably reported to the House, an Amendment in the Nature of a Substitute to H.R. 3200 by a recorded vote of 23 to 18. Pursuant to section 202(c) of Senate Concurrent Resolution 13, I am hereby transmitting the Amendment in the Nature of a Substitute to you as fulfillment of the Committee on Ways and Means budget reconciliation instructions.

Enclosed please find a copy of our Committee's report on H.R. 3200, including legislative language, explanatory report language, estimates from the Joint Committee on Taxation and additional views. Please feel free to contact me if you have any questions.

Sincerely, Charles B. Rangel Chairman, Committee on Ways and Means.

Enclosure.

 

111th Congress

 

1st Session

 

 

HOUSE OF REPRESENTATIVES

 

 

Rept. 111-299 Part 2

 

 

AMERICA'S AFFORDABLE HEALTH CHOICES ACT OF 2009

 

 

REPORT

 

 

of the

 

 

COMMITTEE ON WAYS AND MEANS

 

 

on

 

 

H.R. 3200

 

 

together with

 

 

DISSENTING AND ADDITIONAL VIEWS

 

 

October 14, 2009.--Ordered to be printed

 

 

AMERICA'S AFFORDABLE HEALTH CHOICES ACT OF 2009--PART 2

 

 

October 14, 2009.--Committed to the Committee of the Whole House on the State of the Union and ordered to be printed

 

 

Mr. Rangel, from the Committee on Ways and Means, submitted the following

 

 

REPORT

 

 

together with

 

 

DISSENTING AND ADDITIONAL VIEWS

 

 

[To accompany H.R. 3200]

 

 

The Committee on Ways and Means, to whom was referred the bill (H.R. 3200) to provide affordable, quality health care for all Americans and reduce the growth in health care spending, and for other purposes, having considered the same, report favorably thereon with an amendment and recommend that the bill as amended do pass.

 

I. INTRODUCTION

 

 

A. Purpose and Summary

 

 

The purpose of the bill, H.R. 3200, ("America's Affordable Health Choices Act of 2009") is to provide affordable, quality health care for all Americans and reduce the rate of growth in health care spending.

 

B. Background and Need for Legislation

 

 

AFFORDABLE COVERAGE FOR ALL AMERICANS

 

 

I am confident that we can devise a [health care] system which will enhance and not hinder the remarkable progress which has been made and is being made in practice of the professions of medicine and surgery in the United States.

We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all--regardless of station, race, or creed. Among these are ... The right to adequate medical care and the opportunity to achieve and enjoy good health.--President Franklin D. Roosevelt

We should resolve now that the health of this Nation is a national concern; that financial barriers in the way of attaining health shall be removed; that the health of all its citizens deserves the help of all the Nation.--President Harry S. Truman

"If a free society cannot help the many who are poor, it cannot save the few who are rich"--President John F. Kennedy

No longer will older Americans be denied the healing miracle of modern medicine. No longer will illness crush and destroy the savings that they have so carefully put away over a lifetime so that they might enjoy dignity in their later years. No longer will young families see their own incomes, and their own hopes, eaten away simply because they are carrying out their deep moral obligations to their parents, and to their uncles, and their aunts. And this is not just our tradition--or the tradition of the Democratic Party--or even the tradition of the Nation. It is as old as the day it was first commanded: "Thou shalt open thine hand wide unto thy brother, to thy poor, to thy needy, in thy land."--President Lyndon B. Johnson

An all-directions reform of our health care system--so that every citizen will be able to get quality health care at reasonable cost regardless of income and regardless of area of residence--remains an item of highest priority on my unfinished agenda for America in the 1970s.--President Richard Nixon

This country spends more on health care than any other nation ... We have the finest medical facilities and highly skilled, dedicated health professionals. Yet many of our people still lack adequate medical care, and the cost of care is rising so rapidly it jeopardizes our health goals and our other important social objectives.--President Jimmy Carter

While Medicare takes care of Americans over the age of 65, we're the only Western industrial nation that doesn't provide a system of health insurance for all working people under 65 ... we should provide assistance to unemployed workers to help them keep their health insurance until they find a new job. We also need to make it easier for small businesses to buy into insurance risk pools that are large enough to make it possible to offer coverage at a reasonable cost.--President Bill Clinton

I am not the first President to take up this cause, but I am determined to be the last. It has now been nearly a century since Theodore Roosevelt first called for health care reform. And ever since, nearly every President and Congress, whether Democrat or Republican, has attempted to meet this challenge in some way. A bill for comprehensive health reform was first introduced by John Dingell Sr. in 1943. Sixty-five years later, his son continues to introduce that same bill at the beginning of each session.

Our collective failure to meet this challenge--year after year, decade after decade--has led us to the breaking point. Everyone understands the extraordinary hardships that are placed on the uninsured, who live every day just one accident or illness away from bankruptcy. These are not primarily people on welfare. These are middle-class Americans. Some can't get insurance on the job. Others are self-employed, and can't afford it, since buying insurance on your own costs you three times as much as the coverage you get from your employer. Many other Americans who are willing and able to pay are still denied insurance due to previous illnesses or conditions that insurance companies decide are too risky or too expensive to cover.

We are the only democracy--the only advanced democracy on Earth--the only wealthy nation--that allows such hardship for millions of its people. There are now more than 30 million American citizens who cannot get coverage. In just a two-year period, one in every three Americans goes without health care coverage at some point. And every day, 14,000 Americans lose their coverage. In other words, it can happen to anyone.

But the problem that plagues the health care system is not just a problem for the uninsured. Those who do have insurance have never had less security and stability than they do today. More and more Americans worry that if you move, lose your job, or change your job, you'll lose your health insurance too. More and more Americans pay their premiums, only to discover that their insurance company has dropped their coverage when they get sick, or won't pay the full cost of care. It happens every day.--President Barack Obama

This legislation fulfills a vision carried forth by Presidents Roosevelt, Truman, Kennedy, Nixon, Carter, Clinton, and now President Obama, to provide affordable, quality health care for all Americans.

It ensures affordable health care for 97 percent of Americans, and tackles rising health care costs--a key component of health reform.

To minimize disruption of the current system, the legislation builds on what works in today's health care system, while repairing the aspects that are broken.

It enacts comprehensive insurance market reforms to ensure that no one is denied coverage because of a pre-existing condition, charged more because of their gender or denied coverage when they get sick.

It limits annual out-of-pocket costs for individuals and families so that people will no longer be forced into bankruptcy because of medical expenses.

It creates a new Health Insurance Exchange to enforce federal consumer protections and insurance requirements and to provide a transparent, fair marketplace where individuals, families and employers can comparison shop for high quality, affordable health care plans.

It creates a public health insurance option that will operate on a level-playing field alongside private plans in the Exchange. The public health insurance option will foster competition, quality and choice for consumers. It will also reduce costs in the system as it will force private plans to compete on quality and price rather than by avoiding risk as they do in today's broken health care marketplace.

It provides affordability credits to assist families with incomes below 400% of the federal poverty limit (about $88,000 for a family of four in 2009) with premiums and cost-sharing to make affordable health insurance a reality for all. Annual caps on out-of-pocket spending add further financial protections for individuals and families.

It requires shared responsibility among individuals, employers, and the government so that all Americans obtain essential health benefits.

By building on what works, America's Affordable Health Choices Act will increase employer-sponsored health coverage, broaden Medicaid to meet the needs of those with the lowest incomes, make improvements to Medicare, and create a new Health Insurance Exchange where people can choose from public and private health insurance options. Under this Act, all Americans will have access to quality, affordable health care.

 

HEALTH DELIVERY REFORM

 

 

This legislation institutes health delivery and payment system reforms both to increase quality and to reduce growth in health spending so that health care becomes more affordable for businesses, families, and government.

The reforms are designed to make the nation's health care system more efficient by incentivizing providers to deliver high quality, coordinated, patient-centered care. It does so in large part by recognizing the importance of primary and preventive care. Ensuring that patients receive the right care at the right time means making sure that every American has access to a primary care provider, and that providers and patients alike have access to the best information about evidence-based medicine.

These improvements will not come overnight. But programs such as Medicare, Medicaid and the public insurance option can drive innovative strategies for reforming the health care delivery system in a way that will improve care for every patient and family.

 

STRENGTHENING MEDICARE AND MEDICAID

 

 

This legislation keeps a trust with the American people to preserve the sustainability of the Medicare program. It strengthens the program by making fiscally prudent modifications to provider payments, eliminating waste in the Medicare Advantage program, investing in prevention and extending the Medicare Trust Fund solvency by five years. It makes important investments in Medicare for our nation's seniors and people with disabilities by eliminating cost- sharing for preventive care, closing the gap in prescription drug coverage (the so-called "donut" hole), increasing access for low-income beneficiaries, expanding coverage of mental health providers so beneficiaries can better access these vital services, and limiting Medicare Advantage plans' ability to charge excessive cost sharing. The legislation also reforms the way Medicare updates payments to physicians in a way that is sustainable for providers while still holding physicians accountable for spending growth.

It strengthens the Medicaid program by improving access to primary care services and providers, and expands eligibility so that all individuals under 133 percent of the federal poverty level are assured Medicaid coverage.

 

WORKFORCE INVESTMENTS

 

 

Expansions in coverage will strain an already stressed health workforce. Under the legislation, existing scholarship, loan repayment, and training grant programs are strengthened to address the need for primary care, nursing and public health professionals. Medicare payments are also adjusted to increase reimbursements for primary care providers and to encourage the training of primary care providers as well.

 

CONCLUSION

 

 

America's Affordable Health Care Choices Act will provide 97 percent of Americans with affordable, quality health care. It also begins to change the way health care is delivered in America to obtain better value and reduce the growth in future health care costs. H.R. 3200 fulfills the economic and moral obligation to reform the health care system to make it more equitable and accessible for all.

 

C. Legislative History

 

 

BACKGROUND

 

 

A discussion draft of H.R. 3200 was released to the public on June 19, 2009. H.R. 3200, "America's Affordable Health Choices Act of 2009" was introduced in the House of Representatives on July 15, 2009, and was referred to the Committee on Energy and Commerce, the Committee on Ways and Means, the Committee on Education and Labor, the Committee on Oversight and Government Reform and the Committee on the Budget.

 

SUBCOMMITTEE ACTION

 

 

The Subcommittee on Health of the Committee on Ways and Means held one hearing this year on MedPAC's Annual Report to Congress on Medicare Payment Policy on March 17, 2009.

In the 110th Congress, the Subcommittee on Health held a number of hearings on health reform and related Medicare issues that explored various parts of the health system and informed policy contained in H.R. 3200. The following is a list of these hearings in chronological order.

March 8, 2007--Hearing on Medicare Program Integrity.

March 21, 2007--Hearing on Medicare Advantage.

May 3, 2007--Hearing on Medicare Programs for Low-Income Beneficiaries.

June 12, 2007--Hearing on Strategies to Increase Information on Comparative Clinical Effectiveness.

June 21, 2007--Hearing on Beneficiary Protections in Medicare Part D.

October 16, 2007--Joint Hearing with the Oversight Subcommittee on Statutorily Required Audits of Medicare Advantage Plan Bids.

November 15, 2007--Hearing on Trends in Nursing Home Ownership and Quality.

February 28, 2008--Hearing on Medicare Advantage.

April 15, 2008--Hearing on the Instability of Health Coverage in America.

May 14, 2008--Hearing on Health Savings Accounts (HSAs) and Consumer Driven Health Care: Cost Containment or Cost-Shift?

June 10, 2008--Addressing Disparities in Health and Healthcare: Issues for Reform.

July 15, 2008--Hearing on State Coverage Initiatives.

September 11, 2008--Hearing on Reforming Medicare's Physician Payment System.

September 23, 2008--Hearing on the Health of the Private Health Insurance Market.

 

FULL COMMITTEE ACTION

 

 

The Committee on Ways and Means held six hearings on health reform in the 111th Congress. These hearings explored the current state of various parts of the health system and opportunities through which the system could be reformed and strengthened. In addition, the Committee held a markup of H.R. 3200 on July 16, 2009. The following is a list of these hearings and markups in chronological order.

March 11, 2009--Health Reform in the 21st Century: Expanding Coverage, Improving Quality, Controlling Costs.

April 1, 2009--Health Reform in the 21st Century: Reforming the Health Care Delivery System.

April 22, 2009--Health Reform in the 21st Century: Insurance Market Reforms.

April 29, 2009--Health Reform in the 21st Century: Employer Sponsored Insurance.

May 6, 2009--Health Reform in the 21st Century: A Conversation with Health and Human Services Secretary Kathleen Sebelius.

June 24, 2009--Health Reform in the 21st Century: Proposals to Reform the Health System.

July 17, 2009--The Committee on Ways and Means Marked up the bill, and ordered, as amended, favorably reported.

 

II. EXPLANATION OF THE BILL

 

 

DIVISION A--AFFORDABLE HEALTH CARE CHOICES

 

 

Title I--Protections and Standards for Qualified Health Benefits Plans

 

 

Subtitle A--General Standards

 

 

Sec. 100. Purpose; Table of Contents of Division; General Definitions

 

Purpose

 

The purpose of this division is to provide affordable, quality health care for all Americans and reduce the growth in health care spending. This division achieves this purpose by building on what works in today's health care system, while repairing the aspects that are broken by:
  • Enacting strong insurance market reforms;

  • Creating a new Health Insurance Exchange, with a public health insurance option alongside private plans;

  • Including sliding scale affordability credits; and

  • Initiating shared responsibility among workers, employers, and the government.

 

This division institutes health delivery system reforms both to increase quality and to reduce growth in health spending so that health care becomes more affordable for businesses, families, and government.
  •  

    General Definitions (Created within this Act)

  • Acceptable Coverage.--a qualified health benefit plan coverage, coverage under a grandfathered health insurance coverage or current group health plan, Medicare Part A, Medicaid, Military Health System, certain coverage under Veteran's Health Care Program (VA), and other coverage the Secretary of HHS in coordination with the Health Choices Commissioner sees fit.

  • Basic Plan.--a plan that offers the essential benefits package's minimum requirements to be a qualified health benefits plan approximately 70% of the actuarial value of the benefits provided.

  • Cost-sharing.--includes deductibles, coinsurance, copayments, and similar charges but does not include premiums or any network payment differential for covered services or spending for non-covered services.

  • Employment-Based Health Plan.--the term given to group health plans (as defined in section 733(a)(1) of ERISA (as an employee welfare benefit plan to the extent that plan provides medical care to employees or their dependents, either directly, through insurance or otherwise)--and is comprised of federal and state government plans, tribal plans and church plans.

  • Enhanced Plan.--a plan that offers, in addition to the level of benefits under a basic plan, a lower level of cost-sharing equivalent to approximately 85% of the actuarial value of the benefits provided.

  • Essential Benefits Package.--health benefits coverage, consistent with the standards set forth by the Secretary no later than 18 months after enactment of this Act.

  • Health Benefits Plan.--health insurance coverage and a group health plan, including the public health insurance option.

  • Health Insurance Exchange.--created by this bill to facilitate access of individuals and employers, through a transparent process, to a variety of choices of affordable, quality health insurance coverage, including a public health insurance option.

  • Premium Plan.--a plan that offers, in addition to the level of benefits under a basic plan, a lower level of cost-sharing equivalent to approximately 95% of the actuarial value of the benefits provided.

  • Premium Plus Plan.--a premium plan that also offers additional benefits, such as oral health and vision care, all of which is approved by the Commissioner.

  • Qualified Health Benefits Plan (QHBP) .--a health benefits plan that meets the requirements set forth in Title I (by the Secretary) including the public health insurance option.

  • QHBP Offering Entity.--an entity can be any of the following: a health benefits plan (that is a group health plan) in which the employer is the main source of financing, health insurance coverage which the insurance issuer is offering the coverage, the public health insurance option, a non-federal government plan established by the State or political subdivision of a State, and a federal government plan.

  • Public Health Insurance Option.--a public plan (only available through the Health Insurance Exchange) with payment rates established by the Secretary. The public option would be required to offer basic, enhanced, and premium plans, and would be allowed to offer premium-plus plans. Payment rates for prescription drugs not covered by Medicare Part A or B will be covered by the public option at prices negotiated by the Secretary.

  • Service Area, Premium Rating Area.--with respect to health insurance coverage: (1) if not within the Health Insurance Exchange, an area established by a QHBP offering entity of such coverage in accordance with applicable state law or (2) within the Health Insurance Exchange, an area established by such entity in accordance with state law and applicable rules set forth by the Commissioner for Exchange-participating health benefits plans.

  • "State".--given term for purposes of the Medicaid program, but only includes the 50 states and the District of Columbia.

  • Y1, Y2, etc.--2013, 2014, etc.

 

Sec. 101. Requirements Reforming Health Insurance Marketplace

 

Current Law

 

 

Regulation of the private health insurance market is primarily done at the state level. State regulatory authority is broad in scope and includes requirements related to the issuance and renewal of coverage, benefits, rating, consumer protections, and other issues. Federal regulation of the private market is more narrow in scope and applicable mostly to employer-sponsored health insurance (i.e., through the Employee Retirement Income Security Act of 1974 (ERISA)) and through established federal minimum standards (i.e., through the Genetic Information Nondiscrimination Act of 2008 and the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008, etc).

 

Proposed Law

 

 

This provision would require Qualified Health Benefits Plans (QHBPs) to meet the new federal health insurance standards specified in Subtitles B (relating to affordable coverage), C (relating to essential benefits) and D (relating to consumer protection) of Title I. The section also provides terminology for the phrases "enrollment in employment-based health plans" and "individual and group health insurance coverage."

 

Reason for Change

 

 

Lays out the purpose of the legislation.

 

Effective Date

 

 

January 1, 2013.

Sec. 102. Protecting the Choice to Keep Current Coverage

 

Current Law

 

 

See description under Sec. 101.

 

Proposed Law

 

 

"Grandfathered health insurance coverage" would be defined as individual health insurance coverage that is in effect before the first day of Y1, as long as the insurance carrier does not (1) enroll new individuals on or after the first day of Y1 (would not affect subsequent enrollment of a dependent); (2) change any terms or conditions of the individual coverage, except as required by law; and (3) vary the percentage increase in premiums for a risk group of enrollees without changing the premium for all enrollees in the same risk group at the same rate, as specified by the Commissioner. The Commissioner would establish a 5-year grace period beginning Y1 for existing group health plans to transition to the new federal health insurance standards applied to QHBPs. Limited benefits plans specified in the provision, such as dental only, vision only, flexible spending arrangements, and others, are unaffected by these reforms and may continue to be sold to new applicants irrespective of other reforms.

Individual health insurance coverage that is not grandfathered may only be offered after the first day of Y1 as an Exchange plan. Excepted benefits (e.g., accident or disability insurance) could be offered as long as they are offered and priced separately from health insurance coverage.

For purposes of the individual mandate (established under title III of Division A), an individual would be required to have "acceptable coverage." In order for an individual health insurance policy to be considered acceptable coverage, the policy would be either grandfathered health insurance coverage, in effect prior to Y1 or offered through the Exchange (established under title II of Division A). Group health coverage provided during the grace period would be considered acceptable coverage.

 

Reason for Change

 

 

This section ensures that people can keep current health coverage as long as they'd like. Employers currently offering coverage will have five years to meet insurance reform requirements and the benefit standards (which 96 percent of employer sponsored plans already do today according to an ARC Analysis of BLS National Compensation Survey). These changes are designed to minimize disruption in health insurance coverage and ensure compliance for those who are currently covered.

 

Effective Date

 

 

January 1, 2013.

 

Subtitle B--Standards Guaranteeing Access to Affordable Coverage

 

 

Sec. 111. Prohibiting Pre-Existing Condition Exclusions

 

Current Law

 

 

The Health Insurance Portability and Accountability Act of 1996 (HIPAA), which amended ERISA, limits the duration that issuers in the group market may exclude coverage for pre-existing health conditions for "HIPAA eligible" individuals, among other provisions. Group plans may impose pre-existing condition exclusions for no longer than 12 months (18 months in the case of a late enrollee), and must decrease that exclusion period by the number of months an enrollee had prior "creditable coverage." HIPAA outright prohibits issuers in the individual market from excluding coverage for pre-existing conditions for HIPAA eligibles.

All states require health issuers to reduce the period of time when coverage for pre-existing health conditions may be excluded, in compliance with HIPAA. As of January 2009 in the small group market, 21 states had pre-existing condition exclusion rules that provided consumer protection above the federal standard. And, as of December 2008, 42 states limit the period of time when coverage for pre-existing health conditions may be excluded for non-HIPAA eligible enrollees in the individual market.

 

Proposed Law

 

 

This provision would prohibit a qualified health benefits plan from excluding coverage for pre-existing health conditions, or otherwise limit or condition such coverage with respect to an 12 individual or dependent based on any health status-related factors. Such factors include health status, medical condition (including both physical and mental illnesses), claims experience, receipt of health care, medical history, genetic information, evidence of insurability (including conditions arising out of acts of domestic violence) and disability.

 

Reason for Change

 

 

The HIPAA limitation on pre-existing conditions did not apply to all health plans and permitted pre-existing condition exclusions to be imposed or continued in certain areas.. This provision ends the discriminatory practice of health insurers denying coverage for pre-existing conditions. All plans will be required to meet these standards.

 

Effective Date

 

 

January 1, 2013.

Sec. 112. Guaranteed Issue and Renewal for Insured Plans

 

Current Law

 

 

HIPAA requires that coverage sold to small groups (2-50 employees) must be sold on a guaranteed issue basis. That is, the issuer must accept every small employer that applies for coverage. (Guaranteed issue rules do not address premiums.) HIPAA also guarantees that each issuer in the individual market make at least two policies available ("guaranteed availability") to all HIPAA eligible individuals. In addition, HIPAA guarantees renewal or continuation of group coverage at the option of the plan sponsor (e.g., employer) and individual coverage at the option of the individual, with some exceptions. Insurers may not renew coverage under specified circumstances, such as nonpayment of premiums or fraud.

All states require issuers to offer policies to firms with 2-50 workers on a guaranteed issue basis, in compliance with HIPAA. As of January 2009 in the small group market, 13 states also require issuers to offer policies on a guaranteed issue basis to self-employed "groups of one." And, as of December 2008, 15 states require issuers in the individual market to offer some or all of their insurance products on a guaranteed issue basis to non-HIPAA eligible individuals.

 

Proposed Law

 

 

This provision would require issuers to offer all health insurance coverage on a guaranteed issue and renewal basis beginning in Y1, whether offered through the Exchange (established under Subtitle A of Title II), through any employment-based health plan, or otherwise. Rescissions of coverage would be prohibited, except in cases of fraud.

 

Reason for Change

 

 

This section provides consumer protections to ensure that people can obtain health coverage and can't have it arbitrarily taken away. All new plans will be required to meet these requirements.

 

Effective Date

 

 

January 1, 2013.

Sec. 113. Insurance Rating Rules

 

Current Law

 

 

There are a limited number of federal rating rules applicable to the private group health insurance market. However, many states currently impose stronger rating rules on insurance carriers in the small group and individual markets. Existing state rating rules restrict an insurer's ability to price insurance policies according to the risk of the person or group seeking coverage, and vary considerably from state to state. Such restrictions may specify the case characteristics (or risk factors) that may or may not be considered when setting a premium, such as age. The spectrum of existing state rating limitations ranges from pure community rating, to adjusted (or modified) community rating to rate bands. Some states have no limits on rating practices which permits insurance companies to charge unlimited amounts. Pure community rating means that premiums cannot vary based on any characteristic related to a person's or group's risk, including health. Adjusted community rating means that premiums cannot vary based on health, but may vary based on other key risk factors, such as gender. Rate bands allow premium variation based on health and/or age, but such variation is limited according to a range specified by the state. Moreover, both adjusted community rating and rate bands allow premium variation based on any other permitted case characteristic, such as industry. For each characteristic, the state typically specifies the amount of allowable variation. As of January 2009 in the small group market, one state has pure community rating rules, eleven have adjusted community rating rules, and 35 have rate bands. As of December 2008 in the individual market, two states have pure community rating rules, five have adjusted community rating rules, and eleven have rate bands.

There are no federally-established rating areas in the private health insurance market. However, some states have enacted rating rules in the individual and small group markets that include geographic location as a factor on which premiums may vary. In these cases, the state has established rating areas. Typically, states use counties or zip codes to define those areas.

 

Proposed Law

 

 

This provision would impose new federal rating rules on qualified health benefits plans. QHBP premiums would vary only by age (by no more than a 2:1 ratio within age categories specified by the Commissioner (established under Sec. 141)), premium rating area (as permitted by state regulators or, in the case of an Exchange plan, as specified by the Commissioner), and family enrollment (as specified under State law and consistent with Commissioner rules).

The Commissioner, in coordination with the Secretaries of Health and Human Services (HHS) and Labor, would conduct a study of the large group market to examine (1) characteristics of employers who purchase fully-insured health insurance products and employers who self-fund health benefits, including characteristics related to bearing risk and solvency, and (2) the extent to which rating rules cause adverse selection in the large group market or encourage small and mid-size employers to self-insure health benefits. The Commissioner would submit this report to Congress and the applicable agencies no later than 18 months after enactment, and include any recommendations to ensure that the law does not provide incentives for small and mid-size employers to self-insure or create adverse selection in the risk pools of large group insurers and self-insured employers.

 

Reason for Change

 

 

The provision ensures that Qualified Health Benefits Plans and plans offered outside the exchange offer fair health insurance policies that don't discriminate against enrollees or applicants. It provides for uniform national standards, so employers, employees or individuals moving from state-to-state won't be subject to a patchwork of requirements and protections. It requires a study of the large group marketplace to establish whether these changes have any unforeseen consequences and to advise as to whether Congress should take further action in this arena. All new plans will be required to meet these requirements. There is nothing that prohibits states from requiring stricter rating limits than the federal requirements described here.

 

Effective Date

 

 

January 1, 2013.

Sec. 114. Nondiscrimination in Benefits

 

Current Law

 

 

HIPAA established federal rules regarding non-discrimination based on health status-related factors. Group issuers are prohibited from establishing rules for eligibility and premium contributions based on health status-related factors. Those factors include health status, medical condition (including both physical and mental illnesses), claims experience, receipt of health care, medical history, genetic information, evidence of insurability (including conditions arising out of acts of domestic violence) and disability. In addition, the Genetic Information Nondiscrimination Act of 2008 prohibits issuers in the individual health insurance market from establishing eligibility rules (including continued eligibility) based on an individual's genetic information, and the Mental Health Parity Act of 1996, as amended, establishes parity by prohibiting the placement of a dollar limit (either annual or aggregate lifetime) on mental health benefits that is less than such a limit for medical/surgical benefits for groups with more than 50 employees.

 

Proposed Law

 

 

This provision would require QHBPs to comply with new non-discrimination standards regarding health benefits or benefit structures established by the Commissioner, building on existing federal non-discrimination rules in ERISA, the Public Health Service Act (PHSA), and the Internal Revenue Code of 1986. These standards would apply to plans offered to individuals and groups of all sizes in QHBPs, not just groups with over 50 employees. Existing mental health parity rules, specifically concerning (1) no requirement on group plans to provide mental health benefits, and (2) no impact of limited mental health parity on terms and conditions relating to the amount, duration, or scope of mental health benefits, apply to QHBPs and other policies, regardless of whether coverage is offered in the individual or group market.

 

Reason for Change

 

 

Currently, insurers can and do discriminate in the individual and group market. This section would guarantee that insurers could not discriminate against anyone due to a health-related condition. In addition, it strengthens protections afforded to individuals with mental health needs by extending the existing rules to everyone enrolled in a QHBP.

 

Effective Date

 

 

January 1, 2013.

Sec. 115. Ensuring Adequacy of Provider Networks

 

Current Law

 

 

HIPAA established special rules for plans that develop a network of providers. It allows small group issuers to (1) limit the employers that apply for coverage to those firms with eligible individuals who live or work in the network service area, and (2) deny coverage to small employers if the issuer demonstrates (if required) to the State that it has limited provider capacity due to obligations to existing enrollees and it is applying this decision uniformly without regard to claims experience or health status-related factors. HIPAA also prohibits a small group issuer that has denied coverage in any service area to offer small group coverage in that area for 180 days after the denial.

 

Proposed Law

 

 

This provision would require QHBPs that use provider networks to meet provider network standards that may be established by the Commissioner to ensure the adequacy of networks, and transparency in the cost-sharing differences between in- and out-of-network coverage. The term "provider network" means the providers with respect to covered benefits, treatments, and services available under a health benefit plan.

 

Reason for Change

 

 

This provision provides the Commissioner with the authority to set network adequacy requirements to ensure that plans have the right number of providers to meet the needs of enrollees.

 

Effective Date

 

 

January 1, 2013.

Sec. 116. Ensuring Value and Lower Premiums

 

Current Law

 

 

Medical loss ratio (MLR) describes is the share of total premium revenue spent on medical claims. Medigap insurance policies are private supplemental health care policies that Medicare beneficiaries can purchase to help cover some items, services, and cost sharing not covered under Medicare. Medigap plans are required to have a MLR ratio of 65% for individual policies and 75% for group policies. In addition, some states impose MLR or related requirements on insurers in the individual and/or small group health insurance markets. As of June 2008, MLR required by states ranged from 55% to 80%.

 

Proposed Law

 

 

This provision would require QHBPs to comply with a medical loss ratio standard to be determined by the Commissioner. QHBPs that do not meet such a standard would be required to provide rebates to enrollees, in a manner specified by the Commissioner, in sufficient amounts to meet such a loss ratio. To establish the medical loss ratio standard, the Commissioner would build on the definition and methodology, developed by the HHS Secretary under Section 161, for determining how to calculate such a ratio. The methodology would set the highest ratio possible to ensure adequate QHBP participation, competition both in and out of the Exchange, and value for consumers so that their premium payments are used predominately for medical claims.

 

Reason for Change

 

 

This provision provides the Commissioner with the authority to ensure that premiums are used primarily to provide health benefits and not lost to excessive administrative costs or profit. The Committee is interested in establishing a minimum level of 85 percent.

 

Effective Date

 

 

January 1, 2013.

 

Subtitle C--Standards Guaranteeing Access to Essential Benefits

 

 

Sec. 121. Coverage of Essential Benefits Package

 

Current Law

 

 

There are very limited federal benefit mandates for health insurance. These standards were added to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), and other Acts such as Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 or the Genetic Information Nondiscrimination Act of 2008 and are described in the discussion of Section 122. In addition, there are more than 2,000 state-level benefit mandates that vary across the country.

 

Proposed Law

 

 

This provision would require a QHBP to cover at least an "essential benefit package". QHBPs could be offered in or outside of an Exchange. QHBPs offered outside of an Exchange would be allowed to offer additional benefits beyond those specified in the essential benefits package. For QHBPs offered through the Exchange, a plan offering a premium-plus level of benefits (established under Section 203) could also provide additional benefits.

The requirements under Division A would not affect the offering of limited-purpose or "excepted" benefit plans, including policies covering dental or vision treatment, long-term care, workers' compensation, and other similar benefits, if such benefit plans are offered under a separate policy, contract, or certificate of insurance.

A QHBP would not be allowed to impose coverage restrictions (except cost sharing) on anything unrelated to the clinical appropriateness of the health care items and services.

 

Reason for Change

 

 

The provision ensures the offering of minimum standard benefits, called the essential benefits package, to ensure that all plans meet basic needs and enable people to compare policies in the Exchange on the basis of cost and quality--not hidden differences in benefits. Outside of the Exchange, group health plans eventually have to meet the essential benefits package, as a minimum standard, but can offer additional benefits, as many do today.

 

Effective Date

 

 

January 1, 2013.

Sec. 122. Essential Benefit Package Defined

 

Current Law

 

 

There are very few federally mandated benefits. The laws that provide guidance are found in the Employee Retirement Income Security Act (ERISA), which covers employer-sponsored plans; the Public Health Service Act (PHSA), which covers some insurance plans and state and local government plans; and the Internal Revenue Code (IRC), which covers Church plans in certain circumstances. There is no federal requirement that employers offer health insurance, or that any plans that are offered cover any specific benefits. However, the mandates that do exist require that if a plan (governed by ERISA, PHSA, or IRC) covers a particular service that is addressed in the statutes, then that benefit must be designed in a certain way. Those mandates include:
  • The Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (MHPA) (P.L. 110-343) prevents a large group health plan from placing annual or lifetime dollar limits on mental health benefits that are lower--less favorable--than annual or lifetime dollar limits for medical and surgical benefits offered under the plan, but does not require a plan to cover mental health benefits.

  • The Newborns' and Mothers' Health Protection Act of 1996 (NMHPA) (P.L. 104-204) requires plans that offer maternity coverage to pay for at least a 48-hour hospital stay following childbirth (96-hour stay in the case of a cesarean section).

  • The Women's Health and Cancer Rights Act of 1998 (P.L. 105-277) contains protections for patients who elect breast reconstruction in connection with a mastectomy. For plan participants and beneficiaries receiving benefits in connection with a mastectomy, plans offering coverage for a mastectomy must also cover reconstructive surgery and other benefits related to a mastectomy.

  • The Genetic Information Nondiscrimination Act of 2008 (GINA) (P.L. 110-233) prohibits discrimination based on genetic information by health insurers and employers. GINA strengthens and clarifies existing HIPAA nondiscrimination and portability provisions. Broadly, GINA prohibits health insurers from engaging in three practices: (1) using genetic information about an individual to adjust a group plan's premiums, or, in the case of individual plans, to deny coverage, adjust premiums, or impose a pre-existing condition exclusion; (2) requiring or requesting genetic testing; and (3) requesting, requiring, or purchasing genetic information for underwriting purposes. It also prohibits employers from making hiring or firing decisions based on genetic information.

  • Michelle's Law (P.L. 110-381) ensures that dependent post secondary education students who take a medically necessary leave of absence do not lose health insurance coverage. The law provides that a group health plan may not terminate a college student's health coverage simply because the student takes a medically necessary leave of absence from school or changes to part-time status. The leave of absence must be medically necessary, begin while the student is suffering from a serious illness or injury and would otherwise result in a loss of coverage.

 

Although current federal law provides only a limited number of service and coverage mandates, it does provide some guidance toward the definition of preventive services for use by public programs and private insurance. The U.S. Preventive Services Task Force (USPSTF), administered by the Agency for Healthcare Research and Quality (AHRQ), reviews scientific evidence and makes recommendations to the health care community regarding the use of clinical preventive services, based on evidence of effectiveness and any harm associated with specific services. The USPSTF grades services as "A" through "D," or notes that there is insufficient evidence to support a recommendation. Clinical services graded "A" or "B" by the USPSTF are recommended for use in clinical practice.

Similarly, the Advisory Committee on Immunization Practices (ACIP), administered by the Centers for Disease Control and Prevention (CDC), reviews scientific evidence and makes 19 recommendations to the Secretary and the CDC Director for the routine administration of vaccines to children, adolescents, and adults in the U.S. civilian population. The ACIP is not explicitly authorized; rather, it is based in general authorities of the Secretary in Titles II and III of the PHSA.

"Actuarial value" is a summary measure of a health insurance plan's benefit generosity. It is expressed as the percentage of medical expenses estimated to be paid by the insurer for a standard population and set of allowed charges. Two plans that have the same actuarial value are "actuarially equivalent." Because these are summary measures, two plans that are actuarially equivalent may not provide the same benefits for any two individuals. State health insurance regulations may include requirements expressed in terms of actuarial value.

 

Proposed Law

 

 

This provision would require the essential benefits package to cover specified items and services, limit cost sharing, prohibit annual and lifetime limits on covered services, ensure the adequacy of provider networks, and be equivalent (as certified by the Office of the Actuary of the Centers for Medicare and Medicaid Services) to the average prevailing employer-sponsored coverage.

The essential benefits package would be required to cover the following items and services:

  • Hospitalization;

 

Outpatient hospital and clinic services, including emergency department services;
  • Services of physicians and other health professionals;

  • Services, equipment, and supplies incident to the services of a physician or health professional in appropriate settings;

  • Prescription drugs;

  • Rehabilitative and "habilitative" services (i.e., services to maintain or prevent the deterioration of the physical, intellectual, emotional, and social functioning of developmentally delayed individuals);

  • Mental health and substance use disorder services;

  • Preventive services, include those graded "A" or "B" by the Task Force on Clinical and Preventive Services, as established by this Act, and those vaccines recommended by the Director of the CDC;

  • Maternity care; and

  • Well-baby and well-child care and oral health, vision, and hearing services, equipment, and supplies for those under age 21.

 

The essential benefits package would be subject to various requirements concerning cost-sharing. The package would be required to provide preventive items and services without cost-sharing (including well-baby and well-child care). The annual out-of-pocket limit in Y1 would be $5,000 for an individual and $10,000 for a family: These limits would be annually adjusted for inflation using the Consumer Price Index for all Urban Consumers (CPI-U). To the extent possible, the Secretary would establish cost-sharing levels using copayments (a flat dollar fee) and not coinsurance (a percentage fee). Cost-sharing for the Essential Benefits Package would result in coverage equal to approximately 70 percent of the actuarial value of the benefits if there were no cost-sharing imposed.

 

Reason for Change

 

 

To ensure that Americans will be guaranteed a defined level of benefits, with numerous options available in order to ease comparison shopping among plans based on cost and quality not manipulation of benefits.

 

Effective date

 

 

January 1, 2013.

 

* * * * * * *

 

 

Title II--Health Insurance Exchange and Related Provisions

 

 

Subtitle A--Health Insurance Exchange

 

 

Current Law

 

 

No provision.

 

Proposed Law

 

 

* * * * * * *

 

 

Sec. 207. Health Insurance Exchange Trust Fund

A "Health Insurance Exchange Trust Fund" would be created within the U.S. Treasury, consisting of such amounts as may be appropriated or credited to the fund. The Commissioner would pay from the Trust Fund amounts as determined necessary to make payments to operate the Exchange, including affordability credits.

Dedicated payments to the Trust Fund would include the following:

taxes on individuals not obtaining acceptable coverage (Section 401);

taxes on employers electing to not provide health benefits (Section 412); and

excise tax on employers who fail to satisfy health coverage participation requirements (Section 411).

Such additional sums as necessary would be appropriated. General provisions in the Internal Revenue Code regarding federal government trust funds would apply.

 

Reason for Change

 

 

A trust fund is needed to hold the taxes collected under this act and to enable the payment from that fund for affordability credits and other costs of the Exchange.

* * * * * * *

 

Title III--Shared Responsibility

 

 

A. Individual Responsibility

 

 

(sec. 301 of the bill)

 

PRESENT LAW

 

 

No provision.

 

REASONS FOR CHANGE

 

 

Individual responsibility is a key component of health reform. In order to control rising health care costs, it is vital that everyone be part of the health care system. The only way to ensure that almost everyone is participating is to require such participation by law. To that end, the bill institutes a tax on individuals who choose not to purchase qualified health insurance as the mechanism to enforce participation. The Committee believes that a fair tax rate is based on the individual's ability to pay, but capped at the average cost of health insurance in the national market.

 

EXPLANATION OF PROVISION

 

 

The provision cross-references the shared responsibility provisions of section 59B of the Code (as added by section 401 of the bill) which provides for a tax on an individual (or a husband and wife in the case of a joint return) who do not maintain coverage under acceptable health insurance for themselves and each of their qualifying children.

 

EFFECTIVE DATE

 

 

The provision is effective for taxable years beginning after December 31, 2012.

 

B. Health Coverage Participation Requirements

 

 

(sec. 311 of the bill)

 

PRESENT LAW

 

 

For employers that currently choose to provide health coverage for their employees, the cost to an employer of providing health coverage for its employees is generally deductible as an ordinary and necessary business expense for employee compensation.1 In addition, compensation in the form of employer-provided health insurance is not subject to payroll taxes.2

The Code generally provides that employees are not taxed on (that is, may exclude from gross income) the value of employer-provided health coverage under an accident or health plan.3 In addition, medical care provided under an accident or health plan for employees, their spouses, and their dependents is excluded from the gross income of the employee.4 Employees participating in a cafeteria plan may be able to pay their share of premiums on a pre-tax basis through salary reduction.5 Such salary reduction contributions are treated as employer contributions and thus are also excluded from gross income.

The Employee Retirement Income Security Act of 1974 ("ERISA")6 preempts State law relating to certain employee benefit plans, including employer-sponsored health plans. While ERISA specifically provides that its preemption rule does not exempt or relieve any person from any State law which regulates insurance, ERISA also provides that an employee benefit plan is not deemed to be engaged in the business of insurance for purposes of any State law regulating insurance companies or insurance contracts. As a result of this ERISA preemption, self-insured employer-sponsored health plans need not provide benefits that are mandated under State insurance law.

While ERISA does not require an employer to offer health benefits, it does require compliance with certain rules if an employer chooses to offer health benefits, such as compliance with plan fiduciary standards, reporting and disclosure requirements, and procedures for appealing denied benefit claims. ERISA was amended (as well as the Public Health Service Act7 and the Internal Revenue Code) in the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA")8 and the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"),9 adding other Federal requirements for health plans, including rules for health care continuation coverage, limitations on exclusions from coverage based on preexisting conditions, and a few benefit requirements such as minimum hospital stay requirements for mothers following the birth of a child.

The Code imposes an excise tax on group health plans that fail to meet HIPAA and COBRA requirements. The excise tax generally is equal to $100 per day per failure during the period of noncompliance and generally is imposed on the employer sponsoring the plan.10

Under Medicaid, states may establish "premium assistance" programs, which pay a Medicaid beneficiary's share of premiums for employer-sponsored health coverage. Besides being available to the beneficiary through his or her employer, the coverage must be comprehensive and cost-effective for the State. A 2007 analysis showed that 12 states had Medicaid premium assistance programs as authorized under current law.11

 

REASONS FOR CHANGE

 

 

The Committee believes that individuals, employers, and the government share responsibility to ensure that all Americans have affordable coverage of essential health benefits. The Committee believes that employers have a particular responsibility to either offer coverage to their employees or contribute to the cost of health care coverage, and that the most effective means of implementing health care reform is to build on the current system of employer-sponsored health coverage that already provides coverage to many American families.

 

EXPLANATION OF PROVISION

 

 

Employers offering health benefit plans are required to offer individual and family coverage under a qualified health benefits plan12 (or under certain grandfathered plans) and to make contributions to help discharge the coverage costs of employees enrolled in the employer-provided plan.

Beginning in the second year after the general effective date of the market reforms of the bill, employers are required to make contributions to the Health Insurance Exchange (the "Exchange") for employees who decline employer-provided coverage and instead enroll in an Exchange-participating plan. However contributions are not required if the employee declines coverage because the employee is enrolled in family coverage in the Exchange as a spouse or dependent of another insured.

 

EFFECTIVE DATE

 

 

The provision is effective for periods beginning after December 31, 2012.

 

C. Employer Responsibility to Contribute Towards Employee and Dependant Coverage

 

 

(sec. 312 of the bill)

 

PRESENT LAW

 

 

For employers who choose to offer coverage to their employees, the cost to an employer of providing health coverage for its employees, including the cost of employer contributions towards health coverage premiums, is generally deductible as an ordinary and necessary business expense for employee compensation.13 In addition, compensation in the form of employer-provided health insurance is not subject to payroll taxes.14

 

REASONS FOR CHANGE

 

 

The Committee believes that employers have a particular responsibility to contribute to the cost of health care of their employees, and this requires substantive contributions to single or family health plans provided by the employer. These employer contributions will help in the effort to provide quality, affordable health coverage for all Americans.

 

EXPLANATION OF PROVISION

 

 

Contribution requirements

Employers that offer health benefit plans are required to offer individual and family coverage under a qualified health benefit plan15 (or certain grandfathered health insurance plans) and to make contributions to help discharge the coverage costs of employees (and their spouses and qualifying children, if any) enrolled in the employer-provided plan.

For full time employees, the contribution amount is required to be at least 72.5 percent of the lowest cost plan offered by the employer which meets the requirements of the essential benefits package16 (65 percent for eligible employees electing family coverage).17 For part time employees, the contribution amount is a fraction (as determined in accordance with rules of the Health Choices Commissioner and the Secretaries of Labor, Health and Human Services, and the Treasury, as applicable) of the minimum contributions made for full time employees, with such fraction being equal to a ratio of the average weekly hours worked by the employee compared to the minimum weekly hours specified by the Health Choices Commissioner. An employer cannot satisfy the minimum contribution requirement through a salary reduction arrangement with the employee.

Automatic enrollment for employee sponsored health benefits

An employer that elects to offer health benefit plans must provide each employee with a 30-day opt-out period after the employee becomes eligible for employer-provided coverage in which to either decline coverage entirely of affirmatively enroll in a health plan. At the end of the 30-day period, if the employee does not make an affirmative election with respect to health coverage, the employer must automatically enroll the employee for individual (not family) coverage in the employer-sponsored health benefit plan with the lowest applicable employee premium.

Employers are required, within a reasonable period before the beginning of each plan year, to provide employees with written notice of employees' rights and obligations relating to automatic enrollment. The notice must be both comprehensive in scope (for example, it must explain opt-out and affirmative election rights) and easily understood by the average employee to whom it pertains. Specifically, the notice must explain an employee's right to make an affirmative election as to health coverage rather than being automatically enrolled; and, if more than one level of benefits or employee premium is offered by the employer, the notice must explain in which level of benefits and employee premium the employee will be automatically enrolled absent an affirmative election.

Provision of information to multiple agencies

Employers that offer health benefit plans are required to provide the Health Choices Commissioner, and the Secretaries of Labor, Health and Human Services, and the Treasury with information required by the Health Choices Commissioner to ascertain compliance with the provision's requirements.

 

EFFECTIVE DATE

 

 

The provision is effective for periods beginning after December 31, 2012.

 

D. Employer Contributions in Lieu of Coverage

 

 

(sec. 313 of the bill)

 

PRESENT LAW

 

 

For employers who choose to provide coverage for their employees, the cost to an employer of providing health coverage for its employees is generally deductible as an ordinary and necessary business expense for employee compensation.18 In addition, compensation in the form of employer-provided health insurance is not subject to payroll taxes.19

 

REASONS FOR CHANGE

 

 

If an employer offers coverage and some employees make an affirmative choice not to enroll in employer-provided plans because they cannot afford the provided coverage, the employers' responsibility to play a role in the provision of health care is not waived if that employee chooses coverage in the Exchange. Employers' contribution in lieu of coverage ensures that employers contribute to the provision of health care for all employees who either accept their employer-sponsored insurance or who seek more affordable coverage in the Exchange. For small businesses, reduced contributions help to ensure that small businesses continue to thrive.

 

EXPLANATION OF PROVISION

 

 

Beginning in the second year after enactment of the provision, employers are required to make contributions to the Health Insurance Exchange for employees who decline employer-provided coverage and instead enroll in an Exchange-participating plan. The contribution amount is equal to eight percent of the average wages paid by the employer to its employee during the time the employee was enrolled in the non-employer-provided plan. However, contributions are not required if the employee declines coverage because the employee is enrolled in family coverage as a spouse or dependent of another insured. Employers with annual payrolls not exceeding $250,000 during the preceding calendar year are not subject to the tax. Employers with annual payrolls between $250,000 and $400,000 during the preceding calendar year are subject to a reduced rate. Employer contributions are paid to the Health Choices Commissioner and deposited into the Health Insurance Exchange Trust Fund. The contributions are not tied to a particular employee (i.e., the contribution does not subsidize an employee's premium liability). This contribution requirement parallels the payroll tax equal to eight percent of wages that applies to nonelecting employers.

 

EFFECTIVE DATE

 

 

The provision is effective for periods beginning after December 31, 2012.

 

E. Authority Related to Improper Steering

 

 

(sec. 314 of the bill)

 

PRESENT LAW

 

 

No provision.

 

REASONS FOR CHANGE

 

 

The availability of affordability credits for qualifying individuals might lead employers to manipulate their offer of health coverage in order to encourage selection of healthier employees into their health plan while less healthy employees disproportionately join the Exchange. Consequently, the Health Choices Commissioner must be given tools to allow it to address abusive practices and ensure that both employer and Exchange health plans attract a broad range of risk which will promote efficient insurance markets and mitigate adverse selection.

 

EXPLANATION OF PROVISION

 

 

The Health Choices Commissioner (in coordination with the Secretaries of Labor, Health and Human Services, and the Treasury) has the authority to set standards for determining whether employers, in the course of offering coverage, are undertaking any actions to affect the risk pool within the Health Insurance Exchange by inducing employees to enroll in Exchange-participating health plans rather than in employer-provided plans. An employer found to be violating these standards is treated as not meeting the provision's coverage requirements.

 

EFFECTIVE DATE

 

 

The provision is effective for periods beginning after December 31, 2012.

 

F. Satisfaction of Health Coverage Participation Requirements Under the Employee Retirement Income Security Act of 1974

 

 

(sec. 321 of the bill)

 

PRESENT LAW

 

 

No provision.

 

REASONS FOR CHANGE

 

 

The Committee believes that individuals, employers, and the government share responsibility in ensuring that all Americans have affordable coverage of essential health benefits. The Committee believes that employers have a particular responsibility to either offer coverage to their employees or contribute to the cost of health care coverage, and that the most effective means of implementing health care reform is to build on the current system of employer-sponsored health coverage that provides coverage to many American families.

 

EXPLANATION OF PROVISION

 

 

Elections

Under the provision, employers are required to make an affirmative election regarding whether to offer health benefit plans to employees. Employers electing to offer health benefit plans are required to have their plans meet certain minimum coverage requirements. Employers electing to offer health benefit plans are treated as having established and maintained a group health plan for purposes of ERISA, and the provision's health coverage participation requirements are deemed to be part of the terms and conditions of the employer-provided plan.

The Secretary of Labor is required to conduct periodic audits of a representative sampling of employers and employer-provided group health plans in order to discover noncompliance. The Secretary of Labor must share findings of noncompliance with the Secretary of the Treasury and the Health Choices Commissioner, and must take timely enforcement action as appropriate to achieve compliance.

Aggregation rules

For affiliated groups of employers, the identity of the employer would generally be determined by applying the employer aggregation rules in section 414(b), (c), (m), and (o).20 The same election would apply to all employers in the aggregated group. Employers would be able to make separate elections for employees in separate lines of business, or for full time employees and part time employees.

Noncompliance with coverage requirements

 

Termination of election

 

The Secretary of Labor (in coordination with the Health Choices Commissioner) may terminate an employer's election (and thus subject the employer to the payroll tax imposed on employers that do not offer coverage) if the Secretary determines that the employer was substantially noncompliant with the health coverage participation requirements. The Secretary is permitted to promulgate regulations to carry out the provisions of these coverage requirements, and may issue interim final rules as appropriate.

 

Civil penalties

 

Employers who elect to provide coverage but whose health benefit plans fail to meet the provision's minimum health coverage participation requirements are subject to penalties of $100 per day for each employee to whom the failure applies.21 The Secretary of Labor is required to give advance written notification of failure to employers prior to the assessment of a penalty.

The penalties do not apply to (1) periods during which an employer used reasonable diligence but did not discover any failures, and (2) failures that were corrected within 30 days of discovery (but only if such failures were due to reasonable cause and not willful neglect). Penalties imposed on employers for unintentional failures (i.e., due to reasonable cause and not willful neglect) are to be limited to the lesser of 10 percent of the aggregate amount paid or incurred by the employer during the preceding taxable year for group health plans, or $500,000.

 

EFFECTIVE DATE

 

 

The provision is effective for periods beginning after December 31, 2012.

 

G. Satisfaction of Health Coverage Participation Requirements Under the Internal Revenue Code of 1986

 

 

(sec. 322 of the bill)

 

PRESENT LAW

 

 

No provision.

 

REASONS FOR CHANGE

 

 

The Committee believes that individuals, employers, and the government share responsibility to ensure that all Americans have affordable coverage of essential health benefits. The Committee believes that employers have a particular responsibility to contribute to the health care coverage of their employees and that such responsibility exists even on the part of employers who choose not to provide health care to their employees.

 

EXPLANATION OF PROVISION

 

 

The provision cross-references the satisfaction of health coverage participation requirements in section 3111(c) of the Code (as added by section 412 of the bill) and the excise tax provisions relating to failures of electing employers to comply with coverage requirements in section 4980H of the Code (as added by section 411 of the bill).

 

EFFECTIVE DATE

 

 

The provision is effective for periods beginning after December 31, 2012.

 

* * * * * * *

 

 

Title IV--Amendments to Internal Revenue Code of 1986

 

 

A. Tax on Individuals Without Acceptable Health Care Coverage

 

 

(sec. 401 of the bill and new Code sec. 59B)

 

PRESENT LAW

 

 

No provision.

 

REASONS FOR CHANGE

 

 

A tax on individuals who opt not to purchase health insurance creates an incentive for uninsured individuals to purchase insurance. Consequently, the tax will enhance the effects of insurance market reforms that are a critical component of comprehensive healthcare reform. The Committee believes that a fair tax is based on the individual's ability to pay, but should be capped at the average cost of health insurance premiums in the national market.

 

EXPLANATION OF PROVISION

 

 

Maintenance of health insurance coverage

An individual (or a husband and wife in the case of a joint return) who does not maintain acceptable health insurance coverage for themselves and each of their qualifying children26 is subject to an additional tax. The tax is equal to the lesser of (a) the national average premium for single or family coverage, as applicable, as determined by the Secretary of Treasury in coordination with the Health Choices Commissioner27 or (b) 2.5 percent of the excess of the taxpayer's adjusted gross income ("AGI") over the threshold amount of income required for income tax return filing for that taxpayer under section 6012(a)(1).28 For purposes of calculating the tax, a taxpayer's modified AGI is calculated by adding any tax-exempt interest or foreign earned income to the individual's AGI. Any individual who is a bona fide resident of a possession of the United States (as determined under section 937(a)) (and any qualifying child residing with the individual) is treated as maintaining acceptable coverage. This tax is in addition to both the regular income tax and the alternative minimum tax.

Under the provision, acceptable coverage includes coverage under a qualified health plan, a grandfathered plan, Medicare, Medicaid, Tricare (and other Armed Services coverage), Veterans Administration coverage29 and other coverage approved by the Secretary of the Treasury in coordination with the Health Choices Commissioner.

A qualified health plan generally is a health plan that covers at least an essential benefits package and that includes certain specified limits on required cost sharing, no annual or lifetime limit on covered health care items or services, certain specified minimum services, and certain requirements as to network adequacy as determined by the Health Choices Commissioner.30 A grandfathered plan generally is a health insurance plan purchased in the individual market in which the taxpayer was enrolled prior to date of enactment and the terms or conditions of which are not changed subsequent to the date of enactment other than to reflect area changes.31 Certain group coverage in effect on the general effective date of the insurance market reforms of the bill (i.e., after December 31, 2012) also qualifies as grandfathered coverage, but only for the five year period following the general effective date.

Exceptions

The additional tax applies to United States citizens and resident aliens.32 The additional tax does not apply for non- resident aliens or U.S. citizens and residents who satisfy the definition of a qualified individual, as defined by section 911(d) (relating to individuals whose tax home is in a foreign country and who reside in a foreign country for certain minimum specified time periods). The additional tax does not apply if the maintenance of acceptable coverage would result in a hardship to the individual. The additional tax does not apply if the person's income is below the threshold for filing a Federal income tax return.33 The additional tax also does not apply to any individual (or any qualifying child of the individual) if the individual has in effect an exemption which certifies that the individual is a member of a religious sect described in section 1402(g)(1) and an adherent of established tenets of such sect or division described in section 1402(g)(1).34 For taxpayers who maintain insurance for only part of the year, their annual tax is calculated and then prorated for the duration of time when insurance was not maintained. Lastly, the additional tax does not apply to an individual if the individual is (or may be) claimed as a dependent on the income tax return of another taxpayer for the taxable year. However, parents or guardians claiming qualified children as dependents on their Federal income tax returns are required to maintain coverage for these dependents.

Delegation of regulatory authority

The provision delegates authority to the Secretary of the Treasury to issue regulations or other guidance as necessary to carry out the purposes of the provision. The provision specifically directs the Secretary to issue guidance to provide an exemption from the tax for de minimis lapses of acceptable coverage and a process for applying for a waiver of the requirement to maintain coverage in cases of hardship (due to cost, or otherwise). The exemption for de minimis lapses of acceptable coverage includes lapses of a short duration that arise on account of a change in an individual's employer or employment status. For example, the additional tax is not intended to apply to a reservist who is deactivated from active duty and obtains coverage within a reasonable time period after the expiration of military coverage. In developing guidance in these two specific areas, the Secretary of the Treasury is directed to coordinate with the Health Choices Commissioner.

Information reporting

The new additional tax for failure to maintain health insurance is accompanied by new reporting requirements for providers of insurance coverage. The provider of acceptable coverage is required to supply information to the Department of the Treasury and the primary insured individual including the name, address and taxpayer identification numbers of all individuals receiving insurance under the policy by January 31 of the year following the calendar year for which the insurance was provided. Failure to file the required information return or to include complete and correct information on the required return is subject to the failure to file correct information returns penalty of section 6721.

 

EFFECTIVE DATE

 

 

The new additional tax is effective for taxable years beginning after December 31, 2012. The information reporting is effective for calendar years beginning after December 31, 2012.

 

B. Election to Satisfy Health Coverage Participation Requirements

 

 

(sec. 411 of the bill and new sec. 4980H of the Code)

 

PRESENT LAW

 

 

The Code does not require employers to provide health insurance to employees, and it does not provide a tax credit for any employer that does provide health coverage for its employees. The cost to an employer of providing health coverage for its employees is generally deductible as an ordinary and necessary business expense for employee compensation.35 In addition, compensation in the form of employer-provided health insurance is not subject to payroll taxes.36

The Code generally provides that employees are not taxed on (that is, may exclude from gross income) the value of employer-provided health coverage under an accident or health plan.37 In addition, medical care provided under an accident or health plan for employees, their spouses, and their dependents is excluded from the gross income of the employee.38 Employees participating in a cafeteria plan may be able to pay their share of premiums on a pre-tax basis through salary reduction.39 Such salary reduction contributions are treated as employer contributions and thus are also excluded from gross income.

The Employee Retirement Income Security Act of 1974 ("ERISA")40 preempts State law relating to certain employee benefit plans, including employer-sponsored health plans. While ERISA specifically provides that its preemption rule does not exempt or relieve any person from any State law which regulates insurance, ERISA also provides that an employee benefit plan is not deemed to be engaged in the business of insurance for purposes of any State law regulating insurance companies or insurance contracts. As a result of this ERISA preemption, self-insured employer-sponsored health plans need not provide benefits that are mandated under State insurance law.

While ERISA does not require an employer to offer health benefits, it does require compliance with certain rules if an employer chooses to offer health benefits, such as compliance with plan fiduciary standards, reporting and disclosure requirements, and procedures for appealing denied benefit claims. ERISA was amended (as well as the Public Health Service Act and the Internal Revenue Code) in the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA")41 and the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"),42 adding other Federal requirements for health plans, including rules for health care continuation coverage, limitations on exclusions from coverage based on preexisting conditions, and a few benefit requirements such as minimum hospital stay requirements for mothers following the birth of a child.

The Code imposes an excise tax on group health plans that fail to meet HIPAA and COBRA requirements. The excise tax generally is equal to $100 per day per failure during the period of noncompliance and generally is imposed on the employer sponsoring the plan.43

Under Medicaid, states may establish "premium assistance" programs, which pay a Medicaid beneficiary's share of premiums for employer-sponsored health coverage. Besides being available to the beneficiary through his or her employer, the coverage must be comprehensive and cost-effective for the State. A 2007 analysis showed that 12 states had Medicaid premium assistance programs as authorized under current law.44

 

REASONS FOR CHANGE

 

 

The Committee believes that individuals, employers, and the government share responsibility in ensuring that all Americans have affordable coverage of essential health benefits. The Committee believes that employers have a particular responsibility to contribute to the health care coverage of their employees, and that the most effective means of implementing health care reform is to build on the current system of employer-sponsored health coverage that provides coverage to many American families.

 

EXPLANATION OF PROVISION

 

 

Elections

Under the provision, employers are required to make an affirmative election regarding whether to offer health benefit plans to employees. Employers electing to offer health benefit plans must meet certain minimum benefit and contribution requirements. Employers choosing not to offer health benefit plans, or offering plans that do not meet the minimum benefit and contribution requirements, are subject to a payroll tax (as described in section 412 of the bill).45

The Secretary of the Treasury will prescribe rules for employer elections regarding coverage, including rules for the time, manner and form of elections, and the treatment of affiliated groups of employers, separate lines of business, and full versus part time employees.46 Employers are required to provide verification of their compliance with the provision's health coverage participation requirement to the Health Choices Commissioner and to the Secretaries of Labor, Health and Human Services, and the Treasury.

Parallel provisions for this election (including termination of the election) are provided in ERISA and the Public Health Service Act ("PHSA").47 The Secretary of the Treasury shares authority for providing rules for employers making this election, and authority to terminate the election, with the Secretaries of Labor and Health and Human Services.

 

Aggregation rules

 

For affiliated groups of employers, the identity of the employer is generally determined by applying the employer aggregation rules in section 414(b), (c), (m), and (0).48 The same election must apply to all employers in the aggregated group. Employers are able to make separate elections for employees in separate lines of business, or for full time employees and part time employees.

Contribution requirements

Employers that elect to offer health benefit plans are required to offer individual and family coverage under a qualified health benefit plan (or certain grandfathered health insurance plans)49 and to make contributions to help discharge the coverage costs of employees.50 For full time employees, the contribution amount is required to be at least 72.5 percent of the lowest cost plan offered by the employer which meets the requirements of the essential benefits package51/ (65 percent for eligible employees electing family coverage). For part time employees, the contribution amount is a fraction (as determined in accordance with rules of the Health Choices Commissioner and the Secretaries of Labor, Health and Human Services, and the Treasury, as applicable) of the minimum contributions made for full time employees, with such fraction being equal to a ratio of the average weekly hours worked by the employee compared to the minimum weekly hours specified by the Health Choices Commissioner. An employer cannot satisfy the minimum contribution requirement through a salary reduction arrangement with the employee.

Noncompliance with coverage requirements

Employers who elect to provide coverage but whose health benefit plans fail to meet the provision's minimum health coverage participation requirement are subject to an excise tax of $100 per day for each employee to whom the failure applies.52 The excise tax does not apply to (1) periods during which an employer used reasonable diligence but did not discover any failures, and (2) failures that are corrected within 30 days of discovery (but only if such failures are due to reasonable cause and not willful neglect). Excise taxes imposed on employers for unintentional failures (i.e., due to reasonable cause and not willful neglect) are limited to the lesser of 10 percent of the aggregate amount paid or incurred by the employer during the preceding taxable year for group health plans, or $500,000. There are parallel civil penalties provided in ERISA and PHSA.53 The excise tax with respect to any failure is reduced (but not below zero) by the amount of any civil penalty collected under these parallel provisions. The Secretary is also able to terminate an employer's election (and thus subject the employer to the payroll tax imposed on employers that do not offer coverage) if it is determined that the employer was substantially noncompliant with health coverage participation requirements.

Multi-agency coordination

The Health Choices Commissioner and the Secretaries of Labor, Health and Human Services, and the Treasury are required to execute an interagency memorandum of understanding to ensure coordination with respect to regulations, rulings, interpretations, and enforcement of the provision and the parallel provisions in ERISA and PHSA. The Secretaries of Labor and Health and Human Services are required to conduct periodic audits of employers in order to discover any noncompliance with health coverage participation requirements. The Secretaries of Labor, Health and Human. Services, and the Treasury, and the Health Choices Commissioner are all informed of audit results.

 

EFFECTIVE DATE

 

 

The provision is effective for periods beginning after December 31, 2012.

 

C. Responsibilities of Nonelecting Employers

 

 

(sec. 412 of the bill and sec. 3111(c) of the Code)

 

PRESENT LAW

 

 

In general

An employer's payroll tax obligations are not affected by its determination whether to offer health insurance coverage to its employees.

Under the Federal Insurance Contributions Act ("FICA"), separate taxes are imposed on every employer and employee with respect to wages paid by the employer to the employee.54 These two taxes are commonly referred to as the employer's and the employee's share of FICA. The employee's share of FICA is collected by means of payroll withholding by the employee's employer.

For both the employer and the employee's share of FICA, the tax consists of two parts: (1) old age, survivor, and disability insurance ("OASDI"), which correlates to the Social Security program that provides monthly benefits after retirement, disability, or death;55 and (2) Medicare hospital insurance ("HI").56 The OASDI tax rate is 6.2 percent on both the employee and employer (for a total rate of 12.4 percent). The OASDI tax rate applies to wages up to the OASDI wage base ($106,800 for 2009). The HI tax rate is 1.45 percent on both the employee and the employer (for a total rate of 2.9 percent). Unlike the OASDI tax, the HI tax is not limited to a specific amount of wages, but applies to all wages.

For purposes of the employer's and employee's share of FICA, wages generally means all remuneration for employment including the cash value of all remuneration paid in a medium other than cash. However, the general definition of wages is subject to a number of special rules and exceptions.57

Employment for FICA purposes generally means any service of whatever nature performed by an employee for the employer (irrespective of the citizenship or residence of either) within the United States. In the case of service outside the United States, employment also includes service performed by a United States citizen or resident as an employee for an American employer. As in the case of the definition of wages, the definition of employment is also subject to a number of exceptions and special rules.58 An American employer is defined as an employer which is: (1) the United States or any instrumentality thereof; (2) an individual who is a resident of the United States; (3) a partnership, if at least two-thirds of the partners are United States residents; (4) a trust, if all of the trustees are United States residents; or (5) a corporation organized under the laws of the United States or any of the States.59

 

REASONS FOR CHANGE

 

 

The Committee believes that individuals, employers, and the government share responsibility to ensure that all Americans have affordable coverage of essential health benefits. The Committee believes that employers have a particular responsibility to contribute to the health care coverage of their employees and that such responsibility exists even on the part of employers who choose not to provide health care to their employees. The Committee recognizes, however, that small businesses face special challenges in providing health coverage to their employees, and thus special rules should be provided for small businesses.

 

EXPLANATION OF PROVISION

 

 

Employers that elect not to provide health benefit plans to their employees are subject to an additional payroll tax equal to eight percent of wages.60 The provision's definitions of the terms wages, employment, and employer, are generally the same as under present FICA provisions. The provision, however, differs from present law in several respects. First, the tax is imposed as a result of a voluntary election by the employer not to offer an eligible health plan and not to make the required contribution toward each employee's premium for the plan. Second, as is currently the case for HI, there is no taxable wage base for purposes of the new payroll tax. Third, the definition of employment includes services performed by certain foreign agricultural workers, aliens performing services pursuant to certain nonimmigrant visas, and government workers, among others who are carved out under current law.

Employers are permitted to make separate elections for separate lines of business, or full-time employees and part-time employees (or vice-versa). The new payroll tax applies only to wages paid to employees who are not offered health benefits by their employers.

There is an exception and a reduced rate structure for certain small employers. Employers with annual payrolls not exceeding $250,000 during the preceding calendar year are not subject to the tax. Employers with annual payrolls between $250,000 and $400,000 during the preceding calendar year are subject to a reduced rate, as follows: two percent if the annual payroll does not exceed $300,000; four percent if the annual payroll exceeds $300,000 but does not exceed $350,000; and six percent if the annual payroll exceeds 350,000 but does not exceed $400,000. Annual payroll is defined as the aggregate wages (as defined in section 3121(a)) paid by the employer with respect to employment (as defined in section 3121(b)) during the calendar year.

A parallel payroll tax, including the exception and a reduced rate structure for small employers, applies to railroad carriers.

Territories and possessions of the United States are not treated as States for purposes of the new payroll tax.

 

EFFECTIVE DATE

 

 

The provision is effective for periods beginning after December 31, 2012.

 

D. Credit For Small Business Employee Health Coverage Expenses

 

 

(sec. 421 of the bill and new sec. 45R of the Code)

 

PRESENT LAW

 

 

Deduction of employer contributions for health coverage for employees

The Code does not provide a tax credit to any employer for the provision of health coverage for its employees. The cost to an employer of providing health coverage for its employees is generally deductible as an ordinary and necessary business expense for employee compensation.61 In addition, compensation in the form of employer-provided health insurance is not subject to payroll taxes.62

Employer contributions for health coverage

The Code generally provides that employees are not taxed on (that is, may "exclude" from gross income) the value of employer-provided health coverage under an accident or health plan.63 In addition, medical care provided under an accident or health plan for employees, their spouses, and their dependents is excluded from gross income of the employee.64 Employees participating in a cafeteria plan may be able to pay their share of premiums on a pre-tax basis through salary reduction.65 Such salary reduction contributions are treated as employer contributions and thus also are excluded from gross income.

 

REASONS FOR CHANGE

 

 

The Committee supports additional incentives and assistance to encourage small business employers with low-wage employees to provide health insurance coverage to their employees. Providing health insurance coverage is particularly challenging for these small business employers. In particular, the cost of health insurance may be disproportionately large as a portion of payroll expenses. The tax credit for qualified employee health coverage expenses is designed to make the provision of health insurance coverage by small business employers of low- wage employees more affordable.

 

EXPLANATION OF PROVISION

 

 

General rule

The provision generally provides a tax credit to a qualified small employer for up to 50 percent of its qualified health coverage expenses for the taxable year. Qualified employee health coverage expenses are, with respect to any employer for any taxable year, the aggregate amount paid or incurred by the employer for coverage of any qualified employee of the employer (including any family coverage which covers the employee) under qualified health coverage. However, for this purpose, amounts paid by the employer do not include amounts based on a salary reduction election made by an employee under a cafeteria plan (although such amounts are generally treated as an employer contribution). The credit is a general business credit, eligible to be carried back for one year and carried forward for 20 years.

Qualified small employer

A qualified small employer for purposes of the provision is an employer with less than 25 qualified employees employed during the employer's taxable year, and whose average annual employee compensation is less than $40,000. However, the full amount of the credit (50 percent of qualified health coverage expenses) is available only to an employer with no more than 10 qualified employees and whose average annual employee compensation does not exceed $20,000. Average annual employee compensation is determined by dividing the total aggregate compensation for the taxable year of all qualified employees by the number of qualified employees.

Under the provision, an employee is a qualified employee of an employer for a taxable year if the employee receives at least $5,000 of compensation from the employer during the taxable year for services as an employee of a trade or business. Self-employed individuals, including partners and sole proprietors, are treated as employees with respect to a business or partnership that generates net earnings from self employment for the individual but only if the business or partnership also has common law employees who are qualified employees.

For a common law employee, compensation means wages for purposes of income tax withholding plus elective deferrals within the meaning of section 402(g) and compensation deferred under an eligible deferred compensation plan under section 457. For a self-employed individual, compensation means net earnings from self employment, prior to subtracting any elective contributions. These definitions of compensation66 are used to determine both whether an individual is a qualified employee and to determine average annual employee compensation.

Qualified health coverage and expenses

Qualified health coverage includes two elements. First, the coverage must be acceptable coverage as defined for purposes of the individual responsibility requirement for obtaining health coverage. Second, the coverage must be provided by the employer pursuant to its election to satisfy the employer responsibility requirement by offering coverage, and the employer's contribution toward the cost of the coverage must be at least the minimum required for that purpose.67 The credit is only available for qualified health expenses paid or incurred by the employer for the purchase of health care coverage.

Phase out of the credit

If an employer's average annual employee compensation exceeds $20,000, the credit percentage phases out from the maximum available credit of 50 percent. The percentage is reduced by one percentage point for each $400 by which average annual employee compensation exceeds $20,000. For example, a firm with average compensation of $24,000 and 10 or fewer employees is entitled to a 40-percent credit. In general, if such firm had qualified employee health coverage expenses of $50,000, the credit amount would equal 40 percent of $50,000, or $20,000.

The credit amount determined above is subject to a further phaseout for employers with more than 10 qualified employees. For employers with more than 10 qualified employees, the credit amount is reduced by an amount which bears the same ratio to the amount of the credit as the number of qualified employees of the employer in excess of 10 bears to 15. For example, if a firm has 16 qualified employees, the credit amount is reduced by 40 percent.68 In the example above, the $20,000 credit is thus reduced by $8,000 (40 percent of $20,000) to a credit of $12,000.

Special rules

The employer is determined by applying the employer aggregations rules in section 414(b), (c), (m), and (o) and treating the aggregated group of employers as a single employer.69 Thus, all employees of the aggregated group are taken into account in determining if the employer is a qualified small employer. The credit is not available with respect to qualified employee health coverage expenses for any employee if the employee's compensation for the taxable year exceeds $80,000. Under the provision, the employer generally is allowed a deduction under section 162 for qualified employee health coverage expenses equal total health coverage expenses minus the dollar amount of the credit. The $5,000 compensation threshold for identifying qualified employees, the $20,000 average annual compensation limit, and the $80,000 compensation amount are indexed to changes in the consumer price index for all urban consumers ("CPI-U"). However, in each case, if the resulting amount is not a multiple of $50, the amount is rounded down to the next lowest multiple of $50.

 

EFFECTIVE DATE

 

 

The provision is effective for taxable years beginning after December 31, 2012.

 

E. Disclosures to Carry Out Health Insurance Exchange Subsidies

 

 

(sec. 431 of the bill and sec. 6103(1)(21) of the Code)

 

PRESENT LAW

 

 

Section 6103 provides that returns and return information are confidential and may not be disclosed by the Internal Revenue Service ("IRS"), other Federal employees, State employees, and certain others having access to such information except as provided in the Internal Revenue Code. Section 6103 contains a number of exceptions to the general rule of nondisclosure that authorize disclosure in specifically identified circumstances. For example, section 6103 provides for the disclosure of certain return information for purposes of establishing the appropriate amount of any Medicare Part B Premium Subsidy Adjustment.70

Section 6103(p)(4) requires, as a condition of receiving returns and return information, that Federal and State agencies (and certain other recipients) provide safeguards as prescribed by the Secretary of the Treasury by regulation to be necessary or appropriate to protect the confidentiality of returns or return information.71 Unauthorized disclosure of a return or return information is a felony punishable by a fine not exceeding $5,000 or imprisonment of not more than five years, or both, together with the costs of prosecution.72 The unauthorized inspection of a return or return information is punishable by a fine not exceeding $1,000 or imprisonment of not more than one year, or both, together with the costs of prosecution.73 An action for civil damages also may be brought for unauthorized disclosure.74

 

REASONS FOR CHANGE

 

 

The bill creates within the Health Choices Administration a National Health Insurance Exchange ("Exchange") to facilitate the purchase of health insurance. A State has the option of forming its own health insurance exchange at the State level that must be approved for operation by the Federal government ("approved State Exchange"). The bill provides for "affordability credits," administered by the Exchanges, which subsidize the purchase of health insurance through the Exchanges and the cost of paying for medical care. The affordability credits generally are available on a sliding scale for persons and families with incomes between Medicaid eligibility and 400 percent of the poverty level. To ensure the appropriate level of subsidy is delivered to American families, the Committee believes it is appropriate to allow for the disclosure of certain tax return information to the Exchange, or approved State Exchange to administer the affordability credits.

 

EXPLANATION OF PROVISION

 

 

Upon receipt of a valid written request from the Health Choices Commissioner or the head of the approved State Exchange, the IRS is authorized to disclose limited return information of any taxpayer whose income is relevant in determining the amount of the affordability credit(s). Such return information is limited to (1) taxpayer identity information, (2) filing status, (3) modified adjusted gross income, (4) the number of dependents of the taxpayer, (5) such other information as is prescribed by the Secretary by regulation as might indicate that the taxpayer is eligible for such affordability credit(s) (and the amount thereof), and (6) the taxable year with respect to which the preceding information relates or, if applicable, the fact that such information is not available.

The return information disclosed is to be used by officers and employees of the Health Choices Administration, or approved State Exchange, only for the purposes of and to the extent necessary in establishing and verifying the appropriate amount of any affordability credit and providing for the repayment of any such credit that was in excess of the appropriate amount.

The general rule of confidentiality applies to the information disclosed, as well as the safeguard requirements, penalties, and civil damage remedies for unauthorized disclosure or inspection.

 

EFFECTIVE DATE

 

 

The provision is effective on the date of enactment.

 

F. Surcharge on High-Income Individuals

 

 

(sec. 441 of the bill and new sec. 59C of the Code)

 

PRESENT LAW

 

 

In general

An individual who is a citizen or resident of the United States is subject to income tax on his or her taxable income.75 An individual computes taxable income by reducing gross income by the sum of (i) the deductions allowable in computing adjusted gross income, (ii) the standard deduction (or itemized deductions, at the election of the taxpayer), and (iii) the deduction for personal exemptions. Graduated tax rates are then applied to a taxpayer's taxable income to determine his or her individual income tax liability. Lower rates apply to net capital gain and qualified dividend income. A taxpayer may also be subject to an alternative minimum tax. A taxpayer may reduce his or her income tax liability by certain tax credits.

Gross income

Gross income means income from whatever source derived other than certain items excluded from gross income. Sources of gross income generally include, among other things, compensation for services, interest, dividends, capital gains, rents, royalties, alimony and separate maintenance payments, annuities, income from life insurance and endowment contracts (other than certain death benefits), pensions, gross profits from a trade or business, income in respect of a decedent, and income from S corporations, partnerships,76 trusts or estates.77 Exclusions from gross income include death benefits payable under a life insurance contract, interest on certain State and local bonds, employer-provided health insurance, employer-provided pension contributions, and certain other employer-provided benefits.

Adjusted gross income

An individual's adjusted gross income ("AGI") is determined by subtracting certain allowable deductions from gross income. These deductions are known as "above-the line" deductions. These deductions are generally the deductions incurred to produce gross income. For example, these deductions include trade or business deductions (such as cost of goods sold, small business expensing, depreciation, the domestic production activities deduction, and compensation paid to employees), losses from the sale or exchange of property, deductions attributable to rents and royalties, contributions to pensions and other retirement plans, and moving expenses. Thus, AGI generally is an approximation of "economic income."

Some deductions are not allowable in computing adjusted gross income. These deductions generally are referred to as itemized deductions. The principal itemized deductions are the deductions for interest on a personal residence and investment interest, taxes, charitable contributions, nonbusiness casualty and theft losses, investment expenses, medical and dental expenses, and certain employee expenses. An individual who does not elect to deduct itemized deductions is allowed a standard deduction, which also is not allowable in computing adjusted gross income.

 

REASONS FOR CHANGE

 

 

The Committee strongly believes that health care reform should not add to the Federal deficit. The Committee also believes that a surcharge on the highest income individuals increases fairness and progressivity in the tax Code. It also fulfills the goal of not adding to the tax burden of the large majority of taxpayers. The Committee also believes that the lower levels of the surcharge should not apply if cost savings from health care reform satisfy certain goals.

 

EXPLANATION OF PROVISION

 

 

The bill imposes a tax at the rates of one percent, 1.5 percent, and 5.4 percent on certain income of high-income individuals. In the case of a joint return or return of a surviving spouse, the one percent rate applies to so much of the taxpayer's modified adjusted gross income as exceeds $350,000 but does not exceed $500,000; the 1.5 percent rate applies to so much of the taxpayer's modified adjusted gross income as exceeds $500,000 but does not exceed $1,000,000; and the 5.4 percent rate applies to so much of the modified adjusted gross income as exceeds $1,000,000. In the case of a married individual filing a separate return, the dollar amounts are 50 percent of the above dollar amounts. In the case of unmarried individuals, heads of households and trusts and estates, the dollar amounts are 80 percent of the above dollar amounts. The dollar amounts are indexed for inflation for taxable years beginning after December 31, 2011.

The bill directs the Director of the Office of Management and Budget ("OMB") to determine before December 1, 2012 whether the Federal health reform savings under division B of this bill for the period beginning October 1, 2009 and ending before October 1, 2019, exceed the $525 billion of savings currently estimated by the Congressional Budget Office ("CBO"). If these savings (over $525 billion) do not exceed $150 billion, then the one percent and 1.5 percent rates will become two percent and three percent, respectively, for taxable years beginning after December 31, 2012. If the Director of OMB determines these savings exceed CBO's current estimated savings by more than $150 billion for the period, then the one percent and 1.5 percent rates shall not increase after December 31, 2012. If Director of OMB determines these savings exceed the CBO's current estimated savings by more than $175 billion for the period, then neither the one percent nor 1.5 percent rates shall apply after December 31, 2012. The Committee anticipates that OMB will provide an explanation of its estimate (including a discussion of its key assumptions and estimating techniques) as part of its final determination.

Modified adjusted gross income is the taxpayer's adjusted gross income reduced by the itemized deduction for investment interest.

In the case of a nonresident alien, only amounts taken into account in computing taxable income are taken into account in computing this tax.

In the case of a taxpayer with an amount excluded under section 911 (relating to income earned outside the United States), the dollar amounts applicable to the taxpayer are reduced by the amount of the exclusion (net of disallowed deductions and exclusions).

Charitable trusts are not subject to the tax.

No credits are allowed against this tax and this tax is not taken into account in computing alternative minimum tax liability.

 

EFFECTIVE DATE

 

 

The provision applies to taxable years beginning after December 31, 2010.

 

G. Distributions for Medicine Qualified Only If for Prescribed Drug or Insulin

 

 

(sec. 442 of the bill and secs. 105, 106, 220, and 223 of the Code)

 

PRESENT LAW

 

 

Individual deduction for medical expenses

Expenses for medical care, not compensated for by insurance or otherwise, are deductible by an individual under the rules relating to itemized deductions to the extent the expenses exceed 7.5 percent of AGI.78 Medical care generally is defined broadly as amounts paid for diagnoses, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure of the body.79 However, any amount paid during a taxable year for medicine or drugs is explicitly deductible as a medical expense only if the medicine or drug is a prescribed drug or is insulin.80 Thus, any amount paid for over-the-counter medicine is not deductible as a medical expense.

Exclusion for employer-provided health care

The Code generally provides that employees are not taxed on (that is, may exclude from gross income) the value of employer-provided health coverage under an accident or health plan.81 In addition, any reimbursements under an accident or health plan for medical care expenses for employees, their spouses, and their dependents generally are excluded from gross income.82 An employer may agree to reimburse expenses for medical care of its employees (and their spouses and dependents), not covered by a health insurance plan, through a flexible spending arrangement ("FSA") which allows reimbursement not in excess of a specified dollar amount. Such dollar amount is either elected by an employee under a cafeteria plan ("Health FSA") or otherwise specified by the employer under an arrangement called a health reimbursement arrangement ("HRA"). Reimbursements under these arrangements are also excludible from gross income as employer-provided health coverage. The general definition of medical care without the explicit limitation on medicine applies for purposes of the exclusion for employer-provided health coverage and medical care.83 Thus, under an HRA or under a Health FSA, amounts paid for over-the-counter medicine are treated as medical expenses, and reimbursements for such amounts are excludible from gross income.

Medical savings arrangements

Present law provides that individuals with a high deductible health plan (and generally no other health plan) purchased either through the individual market or through an employer may establish and make tax-deductible contributions to a health savings account ("HSA").84 Subject to certain limitations,85 contributions made to an HSA by an employer, including contributions made through a cafeteria plan through salary reduction, are excluded from income (and from wages for payroll tax purposes). Contributions made by individuals are deductible for income tax purposes, regardless of whether the individuals itemize. Distributions from an HSA that are used for qualified medical expenses are excludible from gross income.86 The general definition of medical care without the explicit limitation on medicine also applies for purposes of this exclusion.87 Similar rules apply for another type of medical savings arrangement called an Archer MSA.88 Thus, a distribution from a HSA or an Archer MSA used to purchase over-the-counter medicine also is excludible as an amount used for qualified medical expenses.

 

REASONS FOR CHANGE

 

 

In 1982, Congress eliminated the individual medical expense deduction for over-the counter medicine (other than insulin) to simplify the deduction, to conform the coverage of the deduction more closely to the coverage of private health insurance policies, and because expenses for over-the-counter medicine are more likely to represent expenses for ordinary consumption than "extraordinary" medical expenses that should be deductible.89 However, Congress did not similarly remove the cost of over-the-counter medicine from the eligibility for excludible reimbursements under Health FSAs (and in later years, HRAs, HSAs, and Archer MSAs) even though similar reasons for not treating reimbursement for these expenses as excludible from gross income apply. The Committee believes that the treatment of reimbursements for over-the-counter medicine under HRAs, Health FSAs, HSAs, and Archer MSAs should be conformed to the treatment of over-the-counter medicine under the itemized deduction for medical expenses.

 

EXPLANATION OF PROVISION

 

 

Under the provision, with respect to medicines, the definition of medical expense for purposes of employer-provided health coverage (including HRAs and Health FSAs), HSAs, and Archer MSAs, is conformed to the definition for purposes of the itemized deduction for medical expenses. Thus, under the provision, the cost of over-the-counter medicines may not be reimbursed with excludible income through a Health FSA, HRA, HSA, or Archer MSA.

 

EFFECTIVE DATE

 

 

The provision is effective for expenses incurred after December 31, 2009.

 

H. Delay in Application of Worldwide Allocation of Interest

 

 

(sec. 443 of the bill and sec. 864 of the Code)

 

PRESENT LAW

 

 

In general

To compute the foreign tax credit limitation, a taxpayer must determine the amount of its taxable income from foreign sources. Thus, the taxpayer must allocate and apportion deductions between items of U.S.-source gross income, on the one hand, and items of foreign-source gross income, on the other.

In the case of interest expense, the rules generally are based on the approach that money is fungible and that interest expense is properly attributable to all business activities and property of a taxpayer, regardless of any specific purpose for incurring an obligation on which interest is paid.90 For interest allocation purposes, all members of an affiliated group of corporations generally are treated as a single corporation (the so-called "one-taxpayer rule") and allocation must be made on the basis of assets rather than gross income. The term "affiliated group" in this context generally is defined by reference to the rules for determining whether corporations are eligible to file consolidated returns.

For consolidation purposes, the term "affiliated group" means one or more chains of includible corporations connected through stock ownership with a common parent corporation that is an includible corporation, but only if: (1) the common parent owns directly stock possessing at least 80 percent of the total voting power and at least 80 percent of the total value of at least one other includible corporation; and (2) stock meeting the same voting power and value standards with respect to each includible corporation (excluding the common parent) is directly owned by one or more other includible corporations.

Generally, the term "includible corporation" means any domestic corporation except certain corporations exempt from tax under section 501 (for example, corporations organized and operated exclusively for charitable or educational purposes), certain life insurance companies, corporations electing application of the possession tax credit, regulated investment companies, real estate investment trusts, and domestic international sales corporations. A foreign corporation generally is not an includible corporation.

Subject to exceptions, the consolidated return and interest allocation definitions of affiliation generally are consistent with each other.91 For example, both definitions generally exclude all foreign corporations from the affiliated group. Thus, while debt generally is considered fungible among the assets of a group of domestic affiliated corporations, the same rules do not apply as between the domestic and foreign members of a group with the same degree of common control as the domestic affiliated group.

 

Banks, savings institutions, and other financial affiliates

 

The affiliated group for interest allocation purposes generally excludes what are referred to in the Treasury regulations as financial corporations.92 A financial corporation includes any corporation, otherwise a member of the affiliated group for consolidation purposes, that is a financial institution (described in section 581 or section 591), the business of which is predominantly with persons other than related persons or their customers, and which is required by State or Federal law to be operated separately from any other entity that is not a financial institution.93 The category of financial corporations also includes, to the extent provided in regulations, bank holding companies (including financial holding companies), subsidiaries of banks and bank holding companies (including financial holding companies), and savings institutions predominantly engaged in the active conduct of a banking, financing, or similar business.94

A financial corporation is not treated as a member of the regular affiliated group for purposes of applying the one-taxpayer rule to other non-financial members of that group. Instead, all such financial corporations that would be so affiliated are treated as a separate single corporation for interest allocation purposes.

Worldwide interest allocation

 

In general

 

The American Jobs Creation Act of 2004 ("AJCA")95 modified the interest expense allocation rules described above (which generally apply for purposes of computing the foreign tax credit limitation) by providing a one-time election (the "worldwide affiliated group election") under which the taxable income of the domestic members of an affiliated group from sources outside the United States generally is determined by allocating and apportioning interest expense of the domestic members of a worldwide affiliated group on a worldwide-group basis (i.e., as if all members of the worldwide group were a single corporation). If a group makes this election, the taxable income of the domestic members of a worldwide affiliated group from sources outside the United States is determined by allocating and apportioning the third-party interest expense of those domestic members to foreign-source income in an amount equal to the excess (if any) of (1) the worldwide affiliated group's worldwide third-party interest expense multiplied by the ratio that the foreign assets of the worldwide affiliated group bears to the total assets of the worldwide affiliated group,96 over (2) the third-party interest expense incurred by foreign members of the group to the extent such interest would be allocated to foreign sources if the principles of worldwide interest allocation were applied separately to the foreign members of the group.97

For purposes of the new elective rules based on worldwide fungibility, the worldwide affiliated group means all corporations in an affiliated group as well as all controlled foreign corporations that, in the aggregate, either directly or indirectly,98 would be members of such an affiliated group if section 1504(b)(3) did not apply (i.e., in which at least 80 percent of the vote and value of the stock of such corporations is owned by one or more other corporations included in the affiliated group). Thus, if an affiliated group makes this election, the taxable income from sources outside the United States of domestic group members generally is determined by allocating and apportioning interest expense of the domestic members of the worldwide affiliated group as if all of the interest expense and assets of 80-percent or greater owned domestic corporations (i.e., corporations that are part of the affiliated group, as modified to include insurance companies) and certain controlled foreign corporations were attributable to a single corporation.

 

Financial institution group election

 

Taxpayers are allowed to apply the bank group rules to exclude certain financial institutions from the affiliated group for interest allocation purposes under the worldwide fungibility approach. The rules also provide a one-time financial institution group election that expands the bank group. At the election of the common parent of the preelection worldwide affiliated group, the interest expense allocation rules are applied separately to a subgroup of the worldwide affiliated group that consists of (1) all corporations that are part of the bank group, and (2) all financial corporations. For this purpose, a corporation is a financial corporation if at least 80 percent of its gross income is financial services income (as described in section 904(d)(2)(C)(i) and the regulations thereunder) that is derived from transactions with unrelated persons.99 For these purposes, items of income or gain from a transaction or series of transactions are disregarded if a principal purpose for the transaction or transactions is to qualify any corporation as a financial corporation.

In addition, anti-abuse rules are provided under which certain transfers from one member of a financial institution group to a member of the worldwide affiliated group outside of the financial institution group are treated as reducing the amount of indebtedness of the separate financial institution group. Regulatory authority is provided with respect to the election to provide for the direct allocation of interest expense in circumstances in which such allocation is appropriate to carry out the purposes of these rules, to prevent assets or interest expense from being taken into account more than once, or to address changes in members of any group (through acquisitions or otherwise) treated as affiliated under these rules.

 

Effective date of worldwide interest allocation

 

The common parent of the domestic affiliated group must make the worldwide affiliated group election. It must be made for the first taxable year beginning after December 31, 2010, in which a worldwide affiliated group exists that includes at least one foreign corporation that meets the requirements for inclusion in a worldwide affiliated group.100 The common parent of the pre-election worldwide affiliated group must make the election for the first taxable year beginning after December 31, 2010, in which a worldwide affiliated group includes a financial corporation. Once either election is made, it applies to the common parent and all other members of the worldwide affiliated group or to all members of the financial institution group, as applicable, for the taxable year for which the election is made and all subsequent taxable years, unless revoked with the consent of the Secretary of the Treasury.

 

Phase-in rule

 

HERA also provided a special phase-in rule in the case of the first taxable year to which the worldwide interest allocation rules apply. For that year, the amount of the taxpayer's taxable income from foreign sources is reduced by 70 percent of the excess of (i) the amount of its taxable income from foreign sources as calculated using the worldwide interest allocation rules over (ii) the amount of its taxable income from foreign sources as calculated using the present-law interest allocation rules. For that year, the amount of the taxpayer's taxable income from domestic sources is increased by a corresponding amount. Any foreign tax credits disallowed by virtue of this reduction in foreign-source taxable income may be carried back or forward under the normal rules for carrybacks and carryforwards of excess foreign tax credits.

 

REASONS FOR CHANGE

 

 

The Committee believes that it is appropriate to delay implementation of the worldwide interest allocation rules.

 

EXPLANATION OF PROVISION

 

 

The provision delays the effective date of worldwide interest allocation rules for nine years, until taxable years beginning after December 31, 2019. The required dates for making the worldwide affiliated group election and the financial institution group election are changed accordingly.

The provision also eliminates the special phase-in rule that applies in the case of the first taxable year to which the worldwide interest allocation rules apply.

 

EFFECTIVE DATE

 

 

The provision is effective for taxable years beginning after December 31, 2010.

 

I. Limitation on Treaty Benefits for Certain Deductible Payments

 

 

(sec. 451 of the bill and sec. 894 of the Code)

 

PRESENT LAW

 

 

In general

The United States taxes foreign corporations only on income that has a sufficient nexus to the United States. Thus, a foreign corporation is generally subject to net-basis U.S. tax only on income that is effectively connected with the conduct of a trade or business in the United States. Such effectively connected income generally is taxed in the same manner and at the same rates as the income of a U.S. corporation. An applicable tax treaty may limit the imposition of U.S. tax on business operations of a foreign corporation to cases in which the business is conducted through a permanent establishment in the United States.

In addition, foreign corporations generally are subject to a gross-basis U.S. tax at a flat 30-percent rate on the receipt of interest, dividends, rents, royalties, and certain similar types of income derived from U.S. sources, subject to certain exceptions. The tax ("U.S. withholding tax") generally is collected by means of withholding by the person making the payment. U.S. withholding tax may be reduced or eliminated under an applicable tax treaty, subject to the conditions discussed below.

Tax treaties

A foreign corporation may not benefit from a provision of a U.S. tax treaty with a foreign country that eliminates or reduces U.S. withholding tax unless the foreign corporation is both a resident of such foreign country and qualifies under any limitation-on-benefits provision contained in the U.S. tax treaty with such foreign country. In general, a foreign corporation is a resident of a foreign country under a U.S. tax treaty with that foreign country if it is liable to tax in that country by reason of its domicile, residence, citizenship, place of management, place of incorporation, or other criterion of a similar nature.101

 

Limitation-on-benefits provisions generally

 

Limitation-on-benefits provisions in income tax treaties are intended to deny treaty benefits in certain cases of treaty shopping or income stripping engaged in by third-country residents. Treaty shopping is said to occur when an entity that is resident in a country with respect to which there is no relevant tax treaty in force (or there is such a treaty in force but the taxpayer desires better benefits than those offered under that treaty) becomes resident in a treaty country or conducts a transaction in such a country for the purpose of qualifying for treaty benefits. For example, treaty shopping by a third-country resident may involve organizing in a treaty country a corporation that is entitled to the benefits of the treaty. Alternatively, a third-country resident eligible for favorable treatment under the tax rules of its country of residency may attempt to reduce the income base of a related treaty-country resident by having that treaty country resident pay to it, directly or indirectly, interest, royalties, or other amounts that are deductible in the treaty country from which the payments are made.

U.S. tax treaties contain a variety of limitation-on-benefits provisions due to the continued and recently accelerated development of limitation-on-benefits concepts, and the negotiated nature of tax treaties in general. Although many older U.S. tax treaties may lack limitation-on-benefits provisions102 or lack the refinements now thought essential to such provisions, the U.S. model income tax treaty, as most recently revised in 2006 ("U.S. model treaty"),103 and the newer U.S. treaties include limitation-on-benefits provisions that limit treaty benefits to resident taxpayers that meet certain detailed requirements intended to minimize these abuses. Present Treasury Department policy, which has been repeatedly ratified by the Senate, is broadly to revise older treaties by tightening limitation-on-benefits provisions to prevent treaty shopping.

The limitation-on-benefits rules included in U.S. income tax treaties and protocols signed since 2001 generally correspond with the limitation-on-benefits provisions of the U.S. model treaty. Certain features of the limitation-on-benefits provisions in recent treaties and protocols, however, differ from the rules in the U.S. model treaty, and some recent treaties and protocols include additional limitation-on-benefits rules not included in the U.S. model treaty. Some of the additions and differences make limitation-on-benefits provisions more restrictive than the rules in the U.S. model treaty, and others make the provisions less restrictive.

 

The U.S. model treaty limitation-on-benefits provision

 

The limitation-on-benefits rules of the U.S. model treaty include three provisions under which a resident of a treaty country may qualify for treaty benefits. First, a treaty-country resident may qualify for all treaty benefits if it has any one of several listed attributes. Second, a treaty-country resident that does not have one of the listed attributes may qualify for treaty benefits for income items that are derived from the other treaty country and that are related to a trade or business carried on in the residence country. Third, a treaty-country resident that would not be eligible for treaty benefits under either of the preceding two provisions may qualify for treaty benefits at the discretion of the competent authority of the other treaty country. These three provisions are described in more detail below.

 

Listed attributes qualifying a treaty-country resident for treaty benefits

 

A treaty-country resident may qualify for treaty benefits under the U.S. model treaty if it has one of the following attributes: it is (1) an individual; (2) a contracting state or a political subdivision or a local authority of the contracting state; (3) a company that satisfies either a public trading or ownership test described below; (4) a pension fund or other tax-exempt organization (if, in the case of a pension fund, more than 50 percent of the fund's beneficiaries, members, or participants are individuals resident in either treaty country); or (5) a person other than an individual that satisfies the ownership and base erosion test described below.

Public trading and ownership tests.--A company satisfies the public trading test if its principal class of shares (and any disproportionate class of shares) is regularly traded on one or more recognized stock exchanges and either its principal class of shares is primarily traded on one or more recognized stock exchanges located in the treaty country in which the company is a resident or the company's primary place of management and control is in its country of residence. A company may satisfy the ownership test if at least 50 percent of the aggregate vote and value of the company's shares (and at least 50 percent of any disproportionate class of the company's shares) is owned directly or indirectly by five or fewer companies entitled to benefits under the public trading test described above. This ownership test may be satisfied by indirect ownership only if each intermediate owner is a resident of either treaty country.

Ownership and base erosion test.--A resident of a treaty country satisfies the ownership prong of the ownership and base erosion test if on at least half the days of the taxable year, persons that are residents of that country and that are entitled to treaty benefits as individuals, governments, companies that satisfy the public trading test, or pension funds or other tax-exempt organizations own, directly or indirectly, stock representing at least 50 percent of the aggregate voting power and value (and at least 50 percent of any disproportionate class of shares) of the resident for whom treaty benefit eligibility is being tested. This ownership requirement may be satisfied by indirect ownership only if each intermediate owner is a resident of the country of residence of the person for which entitlement to treaty benefits is being tested. A resident of a treaty country satisfies the base erosion prong of the ownership and base erosion test if less than 50 percent of the person's gross income for the taxable year, as determined in the person's country of residence, is paid or accrued, directly or indirectly, in the form of deductible payments to persons who are not residents of either treaty country entitled to treaty benefits as individuals, governments, companies that satisfy the public trading test, or pension funds or other tax-exempt organizations (other than arm's-length payments in the ordinary course of business for services or tangible property).

 

Items of income derived from an active trade or business

 

Under the U.S. model treaty, a resident of a treaty country that is not eligible for all treaty benefits under any of the rules described above may be entitled to treaty benefits with respect to a particular item of income derived from the other treaty country. A resident is entitled to treaty benefits for such an income item if the resident is engaged in the active conduct of a trade or business in its country of residence (other than the business of making or managing investments for the resident's own account, unless these activities are banking, insurance, or securities activities carried on by a bank, an insurance company, or a registered securities dealer) and the income derived from the other treaty country is derived in connection with, or is incidental to, that trade or business. If a resident of a treaty country derives an item of income from a trade or business activity that it conducts in the other treaty country, or derives an income item arising in that other country from a related person, the income item eligibility rule just described is considered satisfied for that income item only if the trade or business activity carried on by the resident in its country of residence is substantial in relation to the trade or business activity carried on by the resident or the related person in the other country. The determination whether a trade or business activity is substantial is based on all the facts and circumstances.

 

Discretionary grant of benefits by competent authority

 

A resident of a treaty country not otherwise eligible for treaty benefits under the U.S. model treaty may be eligible for the benefits of the treaty generally or eligible for the benefits with respect to a specific item of income, based on a determination by the competent authority of the other treaty country. The competent authority may grant such benefits if it determines that the establishment, acquisition, or maintenance of the person for whom treaty benefits eligibility is being tested, and the conduct of that person's operations, did not have as one of its principal purposes the obtaining of benefits under the treaty.

 

REASONS FOR CHANGE

 

 

The Committee is aware that even though many recent U.S. income tax treaties include limitation-on-benefits provisions intended to ensure that only persons with sufficient nexus to the treaty partner countries may obtain treaty benefits, foreign multinational taxpayers residing in countries with which the United States does not have comprehensive tax treaties (including tax havens) may engage in treaty shopping. Treaty shopping by foreign multinational companies may involve organizing, in jurisdictions that have income tax treaties with the United States that offer favorable U.S. withholding rates on deductible payments, subsidiaries with no substantial business activities or other connections to those jurisdictions.104 Such payments may ultimately be distributed to the foreign parent corporations in the non-tax-treaty jurisdictions, although payments made directly to the parent companies would not have been eligible for reduced treaty withholding rates. The Committee believes that some instances of treaty shopping of the sort described above involve formerly U.S.-based companies that engaged in corporate inversion transactions prior to the enactment of the anti-inversion rules of section 7874. As a result of these inversion transactions, U.S. parent corporations of multinational groups became subsidiaries of foreign corporations organized in low- or no-tax jurisdictions. The Committee believes that it is inappropriate to allow treaty benefits for deductible payments in cases in which a foreign parent corporation would not have qualified for benefits under a U.S. tax treaty if the payment had been made directly to the parent, including in cases in which the parent is resident in a tax haven.

 

EXPLANATION OF PROVISION

 

 

The provision limits tax treaty benefits with respect to U.S. withholding tax imposed on deductible related-party payments. Under the provision, the amount of U.S. withholding tax imposed on deductible related-party payments may not be reduced under any U.S. income tax treaty unless such withholding tax would have been reduced under a U.S. income tax treaty if the payment were made directly to the foreign parent corporation of the payee. A payment is a deductible related-party payment if it is made directly or indirectly by any entity to any other entity, it is allowable as a deduction for U.S. tax purposes, and both entities are members of the same foreign controlled group of entities.

For purposes of the provision, a foreign controlled group of entities is a controlled group of corporations as defined in section 1563(a)(1), modified as described below, in which the common parent company is a foreign corporation. Such common parent company is referred to as the "foreign parent corporation." A controlled group of corporations consists of a chain or chains of corporations connected through direct stock ownership of at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of stock of each of the corporations. For purposes of the provision, the relevant ownership threshold is lowered from "at least 80 percent" to more than 50 percent, certain members of the controlled group of corporations that would otherwise be treated as excluded members are not treated as excluded members,105 and insurance companies are not treated as members of a separate controlled group of corporations. In addition, a partnership or other noncorporate entity is treated as a member of a controlled group of corporations if such entity is controlled by members of the group.

The Secretary may prescribe regulations that are necessary or appropriate to carry out the purposes of the provision, including regulations providing for the treatment of two or more persons as members of a foreign controlled group of entities if such persons would be the common parent of such group if treated as one corporation, and regulations providing for the treatment of any member of a foreign controlled group of entities as the common parent of that group if such treatment is appropriate taking into account the economic relationships among the group entities.

For example, under the provision, a deductible payment made by a U.S. entity to a foreign entity with a foreign parent corporation that is resident in a country with respect to which the United States does not have an income tax treaty is always subject to the statutory U.S. withholding tax rate of 30 percent, irrespective of whether the payee qualifies for benefits under a tax treaty. If, instead, the foreign parent corporation is a resident of a country with respect to which the United States does have an income tax treaty that would reduce the withholding tax rate on a payment made directly to the foreign parent corporation (regardless of the amount of such reduction), and the payment would qualify for benefits under that treaty if the payment were made directly to the foreign parent corporation, then the payee entity will continue to be eligible for the reduced withholding tax rate under the U.S. income tax treaty with the payee entity's residence country (even if such reduced treaty rate is lower than the rate that would be imposed on a hypothetical direct payment to the foreign parent corporation).

 

EFFECTIVE DATE

 

 

The provision is effective for payments made after the date of enactment.

 

J. Codification of Economic Substance Doctrine

 

 

(sec. 452 of the bill and sec. 7701 of the Code)

 

PRESENT LAW

 

 

In general

The Code provides detailed rules specifying the computation of taxable income, including the amount, timing, source, and character of items of income, gain, loss, and deduction. These rules permit both taxpayers and the government to compute taxable income with reasonable accuracy and predictability. Taxpayers generally may plan their transactions in reliance on these rules to determine the federal income tax consequences arising from the transactions.

In addition to the statutory provisions, courts have developed several doctrines that can be applied to deny the tax benefits of a tax-motivated transaction, notwithstanding that the transaction may satisfy the literal requirements of a specific tax provision. These common-law doctrines are not entirely distinguishable, and their application to a given set of facts is often blurred by the courts, the IRS, and litigants. Although these doctrines serve an important role in the administration of the tax system, they can be seen as at odds with an objective, rule-based system of taxation.

One common-law doctrine applied over the years is the economic substance doctrine. In general, this doctrine denies tax benefits arising from transactions that do not result in a meaningful change to the taxpayer's economic position other than a purported reduction in federal income tax.106

 

Economic substance doctrine

 

Courts generally deny claimed tax benefits if the transaction that gives rise to those benefits lacks economic substance independent of U.S. federal income tax considerations--notwithstanding that the purported activity actually occurred. The Tax Court has described the doctrine as follows:

 

The tax law ... requires that the intended transactions have economic substance separate and distinct from economic benefit achieved solely by tax reduction. The doctrine of economic substance becomes applicable, and a judicial remedy is warranted, where a taxpayer seeks to claim tax benefits, unintended by Congress, by means of transactions that serve no economic purpose other than tax savings.107

Business purpose doctrine

 

A common law doctrine that often is considered together with the economic substance doctrine is the business purpose doctrine. The business purpose doctrine involves an inquiry into the subjective motives of the taxpayer--that is, whether the taxpayer intended the transaction to serve some useful non- tax purpose. In making this determination, some courts have bifurcated a transaction in which activities with non-tax objectives have been combined with unrelated activities having only tax-avoidance objectives, in order to disallow the tax benefits of the overall transaction.108

Application by the courts

 

Elements of the doctrine

 

There is a lack of uniformity regarding the proper application of the economic substance doctrine.109 Some courts apply a conjunctive test that requires a taxpayer to establish the presence of both economic substance (i.e., the objective component) and business purpose (i.e., the subjective component) in order for the transaction to survive judicial scrutiny.110 A narrower approach used by some courts is to conclude that either a business purpose or economic substance is sufficient to respect the transaction.111 A third approach regards economic substance and business purpose as "simply more precise factors to consider" in determining whether a transaction has any practical economic effects other than the creation of tax benefits.112

One decision by the Court of Federal Claims questioned the continuing viability of the doctrine. That court also stated that "the use of the economic substance doctrine to trump mere compliance with the Code would violate the separation of powers" though that court also found that the particular transaction at issue in the case did not lack economic substance. The Court of Appeals for the Federal Circuit ("Federal Circuit Court") overruled the Court of Federal Claims decision, reiterating the viability of the economic substance doctrine and concluding that the transaction in question violated that doctrine.113 The Federal Circuit Court stated that "[w]hile the doctrine may well also apply if the taxpayer's sole subjective motivation is tax avoidance even if the transaction has economic substance, [footnote omitted], a lack of economic substance is sufficient to disqualify the transaction without proof that the taxpayer's sole motive is tax avoidance."114

 

Nontax economic benefits

 

There also is a lack of uniformity regarding the type of non-tax economic benefit a taxpayer must establish in order to demonstrate that a transaction has economic substance. Some courts have denied tax benefits on the grounds that a stated business benefit of a particular structure was not in fact obtained by that structure.115 Several courts have denied tax benefits on the grounds that the subject transactions lacked profit potentia1.116 In addition, some courts have applied the economic substance doctrine to disallow tax benefits in transactions in which a taxpayer was exposed to risk and the transaction had a profit potential, but the court concluded that the economic risks and profit potential were insignificant when compared to the tax benefits.117 Under this analysis, the taxpayer's profit potential must be more than nominal. Conversely, other courts view the application of the economic substance doctrine as requiring an objective determination of whether a "reasonable possibility of profit" from the transaction existed apart from the tax benefits.118 In these cases, in assessing whether a reasonable possibility of profit exists, it may be sufficient if there is a nominal amount of pre-tax profit as measured against expected tax benefits.

 

Financial accounting benefits

 

In determining whether a taxpayer had a valid business purpose for entering into a transaction, at least one court has concluded that financial accounting benefits arising from tax savings do not qualify as a non-tax business purpose.119 However, based on court decisions that recognize the importance of financial accounting treatment, taxpayers have asserted that financial accounting benefits arising from tax savings can satisfy the business purpose test.120

 

Tax-indifferent parties

 

A number of cases have involved transactions structured to allocate income for Federal tax purposes to a tax-indifferent party, with a corresponding deduction, or favorable basis result, to a taxable person. The income allocated to the tax-indifferent party for tax purposes was structured to exceed any actual economic income to be received by the tax indifferent party from the transaction. Courts have sometimes concluded that a particular type of transaction did not satisfy the economic substance doctrine.121 In other cases, courts have indicated that the substance of a transaction did not support the form of income allocations asserted by the taxpayer and have questioned whether asserted business purpose or other standards were met.122

 

REASONS FOR CHANCE [CHANGE]

 

 

Tax avoidance transactions have relied upon the interaction of highly technical tax law provisions to produce tax consequences not contemplated by Congress. When successful, taxpayers who engage in these transactions enlarge the tax gap by gaining unintended tax relief and by undermining the overall integrity of the tax system.

A strictly rule-based tax system cannot efficiently prescribe the appropriate outcome of every conceivable transaction that might be devised and is, as a result, incapable of preventing all unintended consequences. Thus, many courts have long recognized the need to supplement tax rules with anti-tax-avoidance standards, such as the economic substance doctrine, in order to assure the Congressional purpose is achieved. The Committee recognizes that the IRS has achieved a number of recent successes in litigation. The Committee believes it is still desirable to provide greater clarity and uniformity in the application of the economic substance doctrine in order to improve its effectiveness at deterring unintended consequences.

 

EXPLANATION OF PROVISION

 

 

The provision clarifies and enhances the application of the economic substance doctrine. Under the provision, in the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if (1) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position, and (2) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.123 The provision provides a uniform definition of economic substance, but does not alter the flexibility of the courts in other respects.

The determination of whether the economic substance doctrine is relevant to a transaction shall be made in the same manner as if the provision had never been enacted. Thus, the provision does not change current law standards in determining when to utilize an economic substance analysis.124

The provision is not intended to alter the tax treatment of certain basic business transactions that, under longstanding judicial and administrative practice are respected, merely because the choice between meaningful economic alternatives is largely or entirely based on comparative tax advantages. Among125 these basic transactions are (1) the choice between capitalizing a business enterprise with debt or equity;126 (2) a U.S. person's choice between utilizing a foreign corporation or a domestic corporation to make a foreign investment;127 (3) the choice to enter a transaction or series of transactions that constitute a corporate organization or reorganization under subchapter C;128 and (4) the choice to utilize a related-party entity in a transaction, provided that the arm's length standard of section 482 and other applicable concepts are satisfied.129 Leasing transactions, like all other types of transactions, will continue to be analyzed in light of all the facts and circumstances.130 As under present law, whether a particular transaction meets the requirements for specific treatment under any of these provisions can be a question of facts and circumstances. Also, the fact that a transaction does meet the requirements for specific treatment under any provision of the Code is not determinative of whether a transaction or series of transactions of which it is a part has economic substance.131

The provision does not alter the court's ability to aggregate, disaggregate, or otherwise recharacterize a transaction when applying the doctrine. For example, the provision reiterates the present-law ability of the courts to bifurcate a transaction in which independent activities with non-tax objectives are combined with an unrelated item having only tax-avoidance objectives in order to disallow those tax-motivated benefits.132

Conjunctive analysis

The provision clarifies that the economic substance doctrine involves a conjunctive analysis--there must be an inquiry regarding the objective effects of the transaction on the taxpayer's economic position as well as an inquiry regarding the taxpayer's subjective motives for engaging in the transaction. Under the provision, a transaction must satisfy both tests, i.e., the transaction must change in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position, and the taxpayer must have a substantial non-Federal-income-tax purpose133 for entering into such transaction, in order to satisfy the economic substance doctrine. This clarification eliminates the disparity that exists among the Federal circuit courts regarding the application of the doctrine, and modifies its application in those circuits in which either a change in economic position or a non-tax business purpose (without having both) is sufficient to satisfy the economic substance doctrine.134

Non-Federal-tax business purpose

Under the provision, a taxpayer's non-Federal-income-tax purpose for entering into a transaction (the second prong in the analysis) must be substantial.135 For purposes of this analysis, any State or local income tax effect which is related to a Federal income tax effect shall be treated in the same manner as a Federal income tax effect. Also, a purpose of achieving a favorable accounting treatment for financial reporting purposes shall not be taken into account as a non-Federal-income-tax purpose if the origin of such financial accounting benefit is a reduction of Federal income tax.136

Profit potential

Under the provision, a taxpayer may rely on factors other than profit potential to demonstrate that a transaction results in a meaningful change in the taxpayer's economic position or that the taxpayer has a substantial non-Federal-tax purpose for entering into such transaction. The provision does not require or establish a specified minimum return that will satisfy the profit potential test. However, if a taxpayer relies on a profit potential, the present value of the reasonably expected pre-tax profit must be substantial in relation to the present value of the expected net tax benefits that would be allowed if the transaction were respected.137 Fees and other transaction expenses and foreign taxes shall be taken into account as expenses in determining pre-tax profit.

Personal transactions of individuals

In the case of an individual, the provision applies only to transactions entered into in connection with a trade or business or an activity engaged in for the production of income.

Other rules

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of the provision.

No inference is intended as to the proper application of the economic substance doctrine under present law. In addition, the provision shall not be construed as alter or supplanting any other rule of law, including any common-law doctrine or provision of the Code or regulations or other guidance thereunder; and the provision shall be construed as being additive to any such other rule of law.

 

EFFECTIVE DATE

 

 

The provision applies to transactions entered into after the date of enactment.

 

K. Penalties for Underpayments Attributable to Transactions Lacking Economic Substance

 

 

(sec. 453 of the bill and sec. 6662 and sec. 6664 of the Code)

 

PRESENT LAW

 

 

General accuracy-related penalty

An accuracy-related penalty under section 6662 applies to the portion of any underpayment that is attributable to (1) negligence, (2) any substantial understatement of income tax, (3) any substantial valuation misstatement, (4) any substantial overstatement of pension liabilities, or (5) any substantial estate or gift tax valuation understatement. If the correct income tax liability exceeds that reported by the taxpayer by the greater of 10 percent of the correct tax or $5,000 (or, in the case of corporations, by the lesser of (a) 10 percent of the correct tax (or $10,000 if greater) or (b) $10 million), then a substantial understatement exists and a penalty may be imposed equal to 20 percent of the underpayment of tax attributable to the understatement.138 Except in the case of tax shelters,139 the amount of any understatement is reduced by any portion attributable to an item if (1) the treatment of the item is supported by substantial authority, or (2) facts relevant to the tax treatment of the item were adequately disclosed and there was a reasonable basis for its tax treatment. The Treasury Secretary may prescribe a list of positions which the Secretary believes do not meet the requirements for substantial authority under this provision.

The section 6662 penalty generally is abated (even with respect to tax shelters) in cases in which the taxpayer can demonstrate that there was "reasonable cause" for the underpayment and that the taxpayer acted in good faith.140 The relevant regulations for a tax shelter provide that reasonable cause exists where the taxpayer "reasonably relies in good faith on an opinion based on a professional tax advisor's analysis of the pertinent facts and authorities [that] ... unambiguously concludes that there is a greater than 50-percent likelihood that the tax treatment of the item will be upheld if challenged" by the IRS.141 For transactions other than tax shelters, the relevant regulations provide a facts and circumstances test, the most important factor generally being the extent of the taxpayer's effort to assess the proper tax liability. If a taxpayer relies on an opinion, reliance is not reasonable if the taxpayer knows or should have known that the advisor lacked knowledge in the relevant aspects of Federal tax law, or if the taxpayer fails to disclose a fact that it knows or should have known is relevant. Certain additional requirements apply with respect to the advice.142

Listed transactions and reportable avoidance transactions

 

In general

 

A separate accuracy-related penalty under section 6662A applies to any listed transaction and to any other reportable transaction that is not a listed transaction, if a significant purpose of such transaction is the avoidance or evasion of Federal income tax143 ("reportable avoidance transaction"). The penalty rate and defenses available to avoid the penalty vary depending on whether the transaction was adequately disclosed.

Both listed transactions and other reportable transactions are allowed to be described by the Treasury Department under section 6011 as transactions that must be reported, and section 6707A(c) imposes a penalty for failure to adequately report such transactions under section 6011. A reportable transaction is defined as one that the Treasury Secretary determines is required to be disclosed because it is determined to have a potential for tax avoidance or evasion.144 A listed transaction is defined as a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of the reporting disclosure requirements.145

 

Disclosed transactions

 

In general, a 20-percent accuracy-related penalty is imposed on any understatement attributable to an adequately disclosed listed transaction or reportable avoidance transaction.146 The only exception to the penalty is if the taxpayer satisfies a more stringent reasonable cause and good faith exception ("strengthened reasonable cause exception"), which is described below. The strengthened reasonable cause exception is available only if the relevant facts affecting the tax treatment were adequately disclosed, there is or was substantial authority for the claimed tax treatment, and the taxpayer reasonably believed that the claimed tax treatment was more likely than not the proper treatment. A reasonable belief must be based on the facts and law as they exist at the time that the return in question is filed, and not take into account the possibility that a return would not be audited. Moreover, reliance on professional advice may support a reasonable belief only in certain circumstances.147

 

Undisclosed transactions

 

If the taxpayer does not adequately disclose the transaction, the strengthened-reasonable-cause exception is not available (i.e., a strict-liability penalty generally applies), and the taxpayer is subject to an increased penalty equal to 30 percent of the understatement.148 However, a taxpayer will be treated as having adequately disclosed a transaction for this purpose if the IRS Commissioner has separately rescinded the separate penalty under section 6707A for failure to disclose a reportable transaction.149 The IRS Commissioner is authorized to do this only if the failure does not relate to a listed transaction and only if rescinding the penalty would promote compliance and effective tax administration.150

A public entity that is required to pay a penalty for an undisclosed listed or reportable transaction must disclose the imposition of the penalty in reports to the SEC for such periods as the Secretary shall specify. The disclosure to the SEC applies without regard to whether the taxpayer determines the amount of the penalty to be material to the reports in which the penalty must appear, and any failure to disclose such penalty in the reports is treated as a failure to disclose a listed transaction. A taxpayer must disclose a penalty in reports to the SEC once the taxpayer has exhausted its administrative and judicial remedies with respect to the penalty (or if earlier, when paid).151

 

Determination of the understatement amount

 

The penalty is applied to the amount of any understatement attributable to the listed or reportable avoidance transaction without regard to other items on the tax return. For purposes of this provision, the amount of the understatement is determined as the sum of: (1) the product of the highest corporate or individual tax rate (as appropriate) and the increase in taxable income resulting from the difference between the taxpayer's treatment of the item and the proper treatment of the item (without regard to other items on the tax return);152 and (2) the amount of any decrease in the aggregate amount of credits which results from a difference between the taxpayer's treatment of an item and the proper tax treatment of such item.

Except as provided in regulations, a taxpayer's treatment of an item shall not take into account any amendment or supplement to a return if the amendment or supplement is filed after the earlier of when the taxpayer is first contacted regarding an examination of the return or such other date as specified by the Secretary.153

 

Strengthened reasonable cause exception

 

A penalty is not imposed under section 6662A with respect to any portion of an understatement if it is shown that there was reasonable cause for such portion and the taxpayer acted in good faith. Such a showing requires: (1) adequate disclosure of the facts affecting the transaction in accordance with the regulations under section 6011;154 (2) that there is or was substantial authority for such treatment; and (3) that the taxpayer reasonably believed that such treatment was more likely than not the proper treatment. For this purpose, a taxpayer will be treated as having a reasonable belief with respect to the tax treatment of an item only if such belief: (1) is based on the facts and law that exist at the time the tax return (that includes the item) is filed; and (2) relates solely to the taxpayer's chances of success on the merits and does not take into account the possibility that (a) a return will not be audited, (b) the treatment will not be raised on audit, or (c) the treatment will be resolved through settlement if raised.155

A taxpayer may (but is not required to) rely on an opinion of a tax advisor in establishing its reasonable belief with respect to the tax treatment of the item. However, a taxpayer may not rely on an opinion of a tax advisor for this purpose if the opinion (1) is provided by a disqualified tax advisor or (2) is a disqualified opinion.

 

Disqualified tax advisor

 

A disqualified tax advisor is any advisor who: (1) is a material advisor156 and who participates in the organization, management, promotion, or sale of the transaction or is related (within the meaning of section 267(b) or 707(b)(1)) to any person who so participates; (2) is compensated directly or indirectly157 by a material advisor with respect to the transaction; (3) has a fee arrangement with respect to the transaction that is contingent on all or part of the intended tax benefits from the transaction being sustained; or (4) as determined under regulations prescribed by the Secretary, has a disqualifying financial interest with respect to the transaction.

A material advisor is considered as participating in the organization of a transaction if the advisor performs acts relating to the development of the transaction. This may include, for example, preparing documents: (1) establishing a structure used in connection with the transaction (such as a partnership agreement); (2) describing the transaction (such as an offering memorandum or other statement describing the transaction); or (3) relating to the registration of the transaction with any Federal, State, or local government body.158 Participation in the management of a transaction means involvement in the decision-making process regarding any business activity with respect to the transaction. Participation in the promotion or sale of a transaction means involvement in the marketing or solicitation of the transaction to others. Thus, an advisor who provides information about the transaction to a potential participant is involved in the promotion or sale of a transaction, as is any advisor who recommends the transaction to a potential participant.

 

Disqualified opinion

 

An opinion may not be relied upon if the opinion: (1) is based on unreasonable factual or legal assumptions (including assumptions as to future events); (2) unreasonably relies upon representations, statements, finding or agreements of the taxpayer or any other person; (3) does not identify and consider all relevant facts; or (4) fails to meet any other requirement prescribed by the Secretary.

 

Coordination with other penalties

 

To the extent a penalty on an understatement is imposed under section 6662A, that same amount of understatement is not also subject to the accuracy-related penalty under section 6662(a) or to the valuation misstatement penalties under section 6662(e) or 6662(h). However, such amount of understatement is included for purposes of determining whether any understatement (as defined in section 6662(d)(2)) is a substantial understatement as defined under section 6662(d)(1) and for purposes of identifying an underpayment under the section 6663 fraud penalty.

The penalty imposed under section 6662A does not apply to any portion of an understatement to which a fraud penalty is applied under section 6663.

Erroneous claim for refund or credit

If a claim for refund or credit with respect to income tax (other than a claim relating to the earned income tax credit) is made for an excessive amount, unless it is shown that the claim for such excessive amount has a reasonable basis, the person making such claim is subject to a penalty in an amount equal to 20 percent of the excessive amount.159

The term "excessive amount" means the amount by which the amount of the claim for refund for any taxable year exceeds the amount of such claim allowable for the taxable year.

This penalty does not apply to any portion of the excessive amount of a claim for refund or credit which is subject to a penalty imposed under the accuracy related or fraud penalty provisions (including the general accuracy related penalty, or the penalty with respect to listed and reportable transactions, described above).

 

REASONS FOR CHANGE

 

 

The Committee believes that a stronger penalty under section 6662 should be imposed on understatements attributable to non-economic substance and similar transactions, to improve compliance by deterring taxpayers from entering such transactions. The Committee is concerned that under present law there is a potential to avoid penalties in such cases (based for example on certain levels of tax advice), and that the potential that a taxpayer in such cases may pay only the tax due plus interest is not a sufficient deterrent. The Committee therefore believes it is appropriate to impose a new strict liability penalty in such cases. The Committee also believes that a similar strict liability standard should apply to tax shelter transactions.

In addition, the Committee believes that for large corporations, and for persons required to file reports under section 13 of the Securities Exchange Act of 1934, any position for which a reasonable cause and good faith defense to penalties is still available should satisfy a confidence level of being at least more likely than not to prevail, and the same level of confidence should be required of such taxpayers in determining whether there is a substantial understatement of income tax.

 

EXPLANATION OF PROVISION

 

 

The provision imposes a new, stronger penalty under section 6662 for an understatement attributable to any disallowance of claimed tax benefits by reason of a transaction lacking economic substance, as defined in new section 7701(p),160 or failing to meet the requirements of any similar rule of law.161 The penalty rate is 20 percent (increased to 40 percent if the taxpayer does not adequately disclose the relevant facts affecting the tax treatment in the return or a statement attached to the return). Except as provided in regulations, an amended return or supplement to a return is not taken into account if filed after the taxpayer has been contacted for audit or such other date as is specified by the Secretary. No exceptions (including the reasonable cause rules) to the penalty are available (i.e., the penalty is a strict-liability penalty). Thus, under the provision, outside opinions or in-house analysis would not protect a taxpayer from imposition of a penalty if it is determined that the transaction lacks economic substance or fails to meet the requirements of any similar rule of law. Similarly, a claim for refund that is excessive under section 6676 due to a claim that is lacking in economic substance or failing to meet the requirements of any similar rule of law is subject to the 20 percent penalty under that section, and the reasonable basis exception is not available.

The penalty does not apply to any portion of an underpayment on which a fraud penalty is imposed.162 The new 20-percent penalty (and 40-percent penalty for nondisclosed transactions) is also added to the penalties to which section 6662A will not also apply.163

As described above, under the provision, the reasonable cause and good faith exception of present law section 6664(c)(1) does not apply to any portion of an underpayment which is attributable to a transaction lacking economic substance, as defined in section 7701(p), or failing to meet the requirements of any similar rule of law, or to any tax shelter (as defined in present law section 6662(d)(2)(C)). In addition, the reasonable cause and good faith exception of present law section 6664(c)(1) also does not apply to any underpayment in which the taxpayer is a specified person. A specified person is defined as (i) any person required to file periodic or other reports under section 13 of the Securities and Exchange Act of 1934, and (ii) any corporation with gross receipts in excess of $100 million for the taxable year involved.164

In the case of a substantial understatement of income tax (which is a separate type of understatement under new section 6662(b) than an understatement attributable to a transaction lacking economic substance or failing to meet the requirements of any similar rule of law),165 the rules of section 6662(d) still apply, but are changed in the case of a specified person (as defined above). In the case of such a person, it is no longer the case that a substantial understatement is reduced if there is or was substantial authority for the taxpayer's treatment, or if the relevant facts were disclosed and there is a reasonable basis for the taxpayer's tax treatment. Under the provision, a substantial understatement of a specified person can be reduced only by that portion attributable to any item with respect to which the taxpayer had a reasonable belief that the tax treatment by the taxpayer is more likely than not the proper treatment.

 

EFFECTIVE DATE

 

 

The provision applies to transactions entered into after the date of enactment.

 

L. Certain Health Related Benefits Applicable to Spouses and Dependents Extended to Eligible Designated Beneficiaries

 

 

(sec. 461 of the bill and secs. 105, 106, 162, 501, 3121, 3306, and 3401 of the Code)

 

PRESENT LAW

 

 

Definition of dependent for exclusion for employer-provided health coverage

The Code generally provides that employees are not taxed on (that is, may exclude from gross income) the value of employer-provided health coverage for employees, their spouses, and their dependents under an accident or health plan.166 In addition, any reimbursements under the accident or health plan for medical care expenses for employees, their spouses, and their dependents generally are excluded from gross income.167 For purposes of these exclusions, dependents are determined under section 152, but without regard to section 152(b)(1), (b)(2), and (d)(1)(B). Section 152 defines a dependent as a qualifying child or qualifying relative.

Under section 152(c), a child generally is a qualifying child of a taxpayer if the child satisfies each of five tests for the taxable year: (1) the child has the same principal place of abode as the taxpayer for more than one-half of the taxable year; (2) the child has a specified relationship to the taxpayer; (3) the child has not yet attained a specified age; (4) the child has not provided over one-half of their own support for the calendar year in which the taxable year of the taxpayer begins; and (5) the qualifying child has not filed a joint return (other than for a claim of refund) with their spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins. A tie-breaking rule applies if more than one taxpayer claims a child as a qualifying child. The specified relationship is that the child is the taxpayer's son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual. With respect to the specified age, a child must be under age 19 (or under age 24 in the case of a full-time student). However, no age limit applies with respect to individuals who are totally and permanently disabled within the meaning of section 22(e)(3) at any time during the calendar year. Other rules may apply.

Under section 152(d) a qualifying relative means an individual that satisfies four tests for the taxable year: (1) the individual bears a specified relationship to the taxpayer; (2) the individual's gross income for the calendar year in which such taxable year begins is less than the exemption amount under section 151(d);168 (3) the taxpayer provides more than one-half the individual's support for the calendar year in which the taxable year begins; and (4) the individual is not a qualifying child of the taxpayer--or any other taxpayer for any taxable year beginning in the calendar year in which such taxable year begins. The specified relationship test for a qualifying relative is satisfied if that individual is the taxpayer's: (1) child or descendant of a child; (2) brother, sister, stepbrother or stepsister; (3) father, mother or ancestor of either; (4) stepfather or stepmother; (5) niece or nephew; (6) aunt or uncle; (7) in-law; or (8) certain other individuals, who for the taxable year of the taxpayer, have the same principal place of abode as the taxpayer and are members of the taxpayer's household.169

Employers may agree to reimburse medical expenses of their employees (and their spouses and dependents), not covered by a health insurance plan, through flexible spending arrangements which allow reimbursement not in excess of a specified dollar amount (either elected by an employee under a cafeteria plan or otherwise specified by the employer). Reimbursements under these arrangements are also excludible from gross income as employer-provided health coverage. The same definition of dependent applies for purposes of flexible spending arrangements.

A similar rule excludes employer-provided health insurance coverage and reimbursements for medical expenses for employees, their spouses, and their dependents from the employees' wages for payroll tax purposes.170 The same definition of dependent applies for purposes of this exclusion.

Deduction for health insurance premiums of self-employed individuals

Under present law, self-employed individuals may deduct the cost of health insurance for themselves and their spouses and dependents. The deduction is not available for any month in which the self-employed individual is eligible to participate in an employer-subsidized health plan. Moreover, the deduction may not exceed the individual's self-employment income. The deduction applies only to the cost of insurance (i.e., it does not apply to out-of-pocket expenses that are not reimbursed by insurance). The deduction does not apply for self-employment tax purposes. For purposes of the deduction, a more than two percent shareholder-employee of an S corporation is treated the same as a self-employed individual. Thus, the exclusion for employer-provided health care coverage does not apply to such individuals, but they are entitled to the deduction for health insurance costs as if they were self-employed.

Voluntary employees' beneficiary associations

A voluntary employees' beneficiary association ("VEBA") is a tax-exempt entity that is a part of a plan for providing life, sick or accident benefits to its members or their dependents or designated beneficiaries.171 No part of the net earnings of the association inures (other than through the payment of life, sick, accident or other benefits) to the benefit of any private shareholder or individual. A VEBA may be funded with employer contributions or employee contributions or a combination of employer contributions and employee contributions. The same definition of dependent applies for purposes of receipt of medical benefits through a VEBA.

 

REASONS FOR CHANGE

 

 

The Committee recognizes that an increasing number of employers and self-employed individuals offer or desire to offer health coverage and reimbursements for medical expenses to non-spouse, non-dependent beneficiaries, such as same- and opposite-sex domestic partners and their children. Under current law, the provision of these benefits results in additional Federal income tax for the employee or self-employed individual and additional Federal payroll taxes for the employer and the employee. As a result of these additional costs, employers and self-employed individuals may decline to provide coverage to non-spouse, non-dependent beneficiaries or, in cases where such coverage is offered, employees may decline it. Either case results in an increase in the number of individuals and families who are not covered by employer-provided health insurance. The provision will end these tax inequities, thereby encouraging employers and self-employed individuals to expand coverage and increase the number of Americans covered by employer-sponsored health plans.

 

EXPLANATION OF PROVISION

 

 

Exclusion for employer-provided health coverage

The provision amends sections 105 and 106 to extend the general exclusion for employer-provided health coverage to eligible beneficiaries.172 The parallel provisions for excluding employer-provided health care from payroll taxes are also amended.173 An eligible beneficiary is defined as any individual who is eligible to receive benefits or coverage under an accident or health plan. The provision does not place a limit on the number of eligible beneficiaries an individual is able to claim for purposes of the exclusion.

The provision directs the Secretary of the Treasury to issue guidance providing that eligibility for reimbursements from FSAs and HRAs is extended to otherwise qualifying medical expenses of any eligible beneficiary.

A parallel change is made for VEBAs.

Deduction for health insurance premiums of self-employed individuals

The provision amends section 162(l) to permit self-employed individuals to take a deduction for an individual who meets the following criteria: (1) younger than age 19 (24 for full-time students); (2) has the same principal abode as the taxpayer and is a member of the taxpayer's household for the taxable year; and (3) receives more than one-half of his or her support from the taxpayer for the calendar year in which the taxable year begins. The provision does not place a limit on the number of such individuals that a taxpayer is able to claim for purposes of the deduction.

The provision also permits a self-employed individual to take a deduction for an individual who is (1) older than age 19 (or 24 for students); (2) has the same principal abode as the taxpayer and is a member of the taxpayer's household for the taxable year; and (3) is not the individual's spouse, qualifying child or qualifying relative. Self-employed individuals may only take a deduction for one such individual in any tax year.

 

EFFECTIVE DATE

 

 

The provision is effective for taxable years beginning after December 31, 2009.

 

DIVISION B--MEDICARE AND MEDICAID IMPROVEMENTS

 

 

* * * * * * *

 

 

Title VIII--Revenue-Related Provisions

 

 

A. DISCLOSURES TO FACILITATE IDENTIFICATION OF INDIVIDUALS LIKELY TO BE INELIGIBLE FOR LOW-INCOME SUBSIDIES UNDER THE MEDICARE PRESCRIPTION DRUG PROGRAM TO ASSIST SOCIAL SECURITY ADMINISTRATION'S OUTREACH TO ELIGIBLE INDIVIDUALS

 

 

(Sec. 1801 of the bill and Sec. 6103(0(19) of the Code)

 

PRESENT LAW

 

 

Outreach efforts to increase awareness of the availability of Part D subsidies for low-income individuals

Under Medicare Part D (the prescription drug program), beneficiaries with incomes and assets below certain levels may be eligible for Low Income Subsidy ("LIS") benefits. Section 1144 of the Social Security Act requires the Commissioner of Social Security to conduct outreach efforts to inform potential LIS beneficiaries about the additional premium and cost-sharing subsidies. The Social Security Administration ("SSA"), from its own records and other non-tax records available to SSA, is able to determine a potential pool of LIS beneficiaries, but such pool includes many persons ineligible for the LIS benefits due to excess income or resources.

For example, prior to the beginning of the Part D program, SSA identified and conducted outreach to 18.6 million potentially eligible individuals; of these, 6.2 million applied by March 2007 and 2.2 million were found to be eligible. The Centers for Medicare and Medicaid Services ("CMS") believes that some of the remaining 12.4 million that did not apply could be eligible for LIS benefits. The SSA has contacted these individuals a number of times, but has had limited success identifying additional potentially eligible individuals and securing applications from them.

Confidentiality of returns and return information

Section 6103 provides that returns and return information are confidential and may not be disclosed by the IRS, other Federal employees, State employees, and certain others having access to such information except as provided in the Code. Section 6103 contains a number of exceptions to the general rule of nondisclosure that authorize disclosure in specifically identified circumstances.

For example, the Code provides for the disclosure of returns and return information to the SSA for several nontax administration purposes. For purposes of administering the Social Security Act, section 6103(1)(1)(A) authorizes the disclosure to the SSA of returns and return information relating to self-employment taxes, Federal Insurance Contributions Act taxes, and taxes withheld at the source on wages.174 Section 6103(1)(5) provides for the disclosure to the SSA of certain information returns for purposes of carrying out an effective return processing program, the Combined Annual Wage Reporting Program, and for providing mortality status of individuals for certain epidemiological and similar research.175 In addition, the Code provides for the disclosure of certain return information for purposes of establishing the appropriate amount of any Medicare Part B Premium Subsidy Adjustment.176

A December 2008 Treasury study conducted jointly with the SSA found that certain income information in IRS's possession, and, through imputation, some asset information, could be used to narrow the pool of potentially eligible LIS beneficiaries identified by the SSA, thereby allowing the SSA to better target its outreach efforts. Specifically, tax information could be used to screen out some individuals whose income or resources make them likely to be ineligible for LIS benefits.177

 

REASONS FOR CHANGE

 

 

The Committee believes additional income and asset information will assist the SSA in narrowing the pool of identified individuals by excluding those persons likely to ineligible for LIS benefits. With a narrower pool, the SSA could better target its future efforts toward those individuals more likely to be eligible and not expend resources contacting persons that tax records indicate are probably ineligible for LIS benefits.

 

EXPLANATION OF PROVISION

 

 

Under the provision, upon written request from the Commissioner of Social Security, officers and employees of the SSA will have access to the following information (including information available under sections 6103(l)(1) and (l)(5)) with respect to any individual identified by the Commissioner of Social Security:

 

1. return information for the applicable year from returns with respect to wages and payments of retirement income;

2. unearned income information and income information of the taxpayer from partnerships, trusts, estates, and subchapter S corporations for the applicable year;

3. if the individual filed an income tax return for the applicable year, the filing status, number of dependents, income from farming, and income from self employment on such return;

4. if the taxpayer's return status was married filing separately, the social security number of the taxpayer's spouse;

5. if the taxpayer filed a joint return, the social security number, unearned income information, and income information from partnerships, trusts, estates, and Subchapter S corporations of the taxpayer's spouse; and

6. such other return information relating to the taxpayer (and, in the case of a joint return, the taxpayer's spouse) as is prescribed by the Secretary by regulation as might indicate that the taxpayer is likely to be ineligible for a low-income prescription drug subsidy under section 1860D-14 of the Social Security Act.

 

For purposes of the provision, "applicable year" means the most recent taxable year for which information is available in the IRS's taxpayer information records. Under the provision, the SSA may only request tax information with respect to individuals the SSA has identified, through the use of all other reasonably available information, as likely to be eligible for a low-income prescription drug subsidy under section 1860D-14 of the Social Security Act and who have not applied for such subsidy. In the case of an identified individual whose return status was married filing separately and whose spouse was not identified by the SSA as likely to be eligible for a low-income prescription drug subsidy, the SSA may make a separate request for information related to such spouse.

The information disclosed under the provision can only be used by the SSA for purposes of identifying those individuals likely to be ineligible for a low-income prescription drug subsidy for purposes of its outreach efforts under section 1144 of the Social Security Act.

 

EFFECTIVE DATE

 

 

The provision is effective for disclosures made after the date that is 12 months after the date of enactment.

 

B. COMPARATIVE EFFECTIVENESS RESEARCH TRUST FUND; FINANCING FOR TRUST FUND

 

 

(Sec. 1802 of the bill and new Secs. 4375, 4376, 4377, and 9511 of the Code)

 

PRESENT LAW

 

 

No provision.

 

REASONS FOR CHANGE

 

 

The Committee believes that comparative effectiveness research is a public good and that a sustained investment in such research is needed to improve the quality of information about the relative strengths and weaknesses of various health care items, services and systems to allow physicians and patients to make more informed health care decisions. To ensure that there are sufficient amounts of public and private funds dedicated to this purpose, and to insulate such funding from inappropriate outside influence, the Committee believes that it is appropriate to establish a trust fund, impose fees on health insurance plans and receive transfer payments from Medicare, and have such amounts in the fund dedicated to finance comparative effectiveness research.

 

EXPLANATION OF PROVISION

 

 

In general

The provision establishes the Health Care Comparative Effectiveness Research Trust Fund ("CERTF") to carry out the provisions in the bill relating to comparative effectiveness research.

The following amounts are appropriated to the CERTF: $90,000,000 for fiscal year 2010; $100,000,000 for fiscal year 2011; and $110,000,000 for fiscal year 2012. For each fiscal year beginning with fiscal year 2013, the amount appropriated to the CERTF is (1) an amount equal to the net revenues received in the Treasury from the fees imposed on health insurance and self-insured plans under new Code sections 4375, 4376 and 4377 for such fiscal year, and (2) amounts determined by the Secretary of Health and Human Services to be equivalent to the fair share per capita amount for the fiscal year multiplied by the average number of individuals entitled to benefits under Medicare part A, or enrolled under Medicare part B, for such fiscal year. The amount transferred under (2) is limited to $90,000,000. Net revenues means the amount, as estimated by the Secretary of the Treasury, equaling the excess of the fees received in the Treasury on account of the new fee on health insurance and self-insured plans under new Code sections 4375, 4376 and 4377, over the decrease in tax imposed by chapter one of the Code relating to the fees imposed by such sections.

The amounts appropriated for fiscal years 2011 through 2013, as well as the amounts transferred under (2), above, are to be transferred from the Federal Hospital Insurance Trust Fund and from the Federal Supplementary Medical Insurance Trust Fund, and from the Medicare Prescription Drug Account within such Trust Fund, in proportion to the total expenditures during such year that are made under Medicare for the respective trust fund or account.

The fair share per capita amount is an amount computed by the Secretary of Health and Human Services for such fiscal year that will result in revenues to the CERTF of $375,000,000 for the fiscal year. If the Secretary is unable to compute the fair share per capita amount for a fiscal year, a default amount is used. The default amount is $2 for fiscal year 2013. For a subsequent year, the default amount is equal to the default amount for the preceding fiscal year increased by the annual percentage increase in the medical care component of the consumer price index for the 12-month period ending with April of the preceding fiscal year. Beginning not later than December 31, 2011, the Secretary of Health and Human Services must submit to Congress an annual recommendation for a fair share per capita amount for purposes of funding the CERTF.

At least the following amounts in the CERTF must be available to carry out the activities of the Comparative Effectiveness Research Commission established under the bill: $7,000,000 for fiscal year 2010; $9,000,000 for fiscal year 2011; and $10,000,000 for each fiscal year beginning with 2012.

Financing CERTF from fees on health plans

As discussed above, the CERTF is funded in part from fees imposed on health plans under new Code sections 4375 through 4377. Under the provision, a fee is imposed on each specified health insurance policy equal to the fair share per capita amount multiplied by the average number of lives covered under the policy. The issuer of the policy is liable for payment of the fee. A specified health insurance policy includes any accident or health insurance policy178 issued with respect to individuals residing in the United States.179 An arrangement under which fixed payments of premiums are received as consideration for a person's agreement to provide or arrange for the provision of accident or health coverage to residents of the United States, regardless of how such coverage is provided or arranged to be provided, is treated as a specified health insurance policy. The person agreeing to provide or arrange for the provision of coverage is treated as the issuer.

In the case of an applicable self-insured health plan, a fee is imposed equal to the fair share per capita amount multiplied by the average number of lives covered under the plan. The plan sponsor is liable for payment of the fee. For purposes of the provision, the plan sponsor is: the employer in the case of a plan established or maintained by a single employer or the employee organization in the case of a plan established or maintained by an employee organization. In the case of (1) a plan established or maintained by two or more employers or jointly by one of more employers and one or more employee organizations, (2) a multiple employer welfare arrangement, or (3) a voluntary employees' beneficiary association described in Code section 501(c)(9), the plan sponsor is the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan. In the case of a rural electric cooperative or a rural telephone cooperative, the plan sponsor is the cooperative or association.

Under the provision, an applicable self-insured health plan is any plan providing accident or health coverage if any portion of such coverage is provided other than through an insurance policy if such plan is established or maintained (1) by one or more employers for the benefit of their employees or former employees, (2) by one or more employee organizations for the benefit of their members or former members, (3) jointly by one or more employers and one or more employee organizations for the benefit of employees or former employees, (4) by a voluntary employees' beneficiary association described in section 501(c)(9) of the Code, (5) by any organization described in section 501(c)(6) of the Code, or (6) in the case of a plan not previously described, by a multiple employer welfare arrangement (as defined in section 3(40) of the Employee Retirement Income Security Act of 1974 ("ERISA")), a rural electric cooperative (as defined in section 3(40) of ERISA), or a rural telephone cooperative association (as defined in section 3(40)(B)(v) of ERISA).

Governmental entities are not exempt from the fees imposed under the provision except in the case of certain exempt governmental programs. Exempt governmental programs include Medicare, Medicaid, SCHIP, and any program established by Federal law for providing medical care (other than through insurance policies) to members of the Armed Forces, veterans, or members of Indian tribes.

No amount collected from the fee on health insurance and self insurance plans is covered over to any possession of the United States. For purposes of the procedure and administration rules under the Code, the fee imposed under the provision is treated as a tax.

 

EFFECTIVE DATE

 

 

The fee on health insurance and self-insured plans is effective with respect to policies and plans for portions of policy or plan years beginning on or after October 1, 2012.

 

* * * * * * *

 

 

III. VOTES OF THE COMMITTEE

 

 

In compliance with clause 3(b) of rule XIII of the Rules of the House of Representatives, the following statements are made concerning the votes of the Committee on Ways and Means in its consideration of H.R. 3200, "America's Affordable Health Choices Act."

 

MOTION TO REPORT RECOMMENDATIONS

 

 

The Chairman's Amendment in the Nature of a Substitute, as amended, was ordered favorably reported by a rollcall vote of 23 yeas to 18 nays (with a quorum being present). The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

 

VOTES ON AMENDMENTS

 

 

A rollcall vote was conducted on the following amendments to the Chairman's Amendment in the Nature of a Substitute.

A motion offered by Mr. Stark to table the motion offered by Mr. Camp to postpone proceedings was agreed to by a rollcall vote of 24 yeas to 14 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Ryan which would eliminate the public health insurance option which was defeated by a rollcall vote of 15 yeas to 25 nays. the vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Heller which would require Members of Congress and their dependents who are exchange- eligible and who enroll in health coverage to enroll in the public health insurance option which was defeated by a rollcall vote of 18 yeas to 21 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Herger and Mr. Boustany which would prohibit CMS from making coverage determinations using comparative effectiveness research on the basis of cost was defeated by a rollcall vote of 15 yeas to 26 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Brady which would eliminate the public health insurance option if the Secretary of Health and Human Services determines that the public plan option's average wait time for obtaining appointments with physicians exceeds the average private insurance plan wait time was defeated by a rollcall vote of 15 yeas to 26 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Brady and Mr. Johnson which would strike the employer responsibility requirement was defeated by a rollcall vote of 15 yeas to 25 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Linder, Mr. Brady, and Mr. Heller which would prohibit the Health Insurance Exchange from operating in states that do not have malpractice rules similar to malpractice rules in the State of California was defeated by a rollcall vote of 15 yeas and 26 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Heller which would require that an individual's eligibility for the affordability credit requires the individual's approval under the Income and Eligibility Verification System and the Systematic Alien Verification for Entitlements programs under Section 1137 of the Social Security Act was defeated by a rollcall vote of 15 yeas to 26 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Johnson and Mr. Ryan which would prohibit abortions from being a mandated benefit in the essential benefit standard, except in the cases of rape, incest or to save the life of the mother was defeated by a rollcall vote of 18 yeas to 23 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Boustany which would prohibit the Secretary from requiring that health care providers participate in the public health insurance option was defeated by a rollcall vote of 19 yeas to 22 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Boustany which would prohibit the use of Federal funds in maintaining reserves for the public health insurance option and require that the public health insurance option maintain reserves consistent with the National Association of Insurance Commissioners standards was defeated by a rollcall vote of 16 yeas to 25 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Reichert which would allow the sale of individual insurance policies without the protections afforded by the bill which was defeated by a rollcall vote of 15 yeas to 26 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Camp which would delay the effective date of additional revenue offsets until the GAO certifies that the Medicare fraud rate has been reduced to below 1% of total claims and which was defeated by a rollcall vote of 15 yeas to 25 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Herger which would strike section 1121 of the bill (relating to Medicare physicians payment reform) and substitutes an identical provision and provides student loan forgiveness for certain primary care physicians and which was defeated by a rollcall vote of 18 yeas to 22 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Brady which would eliminate the following provisions in the subtitle containing the non- health related revenue offsets: the healthcare surcharge, delay of the implementation of the worldwide interest allocation rules, limitation on treaty benefits for certain deductible payments, codification of economic substance doctrine, and penalties for underpayments was defeated by a rollcall vote of 15 yeas to 26 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Ryan which would eliminate the Medicare solvency trigger, require the GAO to report an assessment of the impact of the Act on the Federal government's financial position, and require CBO to issue an annual report with a 75 year cost estimate on the act and which was defeated by a rollcall vote of 14 yeas to 26 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Cantor which would prohibit funds from this bill to be used to pay for abortion or plans that cover abortion, except in the case of rape, incest, or if there exists a danger to the life of the mother was defeated by a rollcall vote of 19 yeas to 22 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Ms. Brown-Waite which would prohibit the Health Choices Commissioner or any other government employee from automatically enrolling any individual or family in the public health insurance option was defeated by a rollcall vote of 16 yeas to 25 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Davis of Kentucky which would eliminate the provision that requires an employer to pay a penalty if that employer offers creditable health insurance and the employee declines that insurance and obtains coverage from the Health Insurance Exchange was defeated by a rollcall vote of 17 yeas to 24 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Boustany which would require CMS to seek a recommendation of the Medicare Coverage Advisory Committee with respect to certain Medicare national coverage decisions was defeated by a rollcall vote of 15 yeas to 26 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Roskam which would require the public health insurance option to base payment rates on fair-market rates was defeated by a rollcall vote of 19 yeas to 21 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Brady which would repeal the public health insurance option if enrollees in the option have poorer 5-year cancer survival rates than those enrolled in private health insurance offered through the Health Insurance Exchange was defeated by a rollcall vote of 15 yeas to 25 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Ryan which would exempt the first $200,000 ($250,000 for joint filers) in adjusted gross income from the individual responsibility payment that applies to uninsured individuals and exempt the first $250,000 of each employee's wages from the employer responsibility payment that applies to employers that do not provide health coverage was defeated by a rollcall vote of 15 yeas to 26 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

An amendment was offered by Mr. Cantor which would prohibit the Secretary of Health and Human Services from implementing rules or regulations that would restrict individuals from enrolling or purchasing a high deductible health plan that includes a health savings account, and eliminate the provision that would limit excludable reimbursements from a health savings account or an Archer Medical savings account, or under a health reimbursement or flexible spending arrangement, to prescribed drugs or insulin was defeated by a rollcall vote of 16 yeas to 25 nays. The vote was as follows:

[EDITOR'S NOTE: The table of the vote is not reproduced.]

 

IV. BUDGET EFECTS OF THE BILL

 

 

A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS

 

 

In compliance with clause 3(d)(2) of rule XIII of the Rules of the House of Representatives, the following statement is made concerning the effects on the budget of the revenue provisions of the bill, H.R. 3200 as reported. The Committee anticipates that a CBO cost estimate letter will address these issues when the bill proceeds to consideration on the House floor.

 

B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAX EXPENDITURES BUDGET AUTHORITY

 

 

With respect to the requirements of clause 3(c)(2) of House rule XIII and section 308(a) of the Congressional Budget Act of 1974, the Committee anticipates that a CBO cost estimate letter on H.R. 3200 will address these issues when the bill proceeds to consideration on the House floor. CBO is unable to provide a cost estimate prior to the reconciliation of the versions of the bill as amended and reported by the three committees of jurisdiction.

 

C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET OFFICE

 

 

With respect to the requirements of 3(c)(3) of rule XIII of the House of Representatives and section 402 of the Congressional Budget Act of 1974, the Committee anticipates that a CBO cost estimate will address these issues when the bill proceeds to consideration on the House floor.

 

D. MACROECONOMIC IMPACT ANALYSIS

 

 

In compliance with clause 3(h)(2) of rule XIII of the Rules of the House of Representatives, the staff of the Joint Committee on Taxation provides the following macroeconomic analysis of H.R. 3200, "America's Affordable Choices Act of 2009," as reported by the Ways and Means Committee.

 

Summary

 

 

The analysis examines the effects of the different parts of the bill on incentives that could affect either long-run growth or short-term fluctuations in economic activity, progressively incorporating three aspects of the bill in the analysis. All of the analysis is of expected effects within the standard Federal ten-year budget period. The first section looks at changes to the Internal Revenue Code in Title IV of the bill. Next, the effects of low income subsidies for the purchase of health insurance are added to the analysis. Finally, net changes in spending on Medicare and Medicaid are incorporated to provide a picture of the fiscal impacts of the bill as a whole. This analysis uses the Joint Committee staff's Macroeconomic Equilibrium Growth ("MEG") model to evaluate these effects.180 The Joint Committee staff does not have a model designed to analyze possible efficiency, productivity, or labor market impacts of changes in the health sector of the economy, and thus this analysis will not include consideration of such impacts.181

Tax and expenditure policy can affect economic growth through several different channels. Long-term growth is determined by the availability of labor, capital and materials for the production process. In addition, in the short-run, during periods when available resources are not being fully used, growth can also be affected by changes in demand for goods and services. Changes in taxes and government spending can affect the availability of labor and capital by influencing peoples' incentives to work, save, and invest. Fiscal policy, or net changes in Federal debt, can influence long-run growth to the extent that it constrains the amount of capital available for private investment; and, it can influence short-run demand by affecting the amount of after-tax income people have to spend. In terms of the tax policy effects of the bill, H.R. 3200 contains provisions that slightly reduce incentives to work, save, and invest, resulting in a projected slight decline in GDP due to these incentives. From a fiscal policy standpoint, the bill would also result in a slight increase in Federal government debt, which may further reduce, or crowd out, the availability of funds for private investment.

 

Models and data

 

 

The primary focus of Joint Committee staff macroeconomic analysis is to determine the effects of changes in tax policy on the economy. In order to determine the effects of tax policy on average and marginal tax rates, the Joint Committee staff uses large micro- simulation models based on large samples of individual, corporate, and other income tax returns provided by the Statistics of Income division of the Internal Revenue Service.182

To analyze the effects of these tax policy changes on the economy, the current analysis relies on the Joint Committee's Macroeconomic Equilibrium Growth model.183 The MEG model is a reduced form macroeconomic model with neoclassical foundations and myopic expectations. Peoples' willingness to work is determined by their after-tax wages and by the after-tax rate of return on additional hours of work. Changes in average and marginal tax rates affect these decisions. These labor supply decisions are modeled separately for four groups: low income primary workers, low- income secondary workers, high income primary workers, and high income secondary workers. Investment is determined by the after-tax return to capital, which is affected by changes in taxes on business and investment income. The taxation of corporate profits, proprietors' income, dividends, capital gains, and rents are each separately modeled in the MEG model.

The MEG model can be operated in an equilibrium mode, or used to simulate disequilibrium growth paths, by varying monetary policy assumptions. The equilibrium mode assumes the Federal Reserve Board omnisciently counteracts any short-term demand effects of fiscal policy to maintain the existing equilibrium. The disequilibrium growth path reflects the effects of short-term fluctuations in demand. An increase in government spending or reduction in tax rates, all else equal, would increase the amount of disposable income available to consumers, and would generally be expected to increase consumer demand. In contrast, an increase in taxes or decrease in spending or transfer payments would reduce disposable income, and thus would be likely to decrease consumer demand. Often, the Federal Reserve Board ("Fed") influences the interaction between fiscal policy and fluctuations in demand for goods and services by managing interest rates and the money supply.

The following analysis is presented using alternate assumptions about whether the Federal Reserve Board intervenes to influence the demand consequences of the policy. In the first case, the Federal Reserve Board is assumed to swiftly counteract any demand effects of the policy. In the second case, the Federal Reserve Board is assumed not to change its monetary policy at all. Generally, the Federal Reserve Board would be expected to counter the demand effects of a policy if the policy were likely to accelerate a swing in the business cycle. If the policy is counter-cyclical, or neutral, the Federal Reserve Board would be less likely to intervene. Because of current economic conditions, with the economy in a recession and the Federal Reserve Board actively engaged in providing liquidity to the economy to encourage economy expansion, it is difficult to predict how much flexibility it would have in reacting to major fiscal policy initiatives in the near future. However, since most of the provisions of H.R. 3200 would not take effect until 2013, this consideration should be of less relevance than it would be in the current year.

 

Analysis

 

 

Effects of the revenue provisions.--Title IV of H.R. 3200 includes several provisions to provide incentives to increase health insurance coverage, and several provisions to raise revenues to finance the increases in health insurance coverage. The coverage-related revenue provisions include taxes on certain individuals who fail to obtain coverage, and taxes on employers who fail to offer health insurance to their employees or who offer insurance that is not deemed "affordable" and whose employees obtain subsidized coverage through the new health insurance exchange. The following analysis first examines the macroeconomic effects of these revenue provisions. The provisions are projected to result in a net increase in Federal revenues of approximately $790 billion between 2010 and 2019. Figure 1 illustrates the effects of these provisions on aggregate average and marginal tax rates on various sources of income. While the average and marginal tax rates of four different labor groups are separately modeled, for ease of exposition, Figure 1 shows combined wage tax effects. These rates are calculated including some of the behavioral responses to tax changes (such as timing, portfolio effects, and other shifting of income to minimize taxation) that are included in conventional Joint Committee staff revenue estimates.

[EDITOR'S NOTE: Figure 1 not reproduced.]

The most significant of the revenue provisions in this bill is the imposition of a surcharge on adjusted gross incomes ("AGI") above $350,000 for joint filers and $280,000 for single filers, and heads of households. The surcharge is graduated. In 2011, the surtax begins at a rate of one percent on amounts up to $500,000 for joint filers, and $400,000 for individual filers, and increases to 5.4 percent on amounts above $1 million and $800,000 respectively. In 2013, the surtax rates range from two percent to 5.4 percent. Average and marginal tax rates on wages of high income earners are increased by roughly equivalent amounts due to this provision. The increase in average tax rates reduces disposable income, providing some incentive to increase labor supply, while the increase in marginal tax rates on wages reduces the after-tax earnings of additional labor; on net the tax changes provide an incentive for affected taxpayers to reduce their labor supply. Because the surtax applies to all income above the AGI threshold, it also taxes income generated from business activities of sole proprietors, partners, S-Corporation shareholders, and other individuals receiving income from capital. The increased tax on business income reduces the return to business activities, thus reducing incentives to invest in business activities.

Additional provisions affecting individual taxpayers include a penalty on individuals with income above the income tax filing threshold who fail to purchase health insurance, a provision to conform the definition of qualified medical expenditures for Flexible Spending Arrangements, Individual Health Arrangements, Health Savings Accounts, and Medical Savings Accounts to the definition provided under Code section 223, and a provision to provide for certain health benefits currently applicable to a taxpayer's spouse and dependents to certain other beneficiaries. The net effect of these provisions is to slightly increase average and marginal tax rates on individual income.

Additional business-related provisions that are part of health reform include employer responsibility payments assessed on employers with payrolls above $250,000 in 2013 that fail to provide health insurance for their employees, and tax credits for up to 50 percent of the cost of employee health insurance by businesses with fewer than 26 employees and average wages less than $40,000. Additional business tax provisions that contribute to raising revenues include delaying the implementation of worldwide interest allocation for multinational firms until 2020, limiting eligibility for reduced withholding under certain treaties, and codification of the economic substance doctrine for assessing whether certain transactions should generate tax liabilities. The net effect of these additional business tax provisions is to slightly increase average and marginal tax rates on businesses with more than 25 employees.

Table 1 shows the effects of the revenue provisions contained in Title W of H.R. 3200 on economic growth, measured as percent changes in Gross Domestic Product ("GDP") relative to present-law baseline projections, and other key macroeconomic aggregates.

    TABLE 1.--EFFECTS OF REVENUE PROVISIONS PERCENT CHANGE

 

           RELATIVE TO PROJECTED PRESENT LAW LEVELS

 

 

 ------------------------------------------------------------

 

                            Fed Counters         No Fed

 

                           Demand Response      Reaction

 

                              [Percent]         [Percent]

 

                           ----------------------------------

 

                           2010-14  2015-19  2010-14  2015-19

 

 ------------------------------------------------------------

 

 Nominal GDP..............   -0.1     -0.4     -0.4     -1.5

 

 Real GDP.................   -0.1     -0.2     -0.2     -0.3

 

 Real producers' capital

 

   stock..................   -0.2     -0.6     -0.2     -0.7

 

 Labor force

 

   participation..........   -0.1     -0.1     -0.1     -0.1

 

 Employment...............   -0.1     -0.2     -0.2     -0.3

 

 Real consumption.........   -0.3     -0.5     -0.4     -0.7

 

 ------------------------------------------------------------

 

 Change in long-term

 

   interest rates

 

   (basis points).........   -3       -32      -5       -39

 

 ------------------------------------------------------------

 

 Receipts feedback

 

   (percent change

 

   in receipts due

 

   to change in GDP)......   -0.1     -0.4     -0.2     -0.6

 

 ------------------------------------------------------------

 

 

Consistent with the negative incentives for both labor supply and business investment described above, relative to present law, labor force participation is projected to fall by about 0.1 percent relative to the baseline, and business capital stock is projected to fall by 0.2 percent in the early years, and by up to 0.7 percent in the longer run. Because the policy reduces disposable income, it also exerts a downward pressure on demand. Nominal GDP is projected to fall by 0.1 to 0.4 percent in the 2010-2014 and by 0.4 percent to 1.5 percent in 2015-2019, depending on whether the Federal Reserve Board counteracts the downward pressure on demand. Real (inflation-adjusted) GDP would decline by 0.1 to 0.4 percent in 2010-14 and 0.2 to 0.3 percent in 2015-19. Consumption is also projected to fall relative to the baseline by 0.3 to 0.4 percent in 2010-14 and 0.5 to 0.7 percent in 2015-19. One positive effect of these provisions on the economy is a decline in long-term interest rates by up to 39 basis points in the long run due to the reduction in Federal debt. Because of the decline in GDP relative to the baseline, the taxable income base is reduced, and receipts would be 0.1 percent to 0.6 percent lower taking growth effects into account.

Effects of revenue provisions and health insurance subsidies combined.--Beginning in 2013, Title II of H.R. 3200 also provides for subsidies for the purchase of certain qualified health insurance through new health insurance exchanges. These subsidies, referred to as "affordability credits," along with out-of-pocket cost sharing assistance are available to individuals and families with adjusted gross incomes below 400 percent of the Federal poverty level. The affordability credits and subsidies, cost approximately $840 billion from 2010-2019. On net, the subsidies and tax provisions together increase Federal government debt by approximately $50 billion from 2010-2019.

Because of the way the affordability credits are structured, they have incentive effects similar to those of refundable tax credits. The subsidies themselves increase disposable income, just as reductions in average tax rates would for eligible individuals, reducing incentives to work. Because the credits are phased out by income levels, they have the same incentive effect with respect to income-producing activities as increasing marginal tax rates for eligible individuals reducing the return to additional income generation, and thus reducing incentives to work and invest. The affordability credits are designed to assist low-income individuals in purchasing qualified health insurance in compliance with a requirement that everyone have health insurance coverage. The increased health coverage could lead to increased consumption of medical services, which could in turn lead both to changes in individual health status and productivity. In addition, changes in demand for health care services within the context of the health market reforms included in the bill could produce significant changes in the health service delivery system, which could impact the efficiency of the health sector and/or the productivity of the population. The availability of subsidized, risk-pooled health insurance outside of the employment context could also affect people's decisions regarding job changes and retirement. Such effects are beyond the scope of this analysis.

Figure 2 shows the combined effects of the revenue provisions of Title IV and the subsidy provisions of Title II of H.R. 3200. Overall, the effective marginal rate on aggregate wage income continues to increase, while the aggregate average rate declines. In particular, effective marginal tax rates increase for individuals qualifying for the subsidy (whose income is below 400 percent of the Federal poverty level), and for those subject to the surtax (whose adjusted gross income is above $350,000). While the average rate for those subject to the surtax increases, effective average rates (accounting for the subsidy) for subsidy-eligible individuals decrease by a greater amount.

Similarly, Table 2 shows the combined macroeconomic effects of these two Titles of H.R. 3200. Relative to the present law baseline, real GDP is projected to decrease by slightly more from 2015-19, 0.4 percent under the combined tax and subsidy proposal than the with the revenue provisions alone. The combination of tax increases and affordability credits is projected to reduce labor force participation by 0.3 percent between 2015-2019, more than the effects of the revenue provisions alone. Employment is also projected to be reduced relative to what it would be under present law. Because Federal debt is only slightly increased under this scenario, there is little change in long-term interest rates; thus more private investment is displaced by public debt in this scenario relative to the tax provisions alone, and producers' capital stock falls by 0.2 percent in 2010-14 and 1.3 percent in 2015-2019. Conversely, because disposable income is not being contracted, there is little short-run demand effect, with little difference between the effects of the proposal on nominal versus real GDP. The decline in GDP and associated macroeconomic aggregates relative to the present law baseline would result in receipts decreasing by 0.1 to 0.5 percent.

  TABLE 2.--EFFECTS OF TAX PROVISIONS AND EXCHANGE SUBSIDIES

 

   PERCENT CHANGE RELATIVE TO PROJECTED PRESENT LAW LEVELS

 

 

 ------------------------------------------------------------

 

                            Fed Counters         No Fed

 

                           Demand Response      Reaction

 

                              [Percent]         [Percent]

 

                           ----------------------------------

 

                           2010-14  2015-19  2010-14  2015-19

 

 ------------------------------------------------------------

 

 Nominal GDP..............   -0.1     -0.4     -0.3     -0.3

 

 Real GDP.................   -0.1     -0.4     -0.2     -0.2

 

 Real producers' capital

 

   stock..................   -0.2     -1.3     -0.2     -1.2

 

 Labor force

 

   participation..........   -0.1     -0.3     -0.1     -0.3

 

 Employment...............   -0.1     -0.3     -0.2     -0.1

 

 Real consumption.........   -0.2     -0.3     -0.2     -0.3

 

 ------------------------------------------------------------

 

 Change in long-term

 

   interest rates

 

   (basis points).........   -1       -3       -5       -2

 

 ------------------------------------------------------------

 

 Receipts feedback

 

   (percent change in

 

   receipts due to

 

   change in GDP).........   -0.1     -0.5     -0.2     -0.4

 

 ------------------------------------------------------------

 

 

Fiscal effects of the entire bill.--Finally, H.R. 3200 makes many changes to the Medicare and Medicaid programs. The net effect of these changes, in combination with the revenue provisions and the exchange subsidies, is to increase the Federal deficit by approximately $220 billion from 2010-2019. The Joint Committee staff models the Medicaid and Medicare changes as changes in untaxed transfer payments received by taxpayers. As with the affordability subsidies for the purchase of health insurance, these program changes could have effects on the health care delivery system, but these effects are not incorporated in this analysis.

Because any income phase-outs associated with the changes to Medicare and Medicaid have not been modeled, the changes in effective marginal tax rates and average tax rates in this scenario are the same as in the second scenario, shown in Figure 2 above. Only the net effects of these changes on personal disposable income and Federal government debt are considered in this analysis. Table 3 shows the growth effects of the combined revenue provisions, affordability subsidies, and changes to Medicare and Medicaid.

 TABLE 3.--EFFECTS OF TAX PROVISIONS, SUBSIDIES, AND CHANGES

 

    IN OTHER OUTLAYS PERCENT CHANGE RELATIVE TO PROJECTED

 

                      PRESENT LAW LEVELS

 

 

 ------------------------------------------------------------

 

                            Fed Counters         No Fed

 

                           Demand Response      Reaction

 

                              [Percent]         [Percent]

 

                           ----------------------------------

 

                           2010-14  2015-19  2010-14  2015-19

 

 ------------------------------------------------------------

 

 Nominal GDP..............   -0.1     -0.4     -0.2      0.1

 

 Real GDP.................   -0.1     -0.4     -0.1     -0.1

 

 Real producers' capital

 

   stock..................   -0.2     -1.5     -0.2     -1.4

 

 Labor force

 

   participation..........   -0.1     -0.3     -0.1     -0.3

 

 Employment...............   -0.1     -0.3     -0.1      0.0

 

 Real consumption.........   -0.2     -0.2     -0.3      0.0

 

 ------------------------------------------------------------

 

 Change in long-term

 

   interest rates

 

   (basis points).........   1        8       -1        11

 

 ------------------------------------------------------------

 

 Receipts feedback

 

   (percent change in

 

   receipts due to

 

   change in GDP).........   -0.1     -0.6     -0.2     -0.3

 

 ------------------------------------------------------------

 

 

Because effective tax rates are the same in this scenario as in the one above, incentives for work remain the same, and labor force participation is again projected to decline relative to the present law baseline by 0.1 percent from 2010-14 and by 0.3 percent in 2015-19. One noticeable difference between this scenario and the others is the increase in long-term interest rates that results from the increase in Federal government debt. The increased debt crowds out more private investment, reducing business capital stock by up to 1.5 percent in 2015-19. The increase in disposable income also leads to more short-term demand pressure, resulting in smaller declines from the baseline in GDP in the case where the Fed does not attempt to counteract the demand effect. Changes in GDP continue to reduce Federal receipts by modest amounts, by 0.1 to 0.2 percent in 2010-14 and 0.3 to 0.6 percent in 2015-19.

Conclusion.--The revenue, subsidy, and overall fiscal effects of H.R. 3200 create moderately negative growth incentives through raising marginal tax rates on labor and capital and through the interest-rate increase owing to increased deficits. When the revenue provisions are considered alone, the negative incentive effects are somewhat offset by the reduction in long run interest rates.

 

E. PAY-GO RULE

 

 

In compliance with clause 10 of rule XXI of the Rules of the House of Representatives, the following statement is made concerning the effects on the budget of the revenue provisions of the bill, H.R. 3200 as reported: the Committee anticipates that a CBO cost estimate letter on H.R. 3200 will address these issues when the bill proceeds to consideration on the House floor. CBO is unable to provide a cost estimate prior to the reconciliation of the versions of the bill as amended and reported by the three committees of jurisdiction.

 

V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

 

 

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

 

 

With respect to clause 3(c)(1) of rule XIII of the Rules of the House of Representatives (relating to oversight findings), the Committee advises that it was a result of the Committee's oversight review concerning the tax burden on taxpayers that the Committee concluded that it is appropriate and timely to enact the revenue provision included in the bill as reported.

 

B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

 

 

With respect to clause 3(c)(4) of rule XIII of the Rules of the House of Representatives, the goal of H.R. 3200, America's Affordable Health Choices Act of 2009 is to provide affordable, quality health care for all Americans and reduce the rate of growth in health care spending.

 

C. CONSTITUTIONAL AUTHORITY STATEMENT

 

 

With respect to clause 3(d)(1) of the rule XIII of the Rules of the House of Representatives (relating to Constitutional Authority), the Committee states that the Committee's action in reporting this bill is derived from Article I of the Constitution, Section 8 ("The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises. . . "), and from the 16th Amendment to the Constitution.

 

D. INFORMATION RELATING TO UNFUNDED MANDATES

 

 

This information is provided in accordance with section 423 of the Unfunded Mandates Act of 1995 (Pub. L. No. 104-4).

The Committee has determined that the bill contains nine private sector mandates: (i) Tax on individual without acceptable health care coverage; (ii) Election to satisfy health coverage participation requirements; (iii) Responsibilities of nonelecting employers; (iv) Comparative effectiveness research trust fund; financing for trust fund; (v) Impose a surcharge for certain AGI; (vi) Modify the definition of qualified medical expenses for purposes of HRAs, health FSAs, HSAs, and Archer MSAs; (vii) Delay implementation of worldwide interest allocation until 2020; (viii) Limit eligibility for reduced treaty withholding rates based on residency of foreign parent; and (ix) Codification of economic substance doctrine and penalties for underpayments.

The Committee has determined that the bill contains one intergovernmental mandate on State, local, or tribal governments: Responsibilities of nonelecting employers.

 

E. APPLICABILITY OF HOUSE RULE XXI 5(B)

 

 

Rule XXI 5(b) of the Rules of the House of Representatives provides, in part, that "A bill or joint resolution, amendment, or conference report carrying a Federal income tax rate increase may not be considered as passed or agreed to unless so determined by a vote of not less than three-fifths of the Members voting, a quorum being present." The Committee has carefully reviewed the provisions of the bill, and states that the provisions of the bill do not involve any Federal income tax rate increases within the meaning of the rule.

 

F. TAX COMPLEXITY ANALYSIS

 

 

Section 4022(b) of the Internal Revenue Service Reform and Restructuring Act of 1998 (the "IRS Reform Act") requires the staff of the Joint Committee on Taxation (in consultation with the Internal Revenue Service and the Treasury Department) to provide a tax complexity analysis. The complexity analysis is required for all legislation reported by the Senate Committee on Finance, the House Committee on Ways and Means, or any committee of conference if the legislation includes a provision that directly or indirectly amends the Internal Revenue Code and has widespread applicability to individuals or small businesses. For each such provision identified by the staff of the Joint Committee on Taxation a summary description of the provision is provided along with an estimate of the number and type of affected taxpayers, and a discussion regarding the relevant complexity and administrative issues.

Following the analysis of the staff of the Joint Committee on Taxation are the comments of the IRS and Treasury regarding each of the provisions included in the complexity analysis.

1. Tax on individuals without acceptable health care coverage

 

Summary description of the provision

 

The provision taxes individuals who do not maintain coverage under acceptable health insurance for themselves and their qualifying children. The tax is equal to the lesser of (a) the national average premium for single or family coverage, as applicable, or (b) 2.5 percent of the excess of the taxpayer's adjusted gross income ("AGI") over the threshold filing amount. Acceptable coverage includes a health plan that covers at least an essential benefits package and that includes certain specified limits on required cost sharing, no annual or lifetime limit on covered health care items or services, certain specified minimum services, and certain requirements as to network adequacy as determined by the newly appointed Health Choices Commissioner. Acceptable coverage also includes a grandfathered plan, Medicare, Medicaid, Tricare (and other Armed Services coverage), Veterans Administration coverage, and certain other coverage. Those exempt from the penalty include: nonresident aliens, U.S. citizens and residents living abroad, those who can claim health insurance would cause financial hardship, those whose income is below the threshold for filing a Federal income tax return, and those who are properly claimed as dependents on the income tax return of another taxpayer for the taxable year. Individuals maintaining health insurance for part of the year are required to pay a pro-rated tax.

The new additional tax for failure to maintain health insurance is accompanied by new reporting requirements for insurance providers. Any insurance provider is required to provide information to the Department of Treasury and the primary insured individual. The return is required to supply the name, address, and taxpayer identification numbers of all individuals receiving. insurance under the policy by January 31 of the year following the calendar year the insurance was provided. Failure to file the required information return or to include complete and correct information on the required return is subject to the failure to file correct information returns penalty of section 6721.

 

Number of affected taxpayers

 

It is estimated that the provision will affect more than 10 percent of individual or small business tax returns.

 

Discussion

 

The provision creates a reporting requirement for providers of insurance coverage. The reporting requirement obliges the provision of the following information to both the insured individual and the Department of Treasury directly: the name of all insured on the policy, the dates of insurance coverage during the tax year, the Taxpayer Identification Numbers ("TINs") and any other information required by the Secretary. In addition, the insurer will have the added responsibility of determining which insurance plan offerings meet the standard of "qualified coverage."

For individuals for whom there is no additional tax, while the statute creates no requirement for the filing of insurance information by the taxpayer, the taxpayer will receive this information and discretion is left to the Secretary of Treasury for prescribing regulations to carry out the statute, which could include a supplemental reporting requirement from the individual. The 1040, 1040A and 1040-EZ must be amended to add a new line to reflect any additional tax. Individuals owing additional tax will be required to include the amount of the tax owed both on a new form and on the 1040, 1040A or 1040-EZ.

The Internal Revenue Service ("IRS") will be required to reprogram computers to reflect the additional rules, forms and information from employers, insurers and individuals. In addition, regulations would be needed to reflect statutory exemptions from the additional tax and resources needed to resolve disputes regarding maintenance of acceptable coverage and eligibility for exemption from additional tax.

2. Election to satisfy health coverage participation requirements and responsibilities of nonelecting employers

 

Summary description of the provision

 

The provisions create a system under which employers must elect whether to offer health benefits to employees. For employers that elect not to offer health benefits to their employees, the provisions establish a payroll tax equal to eight percent of the wages paid to employees.

Employers that elect to offer health benefits are not required to pay the payroll tax. However, employers that elect to offer health benefits but fail to comply with the rules governing offers of coverage are subject to an excise tax. In addition, beginning in the second year after enactment of the provisions, employers that elect to offer health benefits are required to make contributions, in the amount of eight percent of the average wages paid to employees, to the Health Insurance Exchange for employees who decline employer-provided coverage and instead enroll in an Exchange-participating plan. Finally, employers that elect to offer health benefits to their employees must file an additional return with the IRS containing information about the insured, the period for which coverage was provided, and such other information as the Secretary of the Treasury may require. Similar returns must be filed with the insured employees as well.

Special rules apply for certain small businesses. An employer with an annual payroll that does not exceed $250,000 is exempt from the requirement to offer health benefits or pay a payroll tax and the requirement to make contributions to the Health Insurance Exchange for employees who decline employer-provided coverage in the event that such coverage is offered. For an employer with an annual payroll from $250,000 through $400,000, the eight-percent payroll tax applicable to nonelecting employers, or the eight-percent of wages contribution to the Health Exchange Fund for coverage-declining employees, phases in ratably.

 

Number of affected taxpayers

 

It is estimated that the provision will affect more than 10 percent of small business tax returns.

 

Discussion

 

It is anticipated that small businesses will have to keep additional records and perform additional analysis to comply with the new election and coverage requirements. Small businesses will need to make an affirmative election regarding whether to be subject to the national health coverage participation requirements. Small businesses that elect to offer health benefits will be required to set up provisions for auto-enrolling their employees in one of the employer-offered health plans, and must develop and disseminate written notices informing employees of their rights and obligations relating to the automatic enrollment, including the ability to opt-out of enrollment in the employer-provided plan. Small businesses that elect to provide health coverage to their employees will be required to file an additional return with the IRS containing information about the insured, the period for which coverage was provided, and such other information as the Secretary of the Treasury may require. Similar returns must be filed with the insured employees as well. Small businesses will have to maintain records documenting their election, which employees were provided coverage, whether appropriate taxes for non-covered employees were paid, and that the business filed all necessary reports with the IRS.

It is anticipated that the IRS will have to develop new forms to capture the election by employers whether to provide qualifying health care coverage. The IRS will also have to amend existing forms to implement the provision imposing a tax on employers who fail to satisfy the health coverage participation requirement, and revise several publications to explain the election, participation requirements, and tax imposed by the provisions.

It is anticipated that the IRS will be required to make numerous computer programming changes to tax systems that support employment and excise tax forms required to be filed by employers. The computer systems will also need to be changed to accommodate the new payroll tax and excise taxes requirements. Computer programming changes will be required to accommodate the new information return that will be filed with the IRS by employers.

The Department of the Treasury will have to issue regulations or other guidance regarding employers' elections, the application of the new tax, and the exceptions for failure to comply with the applicable coverage rules and the new reporting requirements (including details as to content and how to report).

The Secretary of the Treasury will be required to coordinate enforcement of the provision with the Secretaries of Labor and Health and Human Services and the Health Choices Commissioner to ensure uniform interpretation and enforcement of the provision. The four agencies will be required to execute an interagency memorandum of understanding.

3. Distribution for medicine qualified only if for prescribed drug or insulin

 

Summary description of the provision

 

Under the provision, the cost of over-the-counter medicines may not be reimbursed with excludible income through health flexible spending arrangements under a cafeteria plan ("Health FSAs"), health reimbursement arrangements ("HRAs"), Health Savings Accounts ("HSAs"), or Archer MSAs.

 

Number of affected taxpayers

 

It is estimated that the provision will affect more than 10 percent of individual tax returns.

 

Discussion

 

Many taxpayers currently use account balances in Health FSAs, HRAs, HSAs, and Archer MSAs to purchase over-the-counter medicine such as ibuprofen, acetaminophen, cold medicine, and suntan lotion with pre-tax dollars. Some taxpayers make these purchases at the end of the year, or the end of the grace period, to avoid forfeiting amounts in Health FSAs. Taxpayers will no longer be able to use these amounts in these accounts for this purpose. As a result, less money will be allocated to these accounts and more money will be allocated to taxable wages. This change will also increase the amount of compensation subject to payroll taxes.

It is anticipated that the IRS will be required to revise the instructions to several forms and to revise several publications to reflect the changes to present law made by the provision. In addition, guidance will need to be issued withdrawing at least one Revenue Ruling and guidance may need to be issued on substantiation rules for reimbursement arrangements.

 

G. LIMITED TAX BENEFITS

 

 

Pursuant to clause 9 of rule XXI of the Rules of the House of Representatives, the Ways and Means Committee has determined that the bill as reported contains no congressional earmarks, limited tax benefits or limited tariff benefits within the meaning of that rule.

 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

 

 

In compliance with clause 3(e) of rule XIII of the Rule of the House of Representatives, changes in existing law made by the bill, as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, existing law in which no change is proposed is shown in roman):

 

* * * * * * *

 

 

----------

 

 

INTERNAL REVENUE CODE OF 1986

 

 

* * * * * * *

 

 

Subtitle A--Income Taxes

 

 

* * * * * * *

 

 

CHAPTER 1--NORMAL TAXES AND SURTAXES

 

 

* * * * * * *

 

 

Subchapter A--Determination of Tax Liability

 

 

PART I--TAX ON INDIVIDUALS

 

 

* * * * * * *

 

 

Part VIII. Health Care Related Taxes.

 

 

* * * * * * *

 

 

PART IV--CREDITS AGAINST TAX

 

 

* * * * * * *

 

 

Subpart D--Business Related Credits

 

 

Sec. 38. General business credit.

 

* * * * * * *

 

 

Sec. 45R. Small business employee health coverage credit.

 

* * * * * * *

 

 

SEC. 38. GENERAL BUSINESS CREDIT.

 

(a) * * *

(b) CURRENT YEAR BUSINESS CREDIT.--For purposes of this subpart, the amount of the current year business credit is the sum of the following credits determined for the taxable year:

 

(1) * * *
* * * * * * *
(34) the carbon dioxide sequestration credit determined under section 45Q(a) [plus]

(35) the portion of the new qualified plug-in electric drive motor vehicle credit to which section 30D(c)(1) applies[.], plus

(36) in the case of a qualified small employer (as defined in section 45R(e)), the small business employee health coverage credit determined under section 45R(a).

* * * * * * *

 

 

SEC. 45R. SMALL BUSINESS EMPLOYEE HEALTH COVERAGE CREDIT.

 

(a) IN GENERAL.--For purposes of section 38, in the case of a qualified small employer, the small business employee health coverage credit determined under this section for the taxable year is an amount equal to the applicable percentage of the qualified employee health coverage expenses of such employer for such taxable year.

(b) APPLICABLE PERCENTAGE.--

 

(1) IN GENERAL.--For purposes of this section, the applicable percentage is 50 percent.

(2) PHASEOUT BASED ON AVERAGE COMPENSATION OF EMPLOYEES.--In the case of an employer whose average annual employee compensation for the taxable year exceeds $20,000, the percentage specified in paragraph (1) shall be reduced by a number of percentage points which bears the same ratio to 50 as such excess bears to $20,000.

 

(c) LIMITATIONS.--

 

(1) PHASEOUT BASED ON EMPLOYER SIZE.--In the case of an employer who employs more than 10 qualified employees during the taxable year, the credit determined under subsection (a) shall be reduced by an amount which bears the same ratio to the amount of such credit (determined without regard to this paragraph and after the application of the other provisions of this section) as--

 

(A) the excess of--

 

(i) the number of qualified employees employed by the employer during the taxable year, over

(ii) 10, bears to

 

(B) 15.

 

(2) CREDIT NOT ALLOWED WITH RESPECT TO CERTAIN HIGHLY COMPENSATED EMPLOYEES.--No credit shall be allowed under subsection (a) with respect to qualified employee health coverage expenses paid or incurred with respect to any employee for any taxable year if the aggregate compensation paid by the employer to such employee during such taxable year exceeds $80,000.

 

(d) QUALIFIED EMPLOYEE HEALTH COVERAGE EXPENSES.--For purposes of this section--

 

(1) IN GENERAL.--The term "qualified employee health coverage expenses" means, with respect to any employer for any taxable year, the aggregate amount paid or incurred by such employer during such taxable year for coverage of any qualified employee of the employer (including any family coverage which covers such employee) under qualified health coverage.

(2) QUALIFIED HEALTH COVERAGE.--The term "qualified health coverage" means acceptable coverage (as defined in section 59B(d)) which--

 

(A) is provided pursuant to an election under section 4980H(a), and

(B) satisfies the requirements referred to in section 4980H(c).

(e) OTHER DEFINITIONS.--For purposes of this section--

 

(1) QUALIFIED SMALL EMPLOYER.--For purposes of this section, the term "qualified small employer" means any employer for any taxable year if--

 

(A) the number of qualified employees employed by such employer during the taxable year does not exceed 25, and

(B) the average annual employee compensation of such employer for such taxable year does not exceed the sum of the dollar amounts in effect under subsection (b)(2).

 

(2) QUALIFIED EMPLOYEE.--The term "qualified employee" means any employee of an employer for any taxable year of the employer if such employee received at least $5,000 of compensation from such employer for services performed in the trade or business of such employer during such taxable year.

(3) AVERAGE ANNUAL EMPLOYEE COMPENSATION.--The term "average annual employee compensation" means, with respect to any employer for any taxable year, the average amount of compensation paid by such employer to qualified employees of such employer during such taxable year.

(4) COMPENSATION.--The term "compensation" has the meaning given such term in section 408(p)(6)(A).

(5) FAMILY COVERAGE.--The term "family coverage" means any coverage other than self-only coverage.

 

(f) SPECIAL RULES.--For purposes of this section--

 

(1) SPECIAL RULE FOR PARTNERSHIPS AND SELF- EMPLOYED.--In the case of a partnership (or a trade or business carried on by an individual) which has one or more qualified employees (determined without regard to this paragraph) with respect to whom the election under 4980H(a) applies, each partner (or, in the case of a trade or business carried on by an individual, such individual) shall be treated as an employee.

(2) AGGREGATION RULE.--All persons treated as a single employer under subsection (b), (c), (m), or (o) of section 414 shall be treated as 1 employer.

(3) DENIAL OF DOUBLE BENEFIT.--Any deduction otherwise allowable with respect to amounts paid or incurred for health insurance coverage to which subsection (a) applies shall be reduced by the amount of the credit determined under this section

(4) INFLATION ADJUSTMENT.--In the case of any taxable year beginning after 2013, each of the dollar amounts in subsections (b)(2), (c)(2), and (e)(2) shall be increased by an amount equal to--

 

(A) such dollar amount, multiplied by

(B) the cost of living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins determined by substituting "calendar year 2012" for "calendar year 1992" in subparagraph (B) thereof.

 

If any increase determined under this paragraph is not a multiple of $50, such increase shall be rounded to the next lowest multiple of $50.
* * * * * * *

 

 

PART VIII--HEALTH CARE RELATED TAXES

 

 

SUBPART A. TAX ON INDIVIDUALS WITHOUT ACCEPTABLE HEALTH CARE COVERAGE.

 

 

SUBPART B. SURCHARGE ON HIGH INCOME INDIVIDUALS.

 

 

Subpart A--Tax on Individuals Without Acceptable Health Care Coverage

 

 

Sec. 59B. Tax on individuals without acceptable health care coverage.

SEC. 59B. TAX ON INDIVIDUALS WITHOUT ACCEPTABLE HEALTH CARE COVERAGE.

 

(a) TAX IMPOSED.--In the case of any individual who does not meet the requirements of subsection (d) at any time during the taxable year, there is hereby imposed a tax equal to 2.5 percent of the excess of--

 

(1) the taxpayer's modified adjusted gross income for the taxable year, over

(2) the amount of gross income specified in section 6012(a)(1) with respect to the taxpayer.

 

(b) LIMITATIONS.--

 

(1) TAX LIMITED TO AVERAGE PREMIUM.--

 

(A) IN GENERAL.--The tax imposed under subsection (a) with respect to any taxpayer for any taxable year shall not exceed the applicable national average premium for such taxable year.

(B) APPLICABLE NATIONAL AVERAGE PREMIUM.--

 

(i) IN GENERAL.--For purposes of subparagraph (A), the "applicable national average premium" means, with respect to any taxable year, the average premium (as determined by the Secretary, in coordination with the Health Choices Commissioner) for self- only coverage under a basic plan which is offered in a Health Insurance Exchange for the calendar year in which such taxable year begins.

(ii) FAILURE TO PROVIDE COVERAGE FOR MORE THAN ONE INDIVIDUAL.--In the case of any taxpayer who fails to meet the requirements of subsection (e) with respect to more than one individual during the taxable year, clause (i) shall be applied by substituting "family coverage" for "self-only coverage".

(2) PRORATION FOR PART YEAR FAILURES.--The tax imposed under subsection (a) with respect to any taxpayer for any taxable year shall not exceed the amount which bears the same ratio to the amount of tax so imposed (determined without regard to this paragraph and after application of paragraph (1)) as--

 

(A) the aggregate periods during such taxable year for which such individual failed to meet the requirements of subsection (d), bears to

(B) the entire taxable year.

(c) EXCEPTIONS.--

 

(1) DEPENDENTS.--Subsection (a) shall not apply to any individual for any taxable year if a deduction is allowable under section 151 with respect to such individual to another taxpayer for any taxable year beginning in the same calendar year as such taxable year.

(2) NONRESIDENT ALIENS.--Subsection (a) shall not apply to any individual who is a nonresident alien.

(3) INDIVIDUALS RESIDING OUTSIDE UNITED STATES.--Any qualified individual (as defined in section 911(d)) (and any qualifying child residing with such individual) shall be treated for purposes of this section as covered by acceptable coverage during the period described in subparagraph (A) or (B) of section 911(d)(1), whichever is applicable.

(4) INDIVIDUALS RESIDING IN POSSESSIONS OF THE UNITED STATES.--Any individual who is a bona fide resident of any possession of the United States (as determined under section 937(a)) for any taxable year (and any qualifying child residing with such individual) shall be treated for purposes of this section as covered by acceptable coverage during such taxable year.

(5) RELIGIOUS CONSCIENCE EXEMPTION.--

 

(A) IN GENERAL.--Subsection (a) shall not apply to any individual (and any qualifying child residing with such individual) for any period if such individual has in effect an exemption which certifies that such individual is a member of a recognized religious sect or division thereof described in section 1402(g)(1) and an adherent of established tenets or teachings of such sect or division as described in such section.

(B) EXEMPTION.--An application for the exemption described in subparagraph (A) shall be filed with the Secretary at such time and in such form and manner as the Secretary may prescribe. Any such exemption granted by the Secretary shall be effective for such period as the Secretary determines appropriate.

(d) ACCEPTABLE COVERAGE REQUIREMENT.--

 

(1) IN GENERAL.--The requirements of this subsection are met with respect to any individual for any period if such individual (and each qualifying child of such individual) is covered by acceptable coverage at all times during such period.

(2) ACCEPTABLE COVERAGE.--For purposes of this section, the term "acceptable coverage" means any of the following:

 

(A) QUALIFIED HEALTH BENEFITS PLAN COVERAGE.--Coverage under a qualified health benefits plan (as defined in section 100(c) of the America's Affordable Health Choices Act of 2009).

(B) GRANDFATHERED HEALTH INSURANCE COVERAGE; COVERAGE UNDER GRANDFATHERED EMPLOYMENT-BASED HEALTH PLAN.--Coverage under a grandfathered health insurance coverage (as defined in subsection (a) of section 102 of the America's Affordable Health Choices Act of 2009) or under a current employment-based health plan (within the meaning of subsection (b) of such section).

(C) MEDICARE.--Coverage under part A of title XVIII of the Social Security Act.

(D) MEDICAID.--Coverage for medical assistance under title XIX of the Social Security Act.

(E) MEMBERS OF THE ARMED FORCES AND DEPENDENTS (INCLUDING TRICARE).--Coverage under chapter 55 of title 10, United States Code, including similar coverage furnished under section 1781 of title 38 of such Code.

(F) VA.--Coverage under the veteran's health care program under chapter 17 of title 38, United States Code, but only if the coverage for the individual involved is determined by the Secretary in coordination with the Health Choices Commissioner to be not less than the level specified by the Secretary of the Treasury, in coordination with the Secretary of Veteran's Affairs and the Health Choices Commissioner, based on the individual's priority for services as provided under section 1705(a) of such title.

(G) OTHER COVERAGE.--Such other health benefits coverage as the Secretary, in coordination with the Health Choices Commissioner, recognizes for purposes of this subsection.

(e) OTHER DEFINITIONS AND SPECIAL RULES.--

 

(1) QUALIFYING CHILD.--For purposes of this section, the term "qualifying child" has the meaning given such term by section 152(c). With respect to any period during which health coverage for a child must be provided by an individual pursuant to a child support order, such child shall be treated as a qualifying child of such individual (and not as a qualifying child of any other individual).

(2) BASIC PLAN.--For purposes of this section, the term "basic plan" has the meaning given such term under section 100(c) of the America's Affordable Health Choices Act of 2009.

(3) HEALTH INSURANCE EXCHANGE.--For purposes of this section, the term "Health Insurance Exchange" has the meaning given such term under section 100(c) of the America's Affordable Health Choices Act of 2009, including any State-based health insurance exchange approved for operation under section 208 of such Act.

(4) FAMILY COVERAGE.--For purposes of this section, the term "family coverage" means any coverage other than self-only coverage.

(5) MODIFIED ADJUSTED GROSS INCOME.--For purposes of this section, the term "modified adjusted gross income" means adjusted gross income--

 

(A) determined without regard to section 911, and

(B) increased by the amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax.

 

(6) NOT TREATED AS TAX IMPOSED BY THIS CHAPTER FOR CERTAIN PURPOSES.--The tax imposed under this section shall not be treated as tax imposed by this chapter for purposes of determining the amount of any credit under this chapter or for purposes of section 55.

 

(f) REGULATIONS.--The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance (developed in coordination with the Health Choices Commissioner) which provide--

 

(1) exemption from the tax imposed under subsection (a) in cases of de minimis lapses of acceptable coverage, and

(2) a process for applying for a waiver of the application of subsection (a) in cases of hardship.

Subpart B--Surcharge on High Income Individuals

 

 

Sec. 59C. Surcharge on high income individuals.

SEC. 59C. SURCHARGE ON HIGH INCOME INDIVIDUALS.

 

(a) GENERAL RULE.--In the case of a taxpayer other than a corporation, there is hereby imposed (in addition to any other tax imposed by this subtitle) a tax equal to--

 

(1) 1 percent of so much of the modified adjusted gross income of the taxpayer as exceeds $350,000 but does not exceed $500,000,

(2) 1.5 percent of so much of the modified adjusted gross income of the taxpayer as exceeds $500,000 but does not exceed $1,000,000, and

(3) 5.4 percent of so much of the modified adjusted gross income of the taxpayer as exceeds $1,000,000.

 

(b) TAXPAYERS NOT MAKING A JOINT RETURN.--In the case of any taxpayer other than a taxpayer making a joint return under section 6013 or a surviving spouse (as defined in section 2(a)), subsection (a) shall be applied by substituting for each of the dollar amounts therein (after any increase determined under subsection (e)) a dollar amount equal to--

 

(1) 50 percent of the dollar amount so in effect in the case of a married individual filing a separate return, and

(2) 80 percent of the dollar amount so in effect in any other case.

 

(c) ADJUSTMENTS BASED ON FEDERAL HEALTH REFORM SAVINGS.--

 

(1) IN GENERAL.--Except as provided in paragraph (2), in the case of any taxable year beginning after December 31, 2012, subsection (a) shall be applied--

 

(A) by substituting "2 percent" for "1 percent", and

(B) by substituting "3 percent" for "1.5 percent".

 

(2) ADJUSTMENTS BASED ON EXCESS FEDERAL HEALTH REFORM SAVINGS.--

 

(A) EXCEPTION IF FEDERAL HEALTH REFORM SAVINGS SIGNIFICANTLY EXCEEDS BASE AMOUNT.--If the excess Federal health reform savings is more than $150,000,000,000 but not more than $175,000,000,000, paragraph (1) shall not apply.

(B) FURTHER ADJUSTMENT FOR ADDITIONAL FEDERAL HEALTH REFORM SAVINGS.--If the excess Federal health reform savings is more than $175,000,000,000, paragraphs (1) and (2) of subsection (a) (and paragraph (1) of this subsection) shall not apply to any taxable year beginning after December 31, 2012.

(C) EXCESS FEDERAL HEALTH REFORM SAVINGS.-- For purposes of this subsection, the term "excess Federal health reform savings" means the excess of--

 

(i) the Federal health reform savings, over

(ii) $525,000,000,000.

 

(D) FEDERAL HEALTH REFORM SAVINGS.--The term "Federal health reform savings" means the sum of the amounts described in subparagraphs (A) and (B) of paragraph (3).

 

(3) DETERMINATION OF FEDERAL HEALTH REFORM SAVINGS.-- Not later than December 1, 2012, the Director of the Office of Management and Budget shall--

 

(A) determine, on the basis of the study conducted under paragraph (4), the aggregate reductions in Federal expenditures which have been achieved as a result of the provisions of, and amendments made by, division B of the America's Affordable Health Choices Act of 2009 during the period beginning on October 1, 2009, and ending with the latest date with respect to which the Director has sufficient data to make such determination, and

(B) estimate, on the basis of such study and the determination under subparagraph (A), the aggregate reductions in Federal expenditures which will be achieved as a result of such provisions and amendments during so much of the period beginning with fiscal year 2010 and ending with fiscal year 2019 as is not taken into account under subparagraph (A).

 

(4) STUDY OF FEDERAL HEALTH REFORM SAVINGS.--The Director of the Office of Management and Budget shall conduct a study of the reductions in Federal expenditures during fiscal years 2010 through 2019 which are attributable to the provisions of, and amendments made by, division B of the America's Affordable Health Choices Act of 2009. The Director shall complete such study not later than December 1, 2012.

(5) REDUCTIONS IN FEDERAL EXPENDITURES DETERMINED WITHOUT REGARD TO PROGRAM INVESTMENTS.--For purposes of paragraphs (3) and (4), reductions in Federal expenditures shall be determined without regard to section 1121 of the America's Affordable Health Choices Act of 2009 and other program investments under division B thereof.

 

(d) MODIFIED ADJUSTED GROSS INCOME.--For purposes of this section, the term "modified adjusted gross income" means adjusted gross income reduced by any deduction (not taken into account in determining adjusted gross income) allowed for investment interest (as defined in section 163(d)). In the case of an estate or trust, adjusted gross income shall be determined as provided in section 67(e).

(e) INFLATION ADJUSTMENTS.--

 

(1) IN GENERAL.--In the case of taxable years beginning after 2011, the dollar amounts in subsection (a) shall be increased by an amount equal to--

 

(A) such dollar amount, multiplied by

(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting "calendar year 2010" for "calendar year 1992" in subparagraph (B) thereof.

 

(2) ROUNDING.--If any amount as adjusted under paragraph (1) is not a multiple of $5,000, such amount shall be rounded to the next lowest multiple of $5,000.

 

(f) SPECIAL RULES.--

 

(1) NONRESIDENT ALIEN.--In the case of a nonresident alien individual, only amounts taken into account in connection with the tax imposed under section 871(b) shall be taken into account under this section.

(2) CITIZENS AND RESIDENTS LIVING ABROAD.--The dollar amounts in effect under subsection (a) (after the application of subsections (b) and (e)) shall be decreased by the excess of--

 

(A) the amounts excluded from the taxpayer's gross income under section 911, over

(B) the amounts of any deductions or exclusions disallowed under section 911(d)(6) with respect to the amounts described in subparagraph (A).

 

(3) CHARITABLE TRUSTS.--Subsection (a) shall not apply to a trust all the unexpired interests in which are devoted to one or more of the purposes described in section 170(c)(2)(B).

(4) NOT TREATED AS TAX IMPOSED BY THIS CHAPTER FOR CERTAIN PURPOSES.--The tax imposed under this section shall not be treated as tax imposed by this chapter for purposes of determining the amount of any credit under this chapter or for purposes of section 55.

* * * * * * *

 

 

Subchapter B--Computation of Taxable Income

 

 

* * * * * * *

 

 

PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME

 

 

* * * * * * *

 

 

SEC. 105. AMOUNTS RECEIVED UNDER ACCIDENT AND HEALTH PLANS.

 

(a) * * *

(b) AMOUNTS EXPENDED FOR MEDICAL CARE.--Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include amounts referred to in subsection (a) if such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care (as defined in section 213(d)) of the taxpayer, his spouse, [and his dependents] his dependents (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) and any eligible beneficiary (within the meaning of section 106(f)) with respect to the taxpayer. Any child to whom section 152(e) applies shall be treated as a dependent of both parents for purposes of this subsection.

* * * * * * *

 

 

SEC. 106. CONTRIBUTIONS BY EMPLOYER TO ACCIDENT AND HEALTH PLANS.

 

(a) * * *
* * * * * * *

 

 

(f) REIMBURSEMENTS FOR MEDICINE RESTRICTED TO PRESCRIBED DRUGS AND INSULIN.--For purposes of this section and section 105, reimbursement for expenses incurred for a medicine or a drug shall be treated as a reimbursement for medical expenses only if such medicine or drug is a prescribed drug or is insulin.

(g) COVERAGE PROVIDED FOR ELIGIBLE BENEFICIARIES OF EMPLOYEES.--

 

(1) IN GENERAL.--Subsection (a) shall apply with respect to any eligible beneficiary of the employee.

(2) ELIGIBLE BENEFICIARY.--For purposes of this subsection, the term "eligible beneficiary" means any individual who is eligible to receive benefits or coverage under an accident or health plan.

* * * * * * *

 

 

PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS

 

 

* * * * * * *

 

 

SEC. 162. TRADE OR BUSINESS EXPENSES.

 

(a) * * *
* * * * * * *

 

 

(l) SPECIAL RULES FOR HEALTH INSURANCE COSTS OF SELF-EMPLOYED INDIVIDUALS.--

 

[(1) ALLOWANCE OF DEDUCTION.--

 

[(A) IN GENERAL.--In the case of an individual who is an employee within the meaning of section 401(c)(1), there shall be allowed as a deduction under this section an amount equal to the applicable percentage of the amount paid during the taxable year for insurance which constitutes medical care for the taxpayer, his spouse, and dependents.

[(B) APPLICABLE PERCENTAGE.--For purposes of subparagraph (A), the applicable percentage shall be determined under the following table:

 ----------------------------------------

 

 [For taxable years

 

   beginning in         The applicable

 

   calendar year--        percentage is--

 

 ----------------------------------------

 

   1999 through 2001       60

 

   2002                    70

 

   2003 and thereafter    100.]

 

 ----------------------------------------

 

(1) ALLOWANCE OF DEDUCTION.--In the case of a taxpayer who is an employee within the meaning of section 401(c)(1), there shall be allowed as a deduction under this section an amount equal to the amount paid during the taxable year for insurance which constitutes medical care for--

 

(A) the taxpayer,

(B) the taxpayer's spouse,

(C) the taxpayer's dependents, and

(D) any individual who--

 

(i) satisfies the age requirements of section 152(c)(3)(A),

(ii) bears a relationship to the taxpayer described in section 152(d)(2)(H), and

(iii) meets the requirements of section 152(d)(1)(C), and

 

(E) one individual who--

 

(i) does not satisfy the age requirements of section 152(c)(3)(A),

(ii) bears a relationship to the taxpayer described in section 152(d)(2)(H),

(iii) meets the requirements of section 152(d)(1)(D), and

(iv) is not the spouse of the taxpayer and does not bear any relationship to the taxpayer described in subparagraphs (A) through (G) of section 152(d)(2).

(2) LIMITATIONS.--

 

(A) * * *

(B) OTHER COVERAGE.--Paragraph (1) shall not apply to any taxpayer for any calendar month for which the taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the spouse, any dependent, or individual described in subparagraph (D) or (E) of paragraph (1) with respect to of the taxpayer. The preceding sentence shall be applied separately with respect to--

 

(i) * * *
* * * * * * *

 

 

PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS

 

 

* * * * * * *

 

 

SEC. 220. ARCHER MSAs.

 

(a) * * *
* * * * * * *

 

 

(d) ARCHER MSA.--For purposes of this section--

 

(1) * * *

(2) QUALIFIED MEDICAL EXPENSES.--

 

(A) IN GENERAL.--The term "qualified medical expenses" means, with respect to an account holder, amounts paid by such holder for medical care (as defined in section 213(d)) for such individual, the spouse of such individual, and any dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of such individual, but only to the extent such amounts are not compensated for by insurance or otherwise. Such term shall include an amount paid for medicine or a drug only if such medicine or drug is a prescribed drug or is insulin.
* * * * * * *

 

 

SEC. 223. HEALTH SAVINGS ACCOUNTS.

 

(a) * * *
* * * * * * *

 

 

(d) HEALTH SAVINGS ACCOUNT.--For purposes of this section--

 

(1) * * *

(2) QUALIFIED MEDICAL EXPENSES.--

 

(A) IN GENERAL.--The term "qualified medical expenses" means, with respect to an account beneficiary, amounts paid by such beneficiary for medical care (as defined in section 213(d) for such individual, the spouse of such individual, and any dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of such individual, but only to the extent such amounts are not compensated for by insurance or otherwise. Such term shall include an amount paid for medicine or a drug only if such medicine or drug is a prescribed drug or is insulin.
* * * * * * *

 

 

Subchapter F--Exempt Organizations

 

 

* * * * * * *

 

 

PART I--GENERAL RULE

 

 

* * * * * * *

 

 

SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN TRUSTS, ETC.

 

(a) * * *

 

* * * * * * *

 

(c) LIST OF EXEMPT ORGANIZATIONS.--The following organizations are referred to in subsection (a):

 

(1) * * *
* * * * * * *
(9) Voluntary employees' beneficiary associations providing for the payment of life, sick, accident, or other benefits to the members of such association or their dependents or designated beneficiaries, if no part of the net earnings of such association inures (other than through such payments) to the benefit of any private shareholder or individual. For purposes of providing for the payment of sick and accident benefits to members of such an association and their dependents, the term "dependents" shall include any individual who is an eligible beneficiary (within the meaning of section 106(f)), as determined under the terms of a medical benefit, health insurance, or other program under which members and their dependents are entitled to sick and accident benefits.
* * * * * * *

 

 

Subchapter N--Tax Based on Income From Sources Within or Without the United States

 

 

* * * * * * *

 

 

PART I--SOURCE RULES AND OTHER GENERAL RULES RELATING TO FOREIGN INCOME

 

 

* * * * * * *

 

 

SEC. 864. DEFINITIONS AND SPECIAL RULES.

 

(a) * * *

 

* * * * * * *

 

(f) ELECTION TO ALLOCATE INTEREST, ETC. ON WORLDWIDE BASIS.-- For purposes of this subchapter, at the election of the worldwide affiliated group--

 

(1) * * *
* * * * * * *
(5) ELECTION TO EXPAND FINANCIAL INSTITUTION GROUP OF WORLDWIDE.--group (A) * * *
* * * * * * *
(D) ELECTION.--An election under this paragraph with respect to any financial institution group may be made only by the common parent of the pre-election worldwide affiliated group and may be made only for the first taxable year beginning after [December 31, 2010] December 31, 2019, in which such affiliated group includes 1 or more financial corporations. Such an election, once made, shall apply to all financial corporations which are members of the electing financial institution group for such taxable year and all subsequent years unless revoked with the consent of the Secretary.
* * * * * * *
(6) ELECTION.--An election to have this subsection apply with respect to any worldwide affiliated group may be made only by the common parent of the domestic affiliated group referred to in paragraph (1)(C) and may be made only for the first taxable year beginning after [December 31, 2010] December 31, 2019, in which a worldwide affiliated group exists which includes such affiliated group and at least 1 foreign corporation. Such an election, once made, shall apply to such common parent and all other corporations which are members of such worldwide affiliated group for such taxable year and all subsequent years unless revoked with the consent of the Secretary.

[(7) TRANSITION.--In the case of the first taxable year to which this subsection applies, the increase (if any) in the amount of the interest expense allocable to sources within the United States by reason of the application of this subsection shall be 30 percent of the amount of such increase determined without regard to this paragraph.]

* * * * * * *

 

 

PART II--NONRESIDENT ALIENS AND FOREIGN CORPORATIONS

 

 

* * * * * * *

 

 

Subpart D--Miscellaneous Provisions

 

 

* * * * * * *

 

 

SEC. 894. INCOME AFFECTED BY TREATY.

 

(a) * * *
* * * * * * *

 

 

(d) LIMITATION ON TREATY BENEFITS FOR CERTAIN DEDUCTIBLE PAYMENTS.--

 

(1) IN GENERAL.--In the case of any deductible related-party payment, any withholding tax imposed under chapter 3 (and any tax imposed under subpart A or B of this part) with respect to such payment may not be reduced under any treaty of the United States unless any such withholding tax would be reduced under a treaty of the United States if such payment were made directly to the foreign parent corporation.

(2) DEDUCTIBLE RELATED-PARTY PAYMENT.--For purposes of this subsection, the term "deductible related-party payment" means any payment made, directly or indirectly, by any person to any other person if the payment is allowable as a deduction under this chapter and both persons are members of the same foreign controlled group of entities.

(3) FOREIGN CONTROLLED GROUP OF ENTITIES.--For purposes of this subsection--

 

(A) IN GENERAL.--The term "foreign controlled group of entities" means a controlled group of entities the common parent of which is a foreign corporation.

(B) CONTROLLED GROUP OF ENTITIES.--The term "controlled group of entities" means a controlled group of corporations as defined in section 1563(a)(1), except that--

 

(i) "more than 50 percent" shall be substituted for "at least 80 percent" each place it appears therein, and

(ii) the determination shall be made without regard to subsections (a)(4) and (b)(2) of section 1563.

 

A partnership or any other entity (other than a corporation) shall be treated as a member of a controlled group of entities if such entity is controlled (within the meaning of section 954(d)(3)) by members of such group (including any entity treated as a member of such group by reason of this sentence).

 

(4) FOREIGN PARENT CORPORATION.--For purposes of this subsection, the term "foreign parent corporation" means, with respect to any deductible related-party payment, the common parent of the foreign controlled group of entities referred to in paragraph (3)(A).

(5) REGULATIONS.--The Secretary may prescribe such regulations or other guidance as are necessary or appropriate to carry out the purposes of this subsection, including regulations or other guidance which provide for--

 

(A) the treatment of two or more persons as members of a foreign controlled group of entities if such persons would be the common parent of such group if treated as one corporation, and

(B) the treatment of any member of a foreign controlled group of entities as the common parent of such group if such treatment is appropriate taking into account the economic relationships among such entities.

* * * * * * *

 

 

Subtitle C--Employment Taxes

 

 

* * * * * * *

 

 

CHAPTER 21--FEDERAL INSURANCE CONTRIBUTIONS ACT

 

 

* * * * * * *

 

 

Subchapter B--Tax on Employers

 

 

* * * * * * *

 

 

SEC. 3111. RATE OF TAX.

 

(a) * * *
* * * * * * *

 

 

(c) EMPLOYERS ELECTING TO NOT PROVIDE HEALTH BENEFITS.--

 

(1) IN GENERAL.--In addition to other taxes, there is hereby imposed on every nonelecting employer an excise tax, with respect to having individuals in his employ, equal to 8 percent of the wages (as defined in section 3121(a)) paid by him with respect to employment (as defined in section 3121(b)).

(2) SPECIAL RULES FOR SMALL EMPLOYERS.--

 

(A) IN GENERAL.--In the case of any employer who is small employer for any calendar year, paragraph (1) shall be applied by substituting the applicable percentage determined in accordance with the following table for "8 percent":
 If the annual payroll of such    The applicable

 

   employer for the preceding       percentage is:

 

   calendar year:

 

 

     Does not exceed $250,000....   0 percent

 

     Exceeds $250,000, but does

 

       not exceed $300,000.......   2 percent

 

     Exceeds $300,000, but does

 

       not exceed $350,000.......   4 percent

 

     Exceeds $350,000, but does

 

       not exceed $400,000.......   6 percent

 

(B) SMALL EMPLOYER.--For purposes of this paragraph, the term "small employer" means any employer for any calendar year if the annual payroll of such employer for the preceding calendar year does not exceed $400,000.

(C) ANNUAL PAYROLL.--For purposes of this paragraph, the term "annual payroll" means, with respect to any employer for any calendar year, the aggregate wages (as defined in section 3121(a)) paid by him with respect to employment (as defined in section 3121(b)) during such calendar year.

 

(3) NONELECTING EMPLOYER.--For purposes of paragraph (1), the term "nonelecting employer" means any employer for any period with respect to which such employer does not have an election under section 4980H(a) in effect.

(4) SPECIAL RULE FOR SEPARATE ELECTIONS.--In the case of an employer who makes a separate election described in section 4980H(a)(4) for any period, paragraph (1) shall be applied for such period by taking into account only the wages paid to employees who are not subject to such election.

(5) AGGREGATION; PREDECESSORS.--For purposes of this subsection--

 

(A) all persons treated as a single employer under subsection (b), (c), (m), or (o) of section 414 shall be treated as 1 employer, and

(B) any reference to any person shall be treated as including a reference to any predecessor of such person.

[(c)] (d) Relief From Taxes in Cases Covered by Certain International Agreements.--During any period in which there is in effect an agreement entered into pursuant to section 233 of the Social Security Act with any foreign country, wages received by or paid to an individual shall be exempt from the taxes imposed by [this section] subsections (a) and (b) to the extent that such wages are subject under such agreement exclusively to the laws applicable to the social security system of such foreign country.

* * * * * * *

 

 

Subchapter C--General Provisions

 

 

* * * * * * *

 

 

SEC. 3121. DEFINITIONS.

 

(a) Wages.--For purposes of this chapter, the term "wages" means all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include--

 

(1) * * *

(2) the amount of any payment (including any amount paid by an employer for insurance or annuities, or into a fund, to provide for any such payment) made to, or on behalf of, an employee [or any of his dependents], any of his dependents, or any eligible beneficiary (within the meaning of section 106(g)) with respect to the employee under a plan or system established by an employer which makes provision for his employees generally (or for his employees generally [and their dependents] and such employees' dependents and eligible beneficiaries (within the meaning of section 106(g))) or for a class or classes of his employees (or for a class or classes of his employees [and their dependents] and such employees' dependents and eligible beneficiaries (within the meaning of section 106(g)) ), on account of--

 

(A) sickness or accident disability (but, in the case of payments made to an employee [or any of his dependents,], any of his dependents, or any eligible beneficiary (within the meaning of section 106(g)) with respect to the employee, this subparagraph shall exclude from the term "wages" only payments which are received under a workman's compensation law), or
* * * * * * *

 

(aa) SPECIAL RULES FOR TAX ON EMPLOYERS ELECTING NOT TO PROVIDE HEALTH BENEFITS.--For purposes of section 3111(c)--

 

(1) Paragraphs (1), (5), and (19) of subsection (b) shall not apply.

(2) Paragraph (7) of subsection (b) shall apply by treating all services as not covered by the retirement systems referred to in subparagraphs (C) and (F) thereof.

(3) Subsection (e) shall not apply and the term "State" shall include the District of Columbia.

 

* * * * * * *

 

 

CHAPTER 22--RAILROAD RETIREMENT TAX ACT

 

 

* * * * * * *

 

 

Subchapter C--Tax on Employers

 

 

* * * * * * *

 

 

SEC. 3221. RATE OF TAX.

 

(a) * * *
* * * * * * *

 

 

(c) EMPLOYERS ELECTING TO NOT PROVIDE HEALTH BENEFITS.--

 

(1) IN GENERAL.--In addition to other taxes, there is hereby imposed on every nonelecting employer an excise tax, with respect to having individuals in his employ, equal to 8 percent of the compensation paid during any calendar year by such employer for services rendered to such employer.

(2) Exception for small employers.--Rules similar to the rules of section 3111(c)(2) shall apply for purposes of this subsection.

(3) Nonelecting employer.--For purposes of paragraph (1), the term "nonelecting employer" means any employer for any period with respect to which such employer does not have an election under section 4980H(a) in effect.

(4) SPECIAL RULE FOR SEPARATE ELECTIONS.--In the case of an employer who makes a separate election described in section 4980H(a)(4) for any period, subsection (a) shall be applied for such period by taking into account only the wages paid to employees who are not subject to such election.

 

[(c)] (d) CROSS REFERENCE.--For application of different contribution bases with respect to the taxes imposed by [subsections (a) and (b), see section 3231(e)(2)] this section, see paragraphs (2) and (13)(B) of section 3231(e).
* * * * * * *

 

 

Subchapter D--General Provisions

 

 

* * * * * * *

 

 

SEC. 3231. DEFINITIONS.

 

(a) * * *
* * * * * * *

 

 

(e) COMPENSATION.--For purposes of this chapter--

 

(1) The term "compensation" means any form of money remuneration paid to an individual for services rendered as an employee to one or more employers. Such term does not include (i) the amount of any payment (including any amount paid by an employer for insurance or annuities, or into a fund, to provide for any such payment) made to, or on behalf of, an employee [or any of his dependents], any of his dependents, or any eligible beneficiary (within the meaning of section 106(g)) with respect to the employee, under a plan or system established by an employer which makes provision for his employees generally (or for his employees generally [and their dependents] and such employees' dependents and eligible beneficiaries (within the meaning of section 106(g))) or for a class or classes of his employees (or for a class or classes of his employees [and their dependents] and such employees' dependents and eligible beneficiaries (within the meaning of section 106(g))), on account of sickness or accident disability or medical or hospitalization expenses in connection with sickness or accident disability or death, except that this clause does not apply to a payment for group-term life insurance to the extent that such payment is includible in the gross income of the employee, (ii) tips (except as is provided under paragraph (3)), (iii) an amount paid specifically - either as an advance, as reimbursement or allowance - for traveling or other bona fide and necessary expenses incurred or reasonably expected to be incurred in the business of the employer provided any such payment is identified by the employer either by a separate payment or by specifically indicating the separate amounts where both wages and expense reimbursement or allowance are combined in a single payment, or (iv) any remuneration which would not (if chapter 21 applied to such remuneration) be treated as wages (as defined in section 3121(a)) by reason of section 3121(a)(5). Such term does not include remuneration for service which is performed by a nonresident alien individual for the period he is temporarily present in the United States as a nonimmigrant under subparagraph (F), (J), (M), or (Q) of section 101(a)(15) of the Immigration and Nationality Act, as amended, and which is performed to carry out the purpose specified in subparagraph (F), (J), (M), or (Q), as the case may be. For the purpose of determining the amount of taxes under sections 3201 and 3221, compensation earned in the service of a local lodge or division of a railway-labor-organization employer shall be disregarded with respect to any calendar month if the amount thereof is less than $25. Compensation for service as a delegate to a national or international convention of a railway labor organization defined as an "employer" in subsection (a) of this section shall be disregarded for purposes of determining the amount of taxes due pursuant to this chapter if the individual rendering such service has not previously rendered service, other than as such a delegate, which may be included in his "years of service" for purposes of the Railroad Retirement Act. Nothing in the regulations prescribed for purposes of chapter 24 (relating to wage withholding) which provides an exclusion from "wages" as used in such chapter shall be construed to require a similar exclusion from "compensation" in regulations prescribed for purposes of this chapter.
* * * * * * *

 

 

(13) SPECIAL RULES FOR TAX ON EMPLOYERS ELECTING NOT TO PROVIDE HEALTH BENEFITS.--For purposes of section 3221(c)--

 

(A) Paragraph (1) shall be applied without regard to the third sentence thereof.

(B) Paragraph (2) shall not apply.

* * * * * * *

 

 

CHAPTER 23--FEDERAL UNEMPLOYMENT TAX ACT

 

 

* * * * * * *

 

 

SEC. 3306. DEFINITIONS.

 

(a) * * *

(b) WAGES.--For purposes of this chapter, the term "wages" means all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include--

 

(1) * * *

(2) the amount of any payment (including any amount paid by an employer for insurance or annuities, or into a fund, to provide for any such payment) made to, or on behalf of, an employee [or any of his dependents], any of his dependents, or any eligible beneficiary (within the meaning of section 106(f)) with respect to the employee, under a plan or system established by an employer which makes provision for his employees generally (or for his employees generally [and their dependents] and such employees' dependents and eligible beneficiaries (within the meaning of section 106(g))) or for a class or classes of his employees (or for a class or classes of his employees [and their dependents] and such employees' dependents and eligible beneficiaries (within the meaning of section 106(g))), on account of--

 

(A) sickness or accident disability (but, in the case of payments made to an employee [or any of his dependents], any of his dependents, or any eligible beneficiary (within the meaning of section 106(g)) with respect to the employee, this subparagraph shall exclude from the term "wages" only payments which are received under a workmen's compensation law), or
* * * * * * *

 

 

CHAPTER 24--COLLECTION OF INCOME TAX AT SOURCE ON WAGES

 

 

* * * * * * *

 

 

SEC. 3401. DEFINITIONS.

 

(a) WAGES.--For purposes of this chapter, the term "wages" means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include remuneration paid--

 

(1) * * *
* * * * * * *

 

 

(22) any payment made to or for the benefit of an employee if at the time of such payment it is reasonable to believe that the employee will be able to exclude such payment from income under section 106(d); [or]

(23) for any benefit or payment which is excludable from the gross income of the employee under section 139B(b)[.]; or

(24) for any payment made to or for the benefit of an employee or any eligible beneficiary (within the meaning of section 106(f)) if at the time of such payment it is reasonable to believe that the employee will be able to exclude such payment from income under section 106 or under section 105 by reference in section 105(b) to section 106(f).

* * * * * * *

 

 

Subtitle D--Miscellaneous Excise Taxes

 

 

CHAPTER 31--RETAIL EXCISE TAXES.

 

 

* * * * * * *

 

 

[CHAPTER 34--POLICIES ISSUED BY FOREIGN INSURERS]

 

 

CHAPTER 34--TAXES ON CERTAIN INSURANCE POLICIES

 

 

* * * * * * *

 

 

[CHAPTER 34--POLICIES ISSUED BY FOREIGN INSURERS]

 

 

CHAPTER 34--TAXES ON CERTAIN INSURANCE POLICIES

 

 

SUBCHAPTER A. POLICIES ISSUED BY FOREIGN INSURERS

 

 

SUBCHAPTER B. INSURED AND SELF-INSURED HEALTH PLANS

 

 

Subchapter A--Policies Issued By Foreign Insurers

 

 

* * * * * * *

 

 

Subchapter B--Insured and Self-Insured Health Plans

 

 

Sec. 4375. Health insurance.

Sec. 4376. Self-insured health plans.

Sec. 4377. Definitions and special rules.

SEC. 4375. HEALTH INSURANCE.

 

(a) IMPOSITION OF FEE.--There is hereby imposed on each specified health insurance policy for each policy year a fee equal to the fair share per capita amount determined under section 9511(c)(1) multiplied by the average number of lives covered under the policy.

(b) LIABILITY FOR FEE.--The fee imposed by subsection (a) shall be paid by the issuer of the policy.

(c) SPECIFIED HEALTH INSURANCE POLICY.--For purposes of this section:

 

(1) IN GENERAL.--Except as otherwise provided in this section, the term "specified health insurance policy" means any accident or health insurance policy issued with respect to individuals residing in the United States.

(2) EXEMPTION FOR CERTAIN POLICIES.--The term "specified health insurance policy" does not include any insurance if substantially all of its coverage is of excepted benefits described in section 9832(c).

(3) TREATMENT OF PREPAID HEALTH COVERAGE ARRANGEMENTS.--

 

(A) IN GENERAL.--In the case of any arrangement described in subparagraph (B)--

 

(i) such arrangement shall be treated as a specified health insurance policy, and

(ii) the person referred to in such subparagraph shall be treated as the issuer.

 

(B) DESCRIPTION OF ARRANGEMENTS.--An arrangement is described in this subparagraph if under such arrangement fixed payments or premiums are received as consideration for any person's agreement to provide or arrange for the provision of accident or health coverage to residents of the United States, regardless of how such coverage is provided or arranged to be provided.
SEC. 4376. SELF-INSURED HEALTH PLANS.

 

(a) IMPOSITION OF FEE.--In the case of any applicable self-insured health plan for each plan year, there is hereby imposed a fee equal to the fair share per capita amount determined under section 9511(c)(1) multiplied by the average number of lives covered under the plan.

(b) LIABILITY FOR FEE.--

 

(1) IN GENERAL.--The fee imposed by subsection (a) shall be paid by the plan sponsor.

(2) PLAN SPONSOR.--For purposes of paragraph (1) the term "plan sponsor" means--

 

(A) the employer in the case of a plan established or maintained by a single employer,

(B) the employee organization in the case of a plan established or maintained by an employee organization,

(C) in the case of--

 

(i) a plan established or maintained by 2 or more employers or jointly by 1 or more employers and 1 or more employee organizations,

(ii) a multiple employer welfare arrangement, or

(iii) a voluntary employees' beneficiary association described in section 501(c)(9),

 

the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan, or

(D) the cooperative or association described in subsection (c)(2)(F) in the case of a plan established or maintained by such a cooperative or association.

(c) APPLICABLE SELF-INSURED HEALTH PLAN.--For purposes of this section, the term "applicable self-insured health plan" means any plan for providing accident or health coverage if--

 

(1) any portion of such coverage is provided other than through an insurance policy, and

(2) such plan is established or maintained--

 

(A) by one or more employers for the benefit of their employees or former employees,

(B) by one or more employee organizations for the benefit of their members or former members,

(C) jointly by 1 or more employers and 1 or more employee organizations for the benefit of employees or former employees,

(D) by a voluntary employees' beneficiary association described in section 501(c)(9),

(E) by any organization described in section 501(c)(6), or

(F) in the case of a plan not described in the preceding subparagraphs, by a multiple employer welfare arrangement (as defined in section 3(40) of Employee Retirement Income Security Act of 1974 ), a rural electric cooperative (as defined in section 3(40)(B)(iv) of such Act), or a rural telephone cooperative association (as defined in section 3(40)(B)(v) of such Act).

SEC. 4377. DEFINITIONS AND SPECIAL RULES.

 

(a) DEFINITIONS.--For purposes of this subchapter--

 

(1) ACCIDENT AND HEALTH COVERAGE.--The term "accident and health coverage" means any coverage which, if provided by an insurance policy, would cause such policy to be a specified health insurance policy (as defined in section 4375(c)).

(2) INSURANCE POLICY.--The term "insurance policy" means any policy or other instrument whereby a contract of insurance is issued, renewed, or extended.

(3) UNITED STATES.--The term "United States" includes any possession of the United States.

 

(b) TREATMENT OF GOVERNMENTAL ENTITIES.--

 

(1) IN GENERAL.--For purposes of this subchapter--

 

(A) the term "person" includes any governmental entity, and

(B) notwithstanding any other law or rule of law, governmental entities shall not be exempt from the fees imposed by this subchapter except as provided in paragraph (2).

 

(2) TREATMENT OF EXEMPT GOVERNMENTAL PROGRAMS.--In the case of an exempt governmental program, no fee shall be imposed under section 4375 or section 4376 on any covered life under such program.

(3) EXEMPT GOVERNMENTAL PROGRAM DEFINED.--For purposes of this subchapter, the term "exempt governmental program" means--

 

(A) any insurance program established under title XVIII of the Social Security Act,

(B) the medical assistance program established by title XIX or XXI of the Social Security Act,

(C) any program established by Federal law for providing medical care (other than through insurance policies) to individuals (or the spouses and dependents thereof) by reason of such individuals being--

 

(i) members of the Armed Forces of the United States, or

(ii) veterans, and

 

(D) any program established by Federal law for providing medical care (other than through insurance policies) to members of Indian tribes (as defined in section 4(d) of the Indian Health Care Improvement Act).
(c) TREATMENT AS TAX.--For purposes of subtitle F, the fees imposed by this subchapter shall be treated as if they were taxes.

(d) NO COVER OVER TO POSSESSIONS.--Notwithstanding any other provision of law, no amount collected under this subchapter shall be covered over to any possession of the United States.

* * * * * * *

 

 

CHAPTER 43--QUALIFIED PENSION, ETC., PLANS

 

 

Sec. 4971. Taxes on failure to meet minimum funding standards

* * * * * * *

Sec. 4980H. Election with respect to health coverage participation requirements.

 

* * * * * * *

 

 

SEC. 4980H. ELECTION WITH RESPECT TO HEALTH COVERAGE PARTICIPATION REQUIREMENTS.

 

(a) ELECTION OF EMPLOYER RESPONSIBILITY TO PROVIDE HEALTH COVERAGE.--

 

(1) IN GENERAL.--Subsection (b) shall apply to any employer with respect to whom an election under paragraph (2) is in effect.

(2) TIME AND MANNER.--An employer may make an election under this paragraph at such time and in such form and manner as the Secretary may prescribe.

(3) AFFILIATED GROUPS.--In the case of any employer which is part of a group of employers who are treated as a single employer under subsection (b), (c), (m), or (o) of section 414, the election under paragraph (2) shall be made by such person as the Secretary may provide. Any such election, once made, shall apply to all members of such group.

(4) SEPARATE ELECTIONS.--Under regulations prescribed by the Secretary, separate elections may be made under paragraph (2) with respect to--

 

(A) separate lines of business, and

(B) full-time employees and employees who are not full-time employees.

 

(5) TERMINATION OF ELECTION IN CASES OF SUBSTANTIAL NONCOMPLIANCE.--The Secretary may terminate the election of any employer under paragraph (2) if the Secretary (in coordination with the Health Choices Commissioner) determines that such employer is in substantial noncompliance with the health coverage participation requirements.

 

(b) EXCISE TAX WITH RESPECT TO FAILURE TO MEET HEALTH COVERAGE PARTICIPATION REQUIREMENTS.--

 

(1) IN GENERAL.--In the case of any employer who fails (during any period with respect to which the election under subsection (a) is in effect) to satisfy the health coverage participation requirements with respect to any employee to whom such election applies, there is hereby imposed on each such failure with respect to each such employee a tax of $100 for each day in the period beginning on the date such failure first occurs and ending on the date such failure is corrected.

(2) LIMITATIONS ON AMOUNT OF TAX.--

 

(A) TAX NOT TO APPLY WHERE FAILURE NOT DISCOVERED EXERCISING REASONABLE DILIGENCE.--No tax shall be imposed by paragraph (1) on any failure during any period for which it is established to the satisfaction of the Secretary that the employer neither knew, nor exercising reasonable diligence would have known, that such failure existed.

(B) TAX NOT TO APPLY TO FAILURES CORRECTED WITHIN 30 DAYS.--No tax shall be imposed by paragraph (1) on any failure if--

 

(i) such failure was due to reasonable cause and not to willful neglect, and

(ii) such failure is corrected during the 30-day period beginning on the 1st date that the employer knew, or exercising reasonable diligence would have known, that such failure existed.

 

(C) OVERALL LIMITATION FOR UNINTENTIONAL FAILURES.--In the case of failures which are due to reasonable cause and not to willful neglect, the tax imposed by subsection (a) for failures during the taxable year of the employer shall not exceed the amount equal to the lesser of--

 

(i) 10 percent of the aggregate amount paid or incurred by the employer (or predecessor employer) during the preceding taxable year for employment- based health plans, or

(ii) $500,000.

 

(D) COORDINATION WITH OTHER ENFORCEMENT PROVISIONS.--The tax imposed under paragraph (1) with respect to any failure shall be reduced (but not below zero) by the amount of any civil penalty collected under section 502(c)(11) of the Employee Retirement Income Security Act of 1974 or section 2793(g) of the Public Health Service Act with respect to such failure.
(c) HEALTH COVERAGE PARTICIPATION REQUIREMENTS.--For purposes of this section, the term "health coverage participation requirements" means the requirements of part I of subtitle B of title III of the America's Affordable Health Choices Act of 2009 (as in effect on the date of the enactment of this section).
* * * * * * *

 

 

Subtitle F--Procedure and Administration

 

 

* * * * * * *

 

 

CHAPTER 61--INFORMATION AND RETURNS

 

 

* * * * * * *

 

 

Subchapter A--Returns and Records

 

 

* * * * * * *

 

 

PART II--TAX RETURNS OR STATEMENTS

 

 

* * * * * * *

 

 

Subpart B--Income Tax Returns

 

 

* * * * * * *

 

 

SEC. 6012. PERSONS REQUIRED TO MAKE RETURNS OF INCOME.

 

(a) GENERAL RULE.--Returns with respect to income taxes under subtitle A shall be made by the following:

 

(1) * * *
* * * * * * *

 

 

(10) Every individual to whom section 59B(a) applies and who fails to meet the requirements of section 59B(d) with respect to such individual or any qualifying child (as defined in section 152(c)) of such individual.
* * * * * * *

 

 

PART III--INFORMATION RETURNS

 

 

* * * * * * *

 

 

Subpart B--Information Concerning Transactions With Other Persons

 

 

Sec. 6041. Information at source.

* * * * * * *

Sec. 6050X. Returns relating to health insurance coverage.

 

* * * * * * *

 

 

SEC. 6050X. RETURNS RELATING TO HEALTH INSURANCE COVERAGE.

 

(a) REQUIREMENT OF REPORTING.--Every person who provides acceptable coverage (as defined in section 59B(d)) to any individual during any calendar year shall, at such time as the Secretary may prescribe, make the return described in subsection (b) with respect to such individual.

(b) FORM AND MANNER OF RETURNS.--A return is described in this subsection if such return--

 

(1) is in such form as the Secretary may prescribe, and

(2) contains--

 

(A) the name, address, and TIN of the primary insured and the name of each other individual obtaining coverage under the policy,

(B) the period for which each such individual was provided with the coverage referred to in subsection (a), and

(C) such other information as the Secretary may require.

(c) STATEMENTS TO BE FURNISHED TO INDIVIDUALS WITH RESPECT TO WHOM INFORMATION IS REQUIRED.--Every person required to make a return under subsection (a) shall furnish to each primary insured whose name is required to be set forth in such return a written statement showing--

 

(1) the name and address of the person required to make such return and the phone number of the information contact for such person, and

(2) the information required to be shown on the return with respect to such individual.

 

The written statement required under the preceding sentence shall be furnished on or before January 31 of the year following the calendar year for which the return under subsection (a) is required to be made.

(d) COVERAGE PROVIDED BY GOVERNMENTAL UNITS.--In the case of coverage provided by any governmental unit or any agency or instrumentality thereof, the officer or employee who enters into the agreement to provide such coverage (or the person appropriately designated for purposes of this section) shall make the returns and statements required by this section.

* * * * * * *

 

 

Subchapter B--Miscellaneous Provisions

 

 

* * * * * * *

 

 

SEC. 6103. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN INFORMATION.

 

(a) GENERAL RULE.--Returns and return information shall be confidential, and except as authorized by this title--

 

(1) * * *
* * * * * * *

 

 

(3) no other person (or officer or employee thereof) who has or had access to returns or return information under subsection (e)(1)(D)(iii), paragraph (6), (10), (12), (16), [(19),] or (20) of subsection (l), paragraph (2) or (4)(B) of subsection (m), or subsection (n),
* * * * * * *

 

 

(l) DISCLOSURE OF RETURNS AND RETURN INFORMATION FOR PURPOSES OTHER THAN TAX ADMINISTRATION.--

 

(1) * * *
* * * * * * *

 

 

[(19) DISCLOSURE OF RETURN INFORMATION FOR PURPOSES OF PROVIDING TRANSITIONAL ASSISTANCE UNDER MEDICARE DISCOUNT CARD PROGRAM.--

 

[(A) IN GENERAL.--The Secretary, upon written request from the Secretary of Health and Human Services pursuant to carrying out section 1860D-31 of the Social Security Act, shall disclose to officers, employees, and contractors of the Department of Health and Human Services with respect to a taxpayer for the applicable year--

 

[(i)(I) whether the adjusted gross income, as modified in accordance with specifications of the Secretary of Health and Human Services for purposes of carrying out such section, of such taxpayer and, if applicable, such taxpayer's spouse, for the applicable year, exceeds the amounts specified by the Secretary of Health and Human Services in order to apply the 100 and 135 percent of the poverty lines under such section, (II) whether the return was a joint return, and (III) the applicable year, or

[(ii) if applicable, the fact that there is no return filed for such taxpayer for the applicable year.

 

[(B) DEFINITION OF APPLICABLE YEAR.--For the purposes of this subsection, the term "applicable year" means the most recent taxable year for which information is available in the Internal Revenue Service's taxpayer data information systems, or, if there is no return filed for such taxpayer for such year, the prior taxable year.

[(C) RESTRICTION ON USE OF DISCLOSED INFORMATION.--Return information disclosed under this paragraph may be used only for the purposes of determining eligibility for and administering transitional assistance under section 1860D-31 of the Social Security Act.]

 

(19) DISCLOSURES TO FACILITATE IDENTIFICATION OF INDIVIDUALS LIKELY TO BE INELIGIBLE FOR LOW-INCOME SUBSIDIES UNDER MEDICARE PRESCRIPTION DRUG PROGRAM TO ASSIST SOCIAL SECURITY ADMINISTRATION'S OUTREACH TO ELIGIBLE INDIVIDUALS.--

 

(A) IN GENERAL.--Upon written request from the Commissioner of Social Security, the following return information (including such information disclosed to the Social Security Administration under paragraph (1) or (5)) shall be disclosed to officers and employees of the Social Security Administration, with respect to any taxpayer identified by the Commissioner of Social Security--

 

(i) return information for the applicable year from returns with respect to wages (as defined in section 3121(a) or 3401(a)) and payments of retirement income (as described in paragraph (1) of this subsection),

(ii) unearned income information and income information of the taxpayer from partnerships, trusts, estates, and subchapter S corporations for the applicable year,

(iii) if the individual filed an income tax return for the applicable year, the filing status, number of dependents, income from farming, and income from self-employment, on such return,

(iv) if the individual is a married individual filing a separate return for the applicable year, the social security number (if reasonably available) of the spouse on such return,

(v) if the individual files a joint return for the applicable year, the social security number, unearned income information, and income information from partnerships, trusts, estates, and subchapter S corporations of the individual's spouse on such return, and

(vi) such other return information relating to the individual (or the individual's spouse in the case of a joint return) as is prescribed by the Secretary by regulation as might indicate that the individual is likely to be ineligible for a low-income prescription drug subsidy under section 1860D-14 of the Social Security Act.

 

(B) APPLICABLE YEAR.--For the purposes of this paragraph, the term "applicable year" means the most recent taxable year for which information is available in the Internal Revenue Service's taxpayer information records.

(C) RESTRICTION ON INDIVIDUALS FOR WHOM DISCLOSURE MAY BE REQUESTED.--The Commissioner of Social Security shall request information under this paragraph only with respect to--

 

(i) individuals the Social Security Administration has identified, using all other reasonably available information, as likely to be eligible for a low-income prescription drug subsidy under section 1860D-14 of the Social Security Act and who have not applied for such subsidy, and

(ii) any individual the Social Security Administration has identified as a spouse of an individual described in clause (i).

 

(D) RESTRICTION ON USE OF DISCLOSED INFORMATION.--Return information disclosed under this paragraph may be used only by officers and employees of the Social Security Administration solely for purposes of identifying individuals likely to be ineligible for a low-income prescription drug subsidy under section 1860D-14 of the Social Security Act for use in outreach efforts under section 1144 of the Social Security Act.
* * * * * * *

 

 

(21) DISCLOSURE OF RETURN INFORMATION TO CARRY OUT HEALTH INSURANCE EXCHANGE SUBSIDIES.--

 

(A) IN GENERAL.--The Secretary, upon written request from the Health Choices Commissioner or the head of a State-based health insurance exchange approved for operation under section 208 of the America's Affordable Health Choices Act of 2009, shall disclose to officers and employees of the Health Choices Administration or such State-based health insurance exchange, as the case may be, return information of any taxpayer whose income is relevant in determining any affordability credit described in subtitle C of title II of the America's Affordable Health Choices Act of 2009. Such return information shall be limited to--

 

(i) taxpayer identity information with respect to such taxpayer,

(ii) the filing status of such taxpayer,

(iii) the modified adjusted gross income of such taxpayer (as defined in section 59B(e)(5)),

(iv) the number of dependents of the taxpayer,

(v) such other information as is prescribed by the Secretary by regulation as might indicate whether the taxpayer is eligible for such affordability credits (and the amount thereof), and

(vi) the taxable year with respect to which the preceding information relates or, if applicable, the fact that such information is not available.

 

(B) RESTRICTION ON USE OF DISCLOSED INFORMATION.--Return information disclosed under subparagraph (A) may be used by officers and employees of the Health Choices Administration or such State-based health insurance exchange, as the case may be, only for the purposes of, and to the extent necessary in, establishing and verifying the appropriate amount of any affordability credit described in subtitle C of title II of the America's Affordable Health Choices Act of 2009 and providing for the repayment of any such credit which was in excess of such appropriate amount.
* * * * * * *

 

 

(p) PROCEDURE AND RECORDKEEPING.--

 

(1) * * *
* * * * * * *

 

 

(4) SAFEGUARDS.--Any Federal agency described in subsection (h)(2), (h)(5), (i)(1), (2), (3), (5), or (7), (j)(1), (2), or (5), (k)(8) or (10), (l)(1), (2), (3), (5), (10), (11), (13), (14), [or (17)] (17), or (19) or (o)(1)(A), the Government Accountability Office, the Congressional Budget Office, or any agency, body, or commission described in subsection (d), (i)(3)(B)(i) or 7(A)(ii), or (l)(6), (7), (8), (9), (12), (15), or (16), any appropriate State officer (as defined in section 6104(c)), or any other person described in subsection (l)(10), (16), (18), [(19),] or (20), or any entity described in subsection (l)(21), shall, as a condition for receiving returns or return information--

 

(A) * * *

 

* * * * * * *

 

(F) upon completion of use of such returns or return information--

 

(i) in the case of an agency, body, or commission described in subsection (d), (i)(3)(B)(i), or (l)(6), (7), (8), (9), or (16), any appropriate State officer (as defined in section 6104(c)), or any other person described in subsection (l)(10), (16), (18), [(19),] or (20) or any entity described in subsection (l)(21), return to the Secretary such returns or return information (along with any copies made therefrom) or make such returns or return information undisclosable in any manner and furnish a written report to the Secretary describing such manner,

(ii) in the case of an agency described in subsections (h)(2), (h)(5), (i)(1), (2), (3), (5) or (7), (j)(1), (2), or (5), (k)(8) or (10), (l)(1), (2), (3), (5), (10), (11), (12), (13), (14), (15), [or (17)] (17), or (19), or (o)(1)(A), or any entity described in subsection (l)(21), the Government Accountability Office, or the Congressional Budget Office, either--

 

(I) * * *
* * * * * * *

 

 

except that the conditions of subparagraphs (A), (B), (C), (D), and (E) shall cease to apply with respect to any return or return information if, and to the extent that, such return or return information is disclosed in the course of any judicial or administrative proceeding and made a part of the public record thereof. If the Secretary determines that any such agency, body, or commission, including an agency, an appropriate State officer (as defined in section 6104(c)), or any other person described in subsection (l)(10), (16), (18), [(19),] or (20), or any entity described in subsection (l)(21), or the Government Accountability Office or the Congressional Budget Office, has failed to, or does not, meet the requirements of this paragraph, he may, after any proceedings for review established under paragraph (7), take such actions as are necessary to ensure such requirements are met, including refusing to disclose returns or return information to such agency, body, or commission, including an agency, an appropriate State officer (as defined in section 6104(c)), or any other person described in subsection (l)(10), (16), (18), [(19),] or (20) or any entity described in subsection (l)(21),, or the Government Accountability Office or the Congressional Budget Office, until he determines that such requirements have been or will be met. In the case of any agency which receives any mailing address under paragraph (2), (4), (6), or (7) of subsection (m) and which discloses any such mailing address to any agent or which receives any information under paragraph (6)(A), (10), (12)(B), or (16) of subsection (l) and which discloses any such information to any agent, or any person including an agent described in subsection (l)(10) or (16), this paragraph shall apply to such agency and each such agent or other person (except that, in the case of an agent, or any person including an agent described in subsection (l)(10) or (16), any report to the Secretary or other action with respect to the Secretary shall be made or taken through such agency). For purposes of applying this paragraph in any case to which subsection (m)(6) applies, the term "return information" includes related blood donor records (as defined in section 1141(h)(2) of the Social Security Act).
* * * * * * *

 

 

CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE PENALTIES

 

 

* * * * * * *

 

 

Subchapter A--Additions to the Tax and Additional Amounts

 

 

* * * * * * *

 

 

PART II--ACCURACY-RELATED AND FRAUD PENALTIES

 

 

* * * * * * *

 

 

SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERPAYMENTS.

 

(a) * * *

(b) PORTION OF UNDERPAYMENT TO WHICH SECTION APPLIES.--This section shall apply to the portion of any underpayment which is attributable to 1 or more of the following:

 

(1) * * *
* * * * * * *

 

 

(6) Any disallowance of claimed tax benefits by reason of a transaction lacking economic substance (within the meaning of section 7701(o)) or failing to meet the requirements of any similar rule of law.

 

This section shall not apply to any portion of an underpayment on which a penalty is imposed under section 6663. Except as provided in paragraph (1) or (2)(B) of section 6662A(e), this section shall not apply to the portion of any underpayment which is attributable to a reportable transaction understatement on which a penalty is imposed under section 6662A.
* * * * * * *

 

 

(d) SUBSTANTIAL UNDERSTATEMENT OF INCOME TAX.--

 

(1) * * *

(2) UNDERSTATEMENT.--

 

(A) * * *
* * * * * * *

 

 

(C) REDUCTION NOT TO APPLY TO TAX SHELTERS.--

 

(i) IN GENERAL.--[Subparagraph (B)] Subparagraphs (B) and (D)(i)(II) shall not apply to any item attributable to a tax shelter.
* * * * * * *

 

 

(D) SPECIAL REDUCTION RULE FOR CERTAIN LARGE OR PUBLICLY TRADED PERSONS.--

 

(i) IN GENERAL.--In the case of any specified person--

 

(I) subparagraph (B) shall not apply, and

(II) the amount of the understatement under subparagraph (A) shall be reduced by that portion of the understatement which is attributable to any item with respect to which the taxpayer has a reasonable belief that the tax treatment of such item by the taxpayer is more likely than not the proper tax treatment of such item.

 

(ii) SPECIFIED PERSON.--For purposes of this subparagraph, the term "specified person" means--

 

(I) any person required to file periodic or other reports under section 13 of the Securities Exchange Act of 1934, and

(II) any corporation with gross receipts in excess of $100,000,000 for the taxable year involved.

 

All persons treated as a single employer under section 52(a) shall be treated as one person for purposes of subclause (II).
* * * * * * *

 

 

(i) INCREASE IN PENALTY IN CASE OF NONDISCLOSED NONECONOMIC SUBSTANCE TRANSACTIONS.--

 

(1) IN GENERAL.--In the case of any portion of an underpayment which is attributable to one or more nondisclosed noneconomic substance transactions, subsection (a) shall be applied with respect to such portion by substituting "40 percent" for "20 percent".

(2) NONDISCLOSED NONECONOMIC SUBSTANCE TRANSACTIONS.--For purposes of this subsection, the term "nondisclosed noneconomic substance transaction" means any portion of a transaction described in subsection (b)(6) with respect to which the relevant facts affecting the tax treatment are not adequately disclosed in the return nor in a statement attached to the return.

(3) SPECIAL RULE FOR AMENDED RETURNS.--Except as provided in regulations, in no event shall any amendment or supplement to a return of tax be taken into account for purposes of this subsection if the amendment or supplement is filed after the earlier of the date the taxpayer is first contacted by the Secretary regarding the examination of the return or such other date as is specified by the Secretary.

SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERSTATEMENTS WITH RESPECT TO REPORTABLE TRANSACTIONS.

 

(a) * * *
* * * * * * *

 

 

(e) SPECIAL RULES.--

 

(1) * * *

(2) COORDINATION WITH OTHER PENALTIES.--

 

(A) * * *

(B) COORDINATION WITH [GROSS VALUATION MISSTATEMENT PENALTY] CERTAIN INCREASED UNDERPAYMENT PENALTIES.--This section shall not apply to any portion of an understatement on which a penalty is imposed under section 6662 if the rate of the penalty is determined under [section 6662(h)] subsections (h) or (i) of section 6662.

* * * * * * *

 

 

SEC. 6664. DEFINITIONS AND SPECIAL RULES.

 

(a) * * *
* * * * * * *

 

 

(c) REASONABLE CAUSE EXCEPTION FOR UNDERPAYMENTS.--

 

(1) * * *
(2) EXCEPTION.--Paragraph (1) shall not apply to--
(A) to any portion of an underpayment which is attributable to one or more tax shelters (as defined in section 6662(d)(2)(C)) or transactions described in section 6662(b)(6), and

(B) to any taxpayer if such taxpayer is a specified person (as defined in section 6662(d)(2)(D)(ii)).

 

[(2)] (3) SPECIAL RULE FOR CERTAIN VALUATION OVERSTATEMENTS.--In the case of any underpayment attributable to a substantial or gross valuation overstatement under chapter 1 with respect to charitable deduction property, paragraph (1) shall not apply. The preceding sentence shall not apply to a substantial valuation overstatement under chapter 1 if--

 

(A) * * *
* * * * * * *

 

 

[(3)] (4) DEFINITIONS.--For purposes of this subsection--

 

(A) CHARITABLE DEDUCTION PROPERTY.--The term "charitable deduction property" means any property contributed by the taxpayer in a contribution for which a deduction was claimed under section 170. For purposes of [paragraph (2)] paragraph (3), such term shall not include any securities for which (as of the date of the contribution) market quotations are readily available on an established securities market.
* * * * * * *

 

 

Subchapter B--Assessable Penalties

 

 

* * * * * * *

 

 

PART I--GENERAL PROVISIONS

 

 

* * * * * * *

 

 

SEC. 6676. ERRONEOUS CLAIM FOR REFUND OR CREDIT.

 

(a) * * *
* * * * * * *

 

 

(c) NONECONOMIC SUBSTANCE TRANSACTIONS TREATED AS LACKING REASONABLE BASIS.--For purposes of this section, any excessive amount which is attributable to any transaction described in section 6662(b)(6) shall not be treated as having a reasonable basis.

[(c)] (d) COORDINATION WITH OTHER PENALTIES.--This section shall not apply to any portion of the excessive amount of a claim for refund or credit which is subject to a penalty imposed under part II of subchapter A of chapter 68.

* * * * * * *

 

 

PART II--FAILURE TO COMPLY WITH CERTAIN INFORMATION REPORTING REQUIREMENTS

 

 

* * * * * * *

 

 

SEC. 6724. WAIVER; DEFINITIONS AND SPECIAL RULES.

 

(a) * * *
* * * * * * *

 

 

(d) DEFINITIONS.--For purposes of this part--

 

(1) INFORMATION RETURN.--The term "information return" means--

 

(A) * * *

(B) any return required by--

 

(i) * * *
* * * * * * *

 

 

(xxii) section 6039(a) (relating to returns required with respect to certain options), [or]

(xxiii) section 6050W (relating to returns to payments made in settlement of payment card transactions), [and] or

(xxiv) section 6050X (relating to returns relating to health insurance coverage), and

* * * * * * *

 

 

(2) PAYEE STATEMENT.--The term "payee statement" means any statement required to be furnished under--

 

(A) * * *
* * * * * * *

 

 

(EE) section 6050U (relating to charges or payments for qualified long-term care insurance contracts under combined arrangements), [or]

(FF) section 6050W(c) (relating to returns relating to payments made in settlement of payment card transactions)[.], or

(GG) section 6050X (relating to returns relating to health insurance coverage).

* * * * * * *

 

 

CHAPTER 75--CRIMES, OTHER OFFENSES, AND FORFEITURES

 

 

* * * * * * *

 

 

Subchapter A--Crimes

 

 

* * * * * * *

 

 

PART I--GENERAL PROVISIONS

 

 

* * * * * * *

 

 

SEC. 7213. UNAUTHORIZED DISCLOSURE OF INFORMATION.

 

(a) RETURNS AND RETURN INFORMATION.--

 

(1) * * *

(2) STATE AND OTHER EMPLOYEES.--It shall be unlawful for any person (not described in paragraph (1)) willfully to disclose to any person, except as authorized in this title, any return or return information (as defined in section 6103(b)) acquired by him or another person under subsection (d), (i)(3)(B)(i) or (7)(A)(ii), (l)(6), (7), (8), (9), (10), (12), (15), (16), (19), [or (20)] (20), or (21) or (m)(2), (4), (5), (6), or (7) of section 6103 or under section 6104(c). Any violation of this paragraph shall be a felony punishable by a fine in any amount not exceeding $5,000, or imprisonment of not more than 5 years, or both, together with the costs of prosecution.

* * * * * * *

 

 

CHAPTER 79--DEFINITIONS

 

 

* * * * * * *

 

 

SEC. 7701. DEFINITIONS.

 

(a) * * *
* * * * * * *

 

 

(o) CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.--

 

(1) APPLICATION OF DOCTRINE.--In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if--

 

(A) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position, and

(B) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.

 

(2) SPECIAL RULE WHERE TAXPAYER RELIES ON PROFIT POTENTIAL.--

 

(A) IN GENERAL.--The potential for profit of a transaction shall be taken into account in determining whether the requirements of subparagraphs (A) and (B) of paragraph (1) are met with respect to the transaction only if the present value of the reasonably expected pre-tax profit from the transaction is substantial in relation to the present value of the expected net tax benefits that would be allowed if the transaction were respected.

(B) TREATMENT OF FEES AND FOREIGN TAXES.-- Fees and other transaction expenses and foreign taxes shall be taken into account as expenses in determining pre-tax profit under subparagraph (A).

 

(3) STATE AND LOCAL TAX BENEFITS.--For purposes of paragraph (1), any State or local income tax effect which is related to a Federal income tax effect shall be treated in the same manner as a Federal income tax effect.

(4) FINANCIAL ACCOUNTING BENEFITS.--For purposes of paragraph (1)(B), achieving a financial accounting benefit shall not be taken into account as a purpose for entering into a transaction if the origin of such financial accounting benefit is a reduction of Federal income tax.

(5) DEFINITIONS AND SPECIAL RULES.--For purposes of this subsection--

 

(A) ECONOMIC SUBSTANCE DOCTRINE.--The term "economic substance doctrine" means the common law doctrine under which tax benefits under subtitle A with respect to a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose.

(B) EXCEPTION FOR PERSONAL TRANSACTIONS OF INDIVIDUALS.--In the case of an individual, paragraph (1) shall apply only to transactions entered into in connection with a trade or business or an activity engaged in for the production of income.

(C) OTHER COMMON LAW DOCTRINES NOT AFFECTED.--Except as specifically provided in this subsection, the provisions of this subsection shall not be construed as altering or supplanting any other rule of law, and the requirements of this subsection shall be construed as being in addition to any such other rule of law.

(D) DETERMINATION OF APPLICATION OF DOCTRINE NOT AFFECTED.--The determination of whether the economic substance doctrine is relevant to a transaction (or series of transactions) shall be made in the same manner as if this subsection had never been enacted.

 

(6) REGULATIONS.--The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.

 

[(o)] (p) CROSS REFERENCES.--

 

(1) * * *
* * * * * * *

 

 

Subtitle I--Trust Fund Code

 

 

* * * * * * *

 

 

CHAPTER 98 TRUST FUND CODE

 

 

* * * * * * *

 

 

Subchapter A--Establishment of Trust Funds

 

 

Sec. 9501. Black Lung Disability Trust Fund.

* * * * * * *

Sec. 9511. Health Care Comparative Effectiveness Research Trust Fund.

 

* * * * * * *

 

 

SEC. 9511. HEALTH CARE COMPARATIVE EFFECTIVENESS RESEARCH TRUST FUND.

 

(a) CREATION OF TRUST FUND.--There is established in the Treasury of the United States a trust fund to be known as the "Health Care Comparative Effectiveness Research Trust Fund" (hereinafter in this section referred to as the "CERTF"), consisting of such amounts as may be appropriated or credited to such Trust Fund as provided in this section and section 9602(b).

(b) TRANSFERS TO FUND.--There are hereby appropriated to the Trust Fund the following:

 

(1) For fiscal year 2010, $90,000,000.

(2) For fiscal year 2011, $100,000,000.

(3) For fiscal year 2012, $110,000,000.

(4) For each fiscal year beginning with fiscal year 2013--

 

(A) an amount equivalent to the net revenues received in the Treasury from the fees imposed under subchapter B of chapter 34 (relating to fees on health insurance and self-insured plans) for such fiscal year; and

(B) subject to subsection (c)(2), amounts determined by the Secretary of Health and Human Services to be equivalent to the fair share per capita amount computed under subsection (c)(1) for the fiscal year multiplied by the average number of individuals entitled to benefits under part A, or enrolled under part B, of title XVIII of the Social Security Act during such fiscal year.

The amounts appropriated under paragraphs (1), (2), (3), and (4)(B) shall be transferred from the Federal Hospital Insurance Trust Fund and from the Federal Supplementary Medical Insurance Trust Fund (established under section 1841 of such Act), and from the Medicare Prescription Drug Account within such Trust Fund, in proportion (as estimated by the Secretary) to the total expenditures during such fiscal year that are made under title XVIII of such Act from the respective trust fund or account.

(c) FAIR SHARE PER CAPITA AMOUNT.--

 

(1) COMPUTATION.--

 

(A) IN GENERAL.--Subject to subparagraph (B), the fair share per capita amount under this paragraph for a fiscal year (beginning with fiscal year 2013) is an amount computed by the Secretary of Health and Human Services for such fiscal year that, when applied under this section and subchapter B of chapter 34 of the Internal Revenue Code of 1986, will result in revenues to the CERTF of $375,000,000 for the fiscal year.

(B) ALTERNATIVE COMPUTATION.--

 

(i) IN GENERAL.--If the Secretary is unable to compute the fair share per capita amount under subparagraph (A) for a fiscal year, the fair share per capita amount under this paragraph for the fiscal year shall be the default amount determined under clause (ii) for the fiscal year.

(ii) DEFAULT AMOUNT.--The default amount under this clause for--

 

(I) fiscal year 2013 is equal to $2; or

(II) a subsequent year is equal to the default amount under this clause for the preceding fiscal year increased by the annual percentage increase in the medical care component of the consumer price index (United States city average) for the 12-month period ending with April of the preceding fiscal year.

 

Any amount determined under subclause (II) shall be rounded to the nearest penny.
(2) LIMITATION ON MEDICARE FUNDING.--In no case shall the amount transferred under subsection (b)(4)(B) for any fiscal year exceed $90,000,000.

 

(d) EXPENDITURES FROM FUND.--

 

(1) IN GENERAL.--Subject to paragraph (2), amounts in the CERTF are available, without the need for further appropriations and without fiscal year limitation, to the Secretary of Health and Human Services for carrying out section 1181 of the Social Security Act.

(2) ALLOCATION FOR COMMISSION.--Not less than the following amounts in the CERTF for a fiscal year shall be available to carry out the activities of the Comparative Effectiveness Research Commission established under section 1181(b) of the Social Security Act for such fiscal year:

 

(A) For fiscal year 2010, $7,000,000.

(B) For fiscal year 2011, $9,000,000.

(C) For each fiscal year beginning with 2012, $10,000,000.

 

Nothing in this paragraph shall be construed as preventing additional amounts in the CERTF from being made available to the Comparative Effectiveness Research Commission for such activities.

 

(e) NET REVENUES.--For purposes of this section, the term "net revenues" means the amount estimated by the Secretary based on the excess of--

 

(1) the fees received in the Treasury under subchapter B of chapter 34, over

(2) the decrease in the tax imposed by chapter 1 resulting from the fees imposed by such subchapter.

* * * * * * *

 

 

VII. DISSENTING VIEWS

 

 

Dissenting Views

 

 

OVERVIEW

 

 

H.R. 3200 is fundamentally flawed legislation that threatens to simultaneously do irreparable harm to the health delivery system and add mountains of additional debt on our children and grandchildren. Long before those bills come due, though, Americans with health insurance would pay thousands of dollars more per year for coverage, and a host of new taxes on individuals and businesses would further hamper efforts to revive an already struggling economy if this bill becomes law.

The bill violates oft-repeated promises by the President and others that health care reform won't cause people to lose coverage they like, that taxes won't increase on families with income less than $250,000 and that tax rates won't increase above what they were during the 1990s.

The minority was united in opposition to the bill for five main reasons:

 

1. It was unnecessarily rushed through the Committee without proper understanding or even a reading of the bill by Members;

2. The massive spending and tax increases will damage an already reeling economy;

3. Americans will lose coverage they have and like;

4. The bill gives the government control over Americans' personal health decisions; and

5. Numerous specific improvements we proposed to the bill were all rejected.

I. BILL SHOULD NOT HAVE BEEN RUSHED INTO AND OUT OF COMMITTEE

 

 

While we share the majority's goal of improving the nation's health care system, the issues are too important and the decisions too difficult to act in haste and without the full range of information necessary to make such critical policy choices.

We held only one hearing on the discussion draft released in June, however not one of the witnesses spoke knowledgably about all of the provisions in the bill because they were only given a couple of days to digest it.

The measure approved by the Committee was substantially changed from the June draft, with the last round of edits coming out just after midnight on Thursday, July 16th, a few hours before the one-day markup of the legislation that began at 9 a.m. that morning.

This contrasts starkly with the health care reform debate in 1994. That year, the full Ways and Means Committee spent 17 days over six weeks conducting our markup. And that was only after holding a dozen hearings (eight at Subcommittee, four at full Committee) on the bill after its introduction.

It is also worth pointing out that the Committee refused to act on the Clinton bill in 1994 until nearly three months after the Congressional Budget Office (CBO) released a comprehensive, 104-page analysis and score. We had no such analysis of H.R. 3200 or the Chairman's mark. What we had instead was a very rough estimate on only a portion of the bill based on specifications as outlined by the Majority to CBO, not on actual legislative text. As Director Elmendorf wrote to Chairman Rangel:

"It is important to note, however, that [those] estimates are based on specifications provided by the tri-committee group rather than an analysis of the language released [this week]. For that reason and others outlined below, those figures do not represent a formal or complete cost estimate for the coverage provisions of the draft legislation."

Quite simply, that is not adequate for a bill as important as this, one that will have such far-reaching impacts on every family and business in America. We cannot afford to guess and hope we got it right. This Committee had no business marking up a bill of which CBO cannot tell us its cost or impacts. That view was further confirmed by testimony during the day by Director Elmendorf about the long-term budget impact of this legislation.

 

II. MASSIVE SPENDING AND TAX INCREASES WILL HURT ECONOMY

 

 

What we do know about the bill is that it matches more than a trillion dollars in new spending that grows even faster than the revenues being generated to pay for it, creating a massive, long-term unfunded federal mandate that imperils the fiscal future of this nation. Ironically, despite claims that the United States is already "spending too much on health care," the bill finances even higher spending with more than $820 billion in new taxes that will be paid for by families making as little as $20,000, small businesses, and manufacturers--all while we are in the midst of a recession and with unemployment moving quickly toward 10 percent.

Section 412 of the bill includes a mandate that employers provide health coverage deemed acceptable by the Federal Government or else pay a new payroll tax of eight percent of total payroll (a so-called "pay-or-play" scheme) that will bring the total U.S. federal payroll tax to more than 23 percent. Only the smallest of businesses would get any relief from this job-killing tax. Economists across the political spectrum agree that workers suffer the economic burden of payroll taxes. In a July 13, 2009 report entitled, "Effects of Changes to the Health Insurance System on Labor Markets," the Congressional Budget Office concluded that an employer mandate "is likely to reduce employment," with the effect being most severe for low-wage workers. It is therefore disappointing that the Majority chose to ignore the warnings of leading groups representing businesses in America about the damage this will do to employment and wages in America.

Section 441 of the bill attempts to plug part of the fiscal hole it creates with a new surtax on individuals and small businesses. The 5.4-percent surtax rate, combined with the already scheduled increase in the top marginal rate to 39.6 percent, would result in an increase in the top Federal income tax rate from 35 percent in 2010 to 45 percent in 2011. Adding in the 2.9-percent Medicare payroll tax and hidden marginal rate increases that operate by phasing out certain deductions, the proposed top Federal rate would jump to about 48 percent, and the average top Federal-State marginal tax rate would be over 52 percent.

While nominally aimed at individuals, the surtax will fall heavily on small businesses, the engine of job creation. According to a Joint Committee on Taxation data projection for 2011, 42 percent of small business income (including the income of sole proprietorships, partnerships, and S Corporations) would be subject to the surtax.

Not content to just tax "the wealthy," the bill also imposes large taxes on some of America's poorest families. Effective in 2013, section 401 would impose a tax on individuals without "acceptable coverage", which would hit single filers with incomes as low as $9,350 and married couples with incomes as low as $18,700 (in 2009 dollars). This undermines President Obama's ongoing promise not to raise taxes on families with incomes under $250,000.

Section 442 would prohibit the use of tax-free distributions from Health Savings Accounts (HSAs), Flexible Spending Arrangements (FSAs), and Health Reimbursement Arrangements (HRAs) to purchase medicine or drugs other than prescription drugs or insulin. By imposing this restriction on the estimated 47 to 50 million individuals who currently carry coverage that includes either an HSA, FSA, or HRA, the bill violates another of President Obama's pledges: to allow families to keep the coverage they have and like.

In addition, the Majority would impose several unwise tax increases that bear no relationship to the purpose of the legislation other than to fund the move toward nationalization of health care in this country. These tax increases include a provision that appears to violate our tax treaties with our trading partners; a multi-year delay in rules that would allow worldwide American businesses to calculate their interest expense more accurately; and codification of the economic substance doctrine. The delay of the interest expense allocation rules is especially troubling. By terminating this tax increase at the end of the budget window, the Majority seems to be subtly acknowledging that the revenues generated by the bill will further fail to keep pace with its spending in the long-run.

 

III. AMERICANS WILL LOSE THE COVERAGE THEY HAVE AND LIKE

 

 

Independent analysis demonstrates that under H.R. 3200, two out of three Americans will lose the coverage they currently enjoy because it establishes a government-run health plan. It will, over time, force other coverage out of the market, eventually turning the government option into a federal monopoly.

This starts with the creation of a federally subsidized government-run insurance plan that would pay hospitals and doctors at set Medicare rates for services. As Medicare significantly underpays providers, the government-run plan will force private plans to pick up the slack. As a result, the average cost of private coverage for a family of four would be $3,628 more expensive because of the new and existing cost-shift, according to analysis by Milliman and the Lewin Group. Because it is unlikely that providers will willingly accept the government-run plan's low reimbursements, the Secretary of HHS would have the authority to force providers to participate in this plan.

The government-run plan will not have to pay state or federal taxes. It would be exempt from complying with state benefit and provider mandates, which have been shown to increase the cost of health insurance. The plan provides a $2 billion interest free loan from taxpayers. Unlike private insurance plans, who can be sued in state courts, the government-run plan could only be sued in federal court. And finally it will have the full backing of the United States government. Regardless of any assurances to the contrary, the government-run insurance plan will be "too big to fail," almost ensuring that taxpayers will be responsible for any funding shortfalls. This affords the government plan further significant advantage over the plans it is supposed to "compete" against.

To further guarantee that result, all private health plans would be required to conform to benefit mandates, as determined by the federal government. Any employer offering coverage that wasn't approved by the government would be forced to pay a steep tax penalty. Further, individual market plans would be prohibited from enrolling new members and would be prohibited from updating their benefits or cost-sharing arrangements for those currently enrolled. This prohibition on new enrollment will result in a death spiral where insurance costs for a plan climb at an unsustainable rate for all existing health insurance plans. By guaranteeing adverse selection will occur, the bill will ultimately force these plans to close down completely.

The bill further prohibits any new insurance plan from creating health coverage that does not conform to the federal government's requirements, and that insurance plan will not be allowed to exist outside of the government established super-structure, referred to in H.R. 3200 as the Exchange. By prohibiting new insurance plans that don't comply with various new federal requirements, the bill effectively limits choice in the insurance market.

 

IV. GIVES THE GOVERNMENT CONTROL OVER PERSONAL HEALTH CARE DECISIONS

 

 

H.R. 3200 will create a system by which health care decisions will be made in Washington that should be made in doctor's offices by patients and their physicians and at kitchen tables by families. House Democrats would establish a new government-run "Exchange" run by a new "Health Choices Commissioner" nominated by the President and confirmed by the Senate. As the Commissioner is serving at the pleasure of the President, some may be concerned about the lack of independence of this individual. The Commissioner would also be required to work with the Secretary of Health and Human Services, who oversees the government-run insurance plan described above, creating the potential for a serious conflict of interest that could significantly disadvantage the private coverage that insures more than 170 million Americans today.

Aside from the will of the President, the Commissioner's power would be unchecked. This is extremely troubling given the large scope of responsibility given to the Commissioner. In fact, the Commissioner is so powerful that the title is referenced almost 200 times in H.R. 3200. This government official would have:

 

The power to decide which treatments patients could receive and at what cost;

The power to decide which private plans would be allowed to participate in the Exchange;

The power to regulate all insurance plans, both in and out of the Exchange;

The power to determine which employers would be allowed to participate in the Exchange;

The power to determine how many Americans will be allowed to choose health coverage through the Exchange;

The power to form and control which physicians and hospitals participate in the government- run plan and in private plan provider networks;

The power to determine which states are allowed to operate their own Exchange and terminate a previously-approved State Exchange at any time;

The power to override state laws regarding covered health benefits;

The power to determine how trillions of taxpayer and employer dollars would be spent within the Exchange;

The power to determine who qualifies for premium assistance; and

The power to automatically enroll Americans into the Exchange if they don't have coverage, including potentially forcing these individuals into the government-run plan.

 

Also troubling is the fact the Secretary of Health and Human Services would decide which prescription drugs are made available in the government plan. Evidence has shown that government officials in other countries have used this power to deny access to needed treatments on the basis of cost.

The bill also contains a new initiative on Comparative Effectiveness Research (CER). This board and its research will significantly harm the patient-doctor relationship if government-run health care uses the research to restrict treatments deemed too expensive. The bill reported by the Committee contains a provision expressly prohibiting the CER board from using its research to make coverage determinations. That may be the biggest of many fig leaves in the bill; in this case, the joke is on us, since the CER board would never make a coverage determination--it doesn't issue health insurance or pay claims, or have to decide what is covered and what is not.

But those who would make such coverage decisions, like the Centers for Medicare and Medicaid Services (CMS), face no such restrictions on their use of CER data. Peter Orszag, Director of the Office of Management and Budget, has publicly affirmed the Administration's desire to use CER to "bend the cost curve." As it relates to CER, this means that CMS and the Health Choices Commissioner will be able to deny coverage based on the cost of treatment, or ration access to health care services, for people in Medicare and every American enrolled in insurance plans offered through the Exchange.

 

V. ATTEMPTS TO IMPROVE THE LEGISLATION WERE REJECTED

 

 

Sadly, the foregoing does not constitute a complete review of the flaws of this legislation. During the Committee mark-up, these and other concerns were identified. Republicans attempted to address them through more than three dozen amendments. Those included amendments to: eliminate the government-run health insurance plan that could result in two out of three Americans losing their current coverage; ensure that comparative effectiveness research isn't used to ration care based on cost; terminate the government-run plan if wait times for care become too long; prevent the government from requiring health care providers to serve patients enrolled in the government-run health plan; ensure the Health Choices Commissioner could not deem abortion to be a required benefit; reverse cuts to Medicare Advantage plans, which give seniors access to benefits not found in the government-run Medicare program; and promote medical liability reform, which would help address the impact that the practice of defensive medicine has on health care spending.

Sadly, not a single one of these or the other amendments offered was accepted, reinforcing the widely held belief that this effort is a purely partisan exercise in which additional views and suggestions simply are not welcome.

 

CONCLUSION

 

 

At the outset of the mark-up, the Majority rejected a motion by the Ranking Member to delay consideration of the bill by one week, notwithstanding the fact the bill had been available for only a few hours and that the Committee did not even have a Congressional Budget Office estimate about the short and long-term impact of the package.

We suppose that should have been an indication about what was to come and the futility of trying to improve this deeply flawed product.

Hours after the mark-up ended, the Congressional Budget Office did release a further partial score of the bill (still based on descriptions of what is in the bill rather than on the legislative text itself). The overall conclusion is that the bill adds nearly $240 billion to the deficit this decade, with the bulk of those costs occurring at the end of the budget window. In 2015 alone, the bill will add $40 billion to the federal deficit. By 2019, that figure will rise to $65 billion and the deepening debt impact shows no signs of slowing down in future years. In short, the $240 billion that this adds to the deficit this decade is just the tip of the fiscal iceberg.

We would like to hope that the Majority's mad dash for an arbitrary finish line, regardless of the consequences, will be called off before real and lasting damage is done to our health care system and our economy. But as we write this, the prognosis is not good.

Dave Camp, Michigan, Wally Herger, California, Sam Johnson, Texas, Kevin Brady, Texas, Paul Ryan, Wisconsin, Eric Cantor, Virginia, John Linder, Georgia, Devin Nunes, California, Patrick J. Tiberi, Ohio, Ginny Brown-Waite, Florida, Geoff Davis, Kentucky, David G. Reichert, Washington, Charles W. Boustany, Jr., Louisiana, Dean Heller, Nevada, Peter J. Roskam, Illinois.

 

VIII. ADDITIONAL VIEWS

 

 

Restricts Current Physician Owned Hospitals, Prohibits Ones Under Construction

 

 

Section 1156 of H.R. 3200 contains provisions that would devastate physician-owned hospitals across this country in two ways. First, it contains a retroactive effective date. Section 1156 states that in order for a physician-owned facility to have the ability to bill Medicare for services, it needs to have received a Medicare provider number by January 1, 2009, a date that came and went over 6 months ago.

This language would prevent 104 hospitals that are under development in over 20 states from ever receiving their Medicare provider number. This includes hospitals that have opened their doors and are already seeing patients, but have not received a provider number through no fault of their own. This means that hospitals, which were relying on current law, would be prohibited from ever becoming a Medicare provider, because of some arbitrary and retroactive deadline set forth in this legislation. Over $5 billion of investments have been made towards these 104 projects; this provision threatens not only those investments but also the 21,000 jobs that stand to be created by these hospitals. This legislation should not threaten this boost in economic growth for our communities and our states at a time our country desperately needs them the most.

Second, this provision restricts the 222 physician-owned hospitals currently operating in 32 states from growing and responding to the needs of the patients and communities they serve. Section 1156 sets forth qualifications that a physician- owned hospital must meet to just be able to apply for permission to grow from the Secretary of Health and Human Services. Besides the policy implications of a hospital needing to petition the federal government for permission to add a hospital bed if their community needs it, the qualifications listed are so restrictive that only 3 of the current 222 facilities meet them.

We are disheartened that these provisions seek to legislate away hospitals in our districts that provide much needed quality and efficient healthcare for our constituents. As this bill continues through the legislative process at such a rapid speed, it is our hope these restrictions are changed so that our constituents can continue to have access to the great care they are currently receiving.

Sam Johnson, Wally Herger, Paul Ryan, Dave Camp, Kevin Brady, John Linder, Dean Heller

 

FOOTNOTES

 

 

1 Sec. 162. However see special rules in section 419 and 419A for the deductibility of contributions to welfare benefit plans with respect to medical benefits for employees and their dependents.

2 Secs. 3121(a)(2) and 3306(b)(2).

3 Sec. 106.

4 Sec. 105(b).

5 Sec. 125.

6 Pub.L. No. 93-406.

7 42 U.S.C. GA.

8 Pub. L. No. 99-272.

9 Pub. L. No. 104-191.

10 Secs. 4980B and 4980D.

11 U.S. Department of Health and Human Services, Center for Medicare and Medicaid Services, "The State Children's Health Insurance Program," Powerpoint Presentation, March 5, 2007, p. 14.

12 For a plan to be a "qualified health benefits plan" it needs to meet certain minimum coverage requirements, but it need not be offered through the Exchange.

13 Sec. 162. However see special rules in section 419 and 419A for the deductibility of contributions to welfare benefit plans with respect to medical benefits for employees and their dependents.

14 Secs. 3121(a)(2) and 3306(b)(2).

15 For a plan to be a "qualified health benefits plan" it needs to meet certain minimum coverage requirements, but it need not be offered through the Health Insurance Exchange.

16 The essential benefits package includes certain specified limits on required cost sharing, bans annual or life time limits on covered health care items or services and certain specified minimum services, and imposes certain requirements as to network adequacy as determined by the Health Choices Commissioner.

17 There is a special rule for determining the lowest cost plan with respect to coverage of an employee under an Exchange participating health benefits plan. In that case the lowest cost plan is the reference premium used for determining the amount of affordability credits.

18 Sec. 162. However, see special rules in section 419 and 419A for the deductibility of contributions to welfare benefit plans with respect to medical benefits for employees and their dependents.

19 Secs. 3121(a)(2) and 3306(b)(2).

20 Section 414(b) provides that, for specified employee benefit purposes, all employees of all corporations which are members of a controlled group of corporations are treated as employed by a single employer. There is a similar rule in section 414(c) under which all employees of trades or businesses (whether or not incorporated) which are under common control are treated under regulations as employed by a single employer, and, in section 414(m), under which employees of an affiliated service group (as defined in that section) are treated as employed by a single employer. Section 414(o) authorizes the Treasury to issue regulations to prevent avoidance of the requirements under section 414(m).

21 The provision permits the penalties to be assessed through an excise tax or a civil penalty under the Employee Retirement Income Security Act of 1974 or the Public Health Service Act. Penalties for any particular failure may not be duplicated, however.

 

* * * * * * *

 

 

26 Under section 152(c), a child generally is a qualifying child of a taxpayer if the child satisfies each of five tests: (1) the child has the same principal place of abode as the taxpayer for more than one-half the taxable year; (2) the child has a specified relationship to the taxpayer; (3) the child has not yet attained a specified age; (4) the child has not provided over one-half of their own support for the calendar year in which the taxable year of the taxpayer begins; and (5) the qualifying child has not filed a joint return (other than for a claim of refund) with their spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins. A tie-breaking rule applies if more than one taxpayer claims a child as a qualifying child. The specified relationship is that the child is the taxpayer's son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual. With respect to the specified age, a child must be under age 19 (or under age 24 in the case of a full-time student). However, no age limit applies with respect to individuals who are totally and permanently disabled within the meaning of section 22(e)(3) at any time during the calendar year. Other rules may apply. The provision includes a special rule under which a child is treated as a qualifying child of an individual for purposes of the provision (and not the qualifying child of any other individual) if such individual is required to provide health care coverage for the child pursuant to a child support order.

27 Under the other provisions of the bill, a new independent agency is established called the Health Choices Administration which is headed by a Health Choices Commissioner. The Health Choices Commissioner will establish qualified plan standards, establish and operate the Health Insurance Exchange, administer the Individual Affordability Credits and perform other functions.

28 Generally, in 2009, the filing threshold is $9,350 for a single person or a married person filing separately and is $18,700 for married filing jointly. 1R-2008-117, Oct 16, 2008.

29 Veterans' Administration coverage is acceptable coverage only if the coverage is not less than a level specified by the Secretary of the Treasury and the Secretary of Veterans Affairs, in coordination with the Health Choices Commissioner, based on the individual's priority for services.

30 These requirements are detailed in the other provisions of the bill.

31 The definition of grandfathered plan is set forth in the other provisions of the bill. No new enrollment is permitted in grandfathered plans (other than dependents of individuals already enrolled).

32 Under section 7701(b)(1)(A), an alien is considered a resident of the United States if the individual: (1) is a lawful permanent U.S. resident (the "green card test") at any time during the relevant year; (2) is present in the United States for 31 or more days during the current calendar year and has been present in the United States for a substantial period of time--during a three-year period, 183 or more days weighted toward the present year (the "substantial presence test"); or (3) makes a "first-year election" to be treated as a resident of the United States (a numerical formula under which an alien may pass the substantial presence test one year earlier than under normal rules).

33 Generally, in 2009, the filing threshold is $9,350 for a single person or a married person filing separately and is $18,700 for married filing jointly. IR-2008-117, Oct. 16, 2008.

34 Sections 1402(g) and 3127 (incorporating section 1402(g) by reference) provide a process for individuals (and employers for themselves and their employees) to file for an exemption from the self-employment tax and Federal Insurance Contributions Act ("FICA") tax if, among other requirements, they are members of a recognized religious sect that has established tenets or teachings by which individuals are conscientiously opposed to the acceptance of any private or public insurance which makes payments in the event of death, disability, old age, retirement or makes payments toward the cost of, or provides services for, medical care.

35 Sec. 162. However, see special rules in section 419 and 419A for the deductibility of contributions to welfare benefit plans with respect to medical benefits for employees and their dependents.

36 Secs. 3121(a)(2) and 3306(b)(2).

37 Sec. 106.

38 Sec. 105(b).

39 Sec. 125.

40 Pub. L. No. 43-406.

41 Pub. L. No. 99-272.

42 Pub. L. No. 104-191.

43 Secs. 4980B and 4980D.

44 U.S. Department of Health and Human Services, Center for Medicare and Medicaid Services, "The State Children's Health Insurance Program," Powerpoint Presentation, March 5, 2007, p. 14.

45 There is an exception for certain small employers. Employers with annual payrolls not exceeding $250,000 during the preceding calendar year are not subject to the tax. Employers with annual payrolls between $250,000 and $400,000 during the preceding calendar year are subject to a reduced rate.

46 Employers electing to offer health benefit plans are to be treated as having established and maintained a group health plan for purposes of ERISA and the Public Health Service Act ("PHSA") (42 U.S.C. 6A) and the provision's health coverage participation requirements are deemed to be part of the terms and conditions of the employer-provided plan.

47 42 U.S.C. 6A.

48 Section 414(b) provides that, for specified employee benefit purposes, all employees of all corporations which are members of a controlled group of corporations are treated as employed by a single employer. There is a similar rule in section 414(c) under which all employees of trades or businesses (whether or not incorporated) which are under common control are treated under regulations as employed by a single employer, and, in section 414(m), under which employees of an affiliated service group (as defined in that section) are treated as employed by a single employer. Section 414(o) authorizes the Treasury to issue regulations to prevent avoidance of the requirements under section 414(m).

49 For a plan to be a "qualified health benefits plan" it needs to meet certain minimum coverage requirements, but it need not be offered through the Health Insurance Exchange.

50 Beginning in the second year after the general effective date of the insurance market reforms of the bill, employers are required to make contributions to the Health Insurance Exchange for employees who decline employer-provided coverage and instead enroll in an Exchange-participating plan. The contribution amount is equal to eight percent of the average wages paid by the employer to its employee during the time the employee was enrolled in the non-employer-provided plan. Employers with annual payrolls not exceeding $250,000 during the preceding calendar year are not subject to the tax. Employers with annual payrolls between $250,000 and $400,000 during the preceding calendar year are subject to a reduced rate. Employer contributions are paid to the Health Choices Commissioner and deposited into the Health Insurance Exchange Trust Fund. The contributions are not tied to a particular employee (i.e., the contribution does not subsidize an employee's premium liability). This contribution requirement parallels the payroll tax equal to eight percent of wages that applies to nonelecting employers.

51 The essential benefits package includes certain specified limits on required cost sharing, bans annual or life time limits on covered health care items or services and certain specified minimum services, and imposes certain requirements as to network adequacy as determined by the Health Choices Commissioner.

52 Under the provision, there is created within the Treasury of the United States a trust fund known as the "Health Insurance Exchange Trust Fund" which consists of such amount as may be appropriated or credited to the trust fund. Under the provision, an amount equal to these excise taxes received from non compliant employers is automatically appropriated to, and thus used to fund, the new Health Insurance Exchange Trust Fund.

53 The provision permits the penalties to be assessed through an excise tax or through a civil penalty under ERISA or PHSA. Penalties for any particular failure are not to be duplicated, however. The Secretary of Labor or Health and Human Services, as appropriate, is required to give advance written notification of failure to employers prior to the assessment of a penalty. The Secretary of Health and Human Services is able to bring civil actions in Federal court to collect civil penalties assessed under PHSA.

54 Secs. 3101-3128 (FICA). Sections 3501-3510 provide additional rules.

55 Pursuant to sec. 201(a) and (b) of the Social Security Act, 42 U.S.C. 401(a) and (b), these OASDI payroll taxes fund the Federal Old and Survivor Insurance Trust Fund and the Federal Disability Trust Fund, respectively. For each fiscal year, an amount equal to the OASDI payroll taxes collected is appropriated for these trust funds.

56 Pursuant to Sec. 1817 of the Social Security Act, 42 U.S.C. 1395i, the HI payroll taxes fund the Federal Hospital Insurance Trust Fund. For each fiscal year, an amount equal to the HI payroll taxes collected is appropriated for this trust fund.

57 Sec. 3121(a).

58 Sec. 3121(b). For example, employment for FICA purposes includes certain service with respect to American vessels or aircrafts and also includes service that is designated-as employment under an agreement entered into under section 233 of the Social Security Act.

59 Sec. 3121(h).

60 Under the provision, there is created within the Treasury of the United States a trust fund known as the "Health Insurance Exchange Trust Fund" which consists of such amount as may be appropriated or credited to the trust fund. Under the provision, an amount equal to these payroll taxes received from employers electing not to provide health benefits is automatically appropriated to, and thus used to fund, the new Health Insurance Exchange Trust Fund.

61 Sec. 162. However see special rules in section 419 and 419A for the deductibility of contributions to welfare benefit plans with respect to medical benefits for employees and their dependents.

62 Secs. 3121(a)(2) and 3306(b)(2).

63 Sec. 106.

64 Sec. 105(b).

65 Sec. 125.

66 The provision specifies that compensation has the same meaning as the definition of compensation for simple plans under section 408(p)(6)(A).

67 Under the provision, for employers that elect to provide coverage rather than pay an additional payroll tax, employers are required to make contributions to help discharge the coverage costs of employees enrolled in the employer-provided plan. For example, for full-time employees, the contribution amount is required to be at least 72.5 percent of the lowest cost plan meeting the requirements of the essential benefits package (reduced to 65 percent for eligible employees electing family coverage).

68 (16-10)/115 = 40 percent.

69 Section 414(b) provides that, for specified employee benefit purposes, all employees of all corporations which are members of a controlled group of corporations are treated as employed by a single employer. There is a similar rule in section 414(c) under which all employees of trades or businesses (whether or not incorporated) which are under common control are treated under regulations as employed by a single employer, and, in section 414(m), under which employees of an affiliated service group (as defined in that section) are treated as employed by a single employer. Section 414(o) authorizes the Treasury to issue regulations to prevent avoidance of the requirements of section 414(m).

70 Sec. 6103(1)(20).

71 Sec. 6103(p)(4)(D).

72 Sec. 7213.

73 Sec. 7213A.

74 Sec. 7431.

75Foreign tax credits generally are available against U.S. income tax imposed on foreign source income to the extent of foreign income taxes paid on that income. A nonresident alien generally is subject to the U.S. individual income tax only on income with a sufficient nexus to the United States.

76 In general, partnerships and S corporations are treated as pass-through entities for Federal income tax purposes. Thus, no Federal income tax is imposed at the entity level. Rather, income of these entities is passed through and taxed to the owners at the individual level.

77 In general, estates and most trusts pay tax on income at the entity level, unless the income is distributed or required to be distributed under governing law or under the terms of the governing instrument. These entities determine their tax liability using a special tax rate schedule and may be subject to the alternative minimum tax. Other trusts are treated as being owned by grantors in whole or in part for tax purposes; in such cases, the grantors are taxed on the income of the trust.

78 Sec. 213(a).

79 Sec. 213(d). There are certain limitations on the general definition including a rule that cosmetic surgery or similar procedures are generally not medical care.

80 Sec. 213(b).

81 Sec 106.

82 Sec. 105(b).

83 Sec. 105(b) provides that reimbursements for medical care within the meaning of section 213(d) pursuant to employer-provided health coverage are excludible from gross income. The definition of medical care in section 213(d) does not include the prescription drug limitation in section 213(b).

84 Sec. 223.

85 For 2009, the maximum aggregate annual contribution that can be made to an HSA is $3,000 in the case of self-only coverage and $5,950 in the case of family coverage ($3,050 and $6,150 for 2010). The annual contribution limits are increased for individuals who have attained age 55 by the end of the taxable year (referred to as "catch-up contributions"). In the case of policyholders and covered spouses who are age 55 or older, the HSA annual contribution limit is greater than the otherwise applicable limit by $1,000 in 2009 and thereafter. Contributions, including catch-up contributions, cannot be made once an individual is enrolled in Medicare.

86 Sec. 223(f).

87 Sec. 223(d)(2).

88 Sec. 220.

89 Sec. 213(b) was added by sec. 202 of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248. The reasons for the change to limit the deduction to prescription medicine are described in JCS- 38-82 at 24-25.

90 However, exceptions to the fungibility principle are provided in particular cases, some of which are described below.

91 One such exception is that the affiliated group for interest allocation purposes includes section 936 corporations (certain electing domestic corporations that have income from the active conduct of a trade or business in Puerto Rico or another U.S. possession) that are excluded from the consolidated group.

92 Treas. Reg. sec. 1.861-11T(d)(4).

93 Sec. 864(e)(5)(C).

94 Sec. 864(e)(5)(D).

95 Pub. L. No. 108-357, sec. 401.

96 For purposes of determining the assets of the worldwide affiliated group, neither stock in corporations within the group nor indebtedness (including receivables) between members of the group is taken into account.

97 Although the interest expense of a foreign subsidiary is taken into account for purposes of allocating the interest expense of the domestic members of the electing worldwide affiliated group for foreign tax credit limitation purposes, the interest expense incurred by a foreign subsidiary is not deductible on a U.S. return.

98 Indirect ownership is determined under the rules of section 958(a)(2) or through applying rules similar to those of section 958(a)(2) to stock owned directly or indirectly by domestic partnerships, trusts, or estates.

99 See Treas. Reg. sec. 1.904-4(e)(2).

100 As originally enacted under AJCA, the worldwide interest allocation rules were effective for taxable years beginning after December 31, 2008. However, the Housing and Economic Recovery Act of 2008 ("HERA") delayed the implementation of the worldwide interest allocation rules for two years, until taxable years beginning after December 31, 2010. Pub. L. No. 110-289, sec. 3093.

101 United States Model Income Tax Convention of November 15, 2006, Art. 4, par. 1.

102 U.S. income tax treaties with Greece, Hungary, Pakistan, the Philippines, Poland, and Romania are examples of such treaties, each of which entered into force more than 25 years ago. The United States recently concluded negotiations for a new income tax treaty with Hungary that contains a modern limitation-on-benefits provision; the U.S. Senate must still ratify that treaty before it may enter into force.

103 United States Model Income Tax Convention of November 15, 2006, Art. 22.

104 As documented in the Department of the Treasury Report to the Congress on Earnings Stripping, Transfer Pricing and U.S. Income Tax Treaties, some of the older U.S. income treaties that do not have limitation-on-benefits provisions, or treaties that lack all of the recent refinements to such provisions, provide for zero or low rates of U.S. withholding on certain deductible payments, including interest. Department of the Treasury, Report to the Congress on Earnings Stripping, Transfer Pricing and U.S. Income Tax Treaties 82 (2007).

105 Under section 1563(b)(2), a corporation that is a member of a controlled group of corporations on December 31 of a taxable year is treated as an excluded member of the group for the taxable year that includes such December 31 if such corporation--

(A) is a member of the group for less than one-half the number of days in such taxable year which precedes such December 31;

(B) is exempt from taxation under section 501(a) for such taxable year;

(C) is a foreign corporation subject to tax under section 881 for such taxable year;

(D) is an insurance company subject to taxation under section 801; or

(E) is a franchised corporation (as defined in section 1563(f)(4)).

106 See, e.g., ACM Partnership v. Commissioner, 157 F.3d 231 (3d Cir. 1998), aff'g 73 T.C.M. (CCH) 2189 (1997), cert. denied 526 U.S. 1017 (1999); Klamath Strategic Investment Fund, LLC v. United States, 472 F. Supp. 2d 885 (E.D. Texas 2007), aff'd 568 F.3d 537 (5th Cir. 2009); Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006), vacating and remanding 62 Fed. Cl. 716 (2004) (slip opinion at 123-124, 128); cert. denied, 127 S. Ct. 1261 (Mem.) (2007).

Closely related doctrines also applied by the courts (sometimes interchangeably with the economic substance doctrine) include the "sham transaction doctrine" and the "business purpose doctrine." See, e.g., Knetsch v. United States, 364 U.S. 361 (1960) (denying interest deductions on a "sham transaction" whose only purpose was to create the deductions). Certain "substance over form" cases involving tax-indifferent parties, in which courts have found that the substance of the transaction did not comport with the form asserted by the taxpayer, have also involved examination of whether the change in economic position that occurred, if any, was consistent with the form asserted, and whether the claimed business purpose supported the particular tax benefits that were claimed. See, e.g., TIFD-III-E, Inc. v. United States, 459 F.3d 220 (2d Cir. 2006); BB&T Corporation v. United States, 2007-1 USTC P 50,130 (M.D.N.C. 2007), aff'd 523 F.3d 461 (4th Cir. 2008).

107ACM Partnership v. Commissioner, 73 T.C.M. at 2215.

108 See ACM Partnership v. Commissioner, 157 F.3d at 256 n.48.

109 "The casebooks are glutted with [economic substance] tests. Many such tests proliferate because they give the comforting illusion of consistency and precision. They often obscure rather than clarify." Collins v. Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988).

110 See, e.g., Pasternak v. Commissioner, 990 F.2d 893, 898 (6th Cir. 1993) ("The threshold question is whether the transaction has economic substance. If the answer is yes, the question becomes whether the taxpayer was motivated by profit to participate in the transaction."). See also, Klamath Strategic Investment Fund v. United States, 568 F. 3d 537 (5th Cir. 2009) (even if taxpayers may have had a profit motive, a transaction was disregarded where it did not in fact have any realistic possibility of profit and funding was never at risk).

111 See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d 89, 91-92 (4th Cir. 1985) ("To treat a transaction as a sham, the court must find that the taxpayer was motivated by no business purposes other than obtaining tax benefits in entering the transaction, and, second, that the transaction has no economic substance because no reasonable possibility of a profit exists."); IES Industries v. United States, 253 F.3d 350, 358 (8th Cir. 2001) ("In determining whether a transaction is a sham for tax purposes [under the Eighth Circuit test], a transaction will be characterized as a sham if it is not motivated by any economic purpose out of tax considerations (the business purpose test), and if it is without economic substance because no real potential for profit exists (the economic substance test)."). As noted earlier, the economic substance doctrine and the sham transaction doctrine are similar and sometimes are applied interchangeably. For a more detailed discussion of the sham transaction doctrine, see, e.g., Joint Committee on Taxation, Study of Present-Law Penalty and Interest Provisions as Required by Section 3801 of the Internal Revenue Service Restructuring and Reform Act of 1998 (including Provisions Relating to Corporate Tax Shelters) (JCS-3-99) at 182.

112 See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 247; James v. Commissioner, 899 F.2d 905, 908 (10th Cir. 1995); Sacks v. Commissioner, 69 F.3d 982, 985 (9th Cir. 1995) ("Instead, the consideration of business purpose and economic substance are simply more precise factors to consider ... We have repeatedly and carefully noted that this formulation cannot be used as a 'rigid two-step analysis'.")

113Coltec Industries, Inc. v. United States, 62 Fed. Cl. 716 (2004) (slip opinion at 123-124, 128); vacated and remanded, 454 F.3d 1340 (Fed. Cir. 2006), cert. denied, 127 S. Ct. 1261 (Mem.) (2007).

114 The Federal Circuit Court stated that "when the taxpayer claims a deduction, it is the taxpayer who bears the burden of proving that the transaction has economic substance." The Federal Circuit Court quoted a decision of its predecessor court, stating that "Gregory v. Helvering requires that a taxpayer carry an unusually heavy burden when he attempts to demonstrate that Congress intended to give favorable tax treatment to the kind of transaction that would never occur absent the motive of tax avoidance." The Court also stated that "while the taxpayer's subjective motivation may be pertinent to the existence of a tax avoidance purpose, all courts have looked to the objective reality of a transaction in assessing its economic substance." Coltec Industries, Inc. v. United States, 454 F.3d at 1355, 1356.

115 See, e.g., Coltec Industries v. United States, 454 F.3d 1340 (Fed. Cir. 2006). The court analyzed the transfer to a subsidiary of a note purporting to provide high stock basis in exchange for a purported assumption of liabilities, and held these transactions unnecessary to accomplish any business purpose of using a subsidiary to manage asbestos liabilities. The court also held that the purported business purpose of adding a barrier to veil-piercing claims by third parties was not accomplished by the transaction. 454 F.3d at 1358-1360 (Fed. Cir. 2006).

116 See, e.g., Knetsch, 364 U.S. at 361; Goldstein v. Commissioner, 364 F.2d 734 (2d Cir. 1966) (holding that an unprofitable, leveraged acquisition of Treasury bills, and accompanying prepaid interest deduction, lacked economic substance).

117 See, e.g., Goldstein v. Commissioner, 364 F.2d at 739-40 (disallowing deduction even though taxpayer had a possibility of small gain or loss by owning Treasury bills); Sheldon v. Commissioner, 94 T.C. 738, 768 (1990) (stating that "potential for gain ... is infinitesimally nominal and vastly insignificant when considered in comparison with the claimed deductions").

118 See, e.g., Rice's Toyota World v. Commissioner, 752 F. 2d 89, 94 (4th Cir. 1985) (the economic substance inquiry requires an objective determination of whether a reasonable possibility of profit from the transaction existed apart from tax benefits); Compaq Computer Corp. v. Commissioner, 277 F.3d 778, 781 (5th Cir. 2001) (applied the same test, citing Rice's Toyota World); IES Industries v. United States, 253 F.3d 350, 354 (8th Cir. 2001).

119 See American Electric Power, Inc. v. United States, 136 F. Supp. 2d 762, 791-92 (S.D. Ohio 2001), aff'd, 326 F.3d.737 (6th Cir. 2003).

120 See, e.g., Joint Committee on Taxation, Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations (JCX-3-03) February, 2003 ("Enron Report"), Volume III at C-93, 289. Enron Corporation relied on Frank Lyon Co. v. United States, 435 U.S. 561, 577-78 (1978), and Newman v. Commissioner, 902 F.2d 159, 163 (2d Cir. 1990), to argue that financial accounting benefits arising from tax savings constitute a good business purpose.

121 See, e.g., ACM Partnership v. Commissioner, 157 F.3d 231 (3d Cir. 1998), aff'g 73 T.C.M. (CCH) 2189 (1997), cert. denied 526 U.S. 1017 (1999).

122 See, e.g., TIFD-III-E, Inc. v. United States, 459 F.3d 220 (2d Cir. 2006).

123 In applying these tests, any State or local income tax effect which is related to a Federal income tax effect shall be treated in the same manner as a Federal income tax effect.

124 If the tax benefits are clearly consistent with all applicable provisions of the Code and the purposes of such provisions, it is not intended that such tax benefits be disallowed if the only reason for such disallowance is that the transaction fails the economic substance doctrine as defined in this provision. See, e.g., Treas. Reg. sec. 1.269-2, stating that characteristic of circumstances in which a deduction otherwise allowed will be disallowed are those in which the effect of the deduction, credit, or other allowance would be to distort the liability of the particular taxpayer when the essential nature of the transaction or situation is examined in the light of the basic purpose or plan which the deduction, credit, or other allowance was designed by the Congress to effectuate.

125 The examples are illustrative and not exclusive.

126 See, e.g., John Kelley Co. v. Commissioner, 326 U.S. 521 (1946) (respecting debt characterization in one case and not in the other, based on all the facts and circumstances).

127 See, e.g., Sam Siegel v. Commissioner, 45. T.C. 566 (1966), acq. 1966-2 C.B. 3. But see Commissioner v. Bollinger, 485 U.S. 340 (1988) (agency principles applied to title-holding corporation under the facts and circumstances).

128 See, e.g., Rev. Proc. 2009-3 2009-11 R.B. 108, Secs. 3.01(38), (39), and (41) (IRS will not rule on certain matters relating to incorporations or reorganizations unless there is a "significant issue"); compare Gregory v. Helvering, 293 U.S. 465 (1935).

129 See, e.g., National Carbide v. Commissioner, 336 U.S. 422 (1949), Moline Properties v. Commissioner, 319 U.S. 435 (1943); compare, e.g. Aiken Industries, Inc. v. Commissioner, 56 T.C. 925 (1971), acq., 19722 C.B. 1; Commissioner v. Bollinger, 485 U.S. 340 (1988); see also sec. 7701(1).

130 See, e.g., Frank Lyon v. Commissioner, 435 U.S. 561 (1978); Hilton v. Commissioner, 74 T.C. 305, aff'd, 671 F. 2d 316 (9th Cir. 1982), cert. denied, 459 U.S. 907 (1982); Coltec Industries v. United States, 454 F.3d 1340 (Fed. Cir. 2006), cert. denied, 127 S. Ct. 1261 (Mem.) (2007); BB&T Corporation v. United States, 2007-1 USTC P 50,130 (M.D.N.C. 2007), aff'd, 523 F.3d 461 (4th Cir. 2008).

131 As examples of cases in which courts have found that a transaction does not meet the requirements for the treatment claimed by the taxpayer under the Code, or does not have economic substance, see e.g., TIFD-III-E, Inc. v. United States, 459 F.3d 220 (2d Cir. 2006); BB&T Corporation v. United States, 2007-1 USTC P 50,130 (M.D.N.C. 2007) aff'd, 523 F.3d 461 (4th Cir. 2008); Tribune Company and Subsidiaries v. Commissioner, 125 T.C. 110 (2005); H.J. Heinz Company and Subsidiaries v. United States, 76 Fed. Cl. 570 (2007); Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006), cert. denied 127 S. Ct. 1261 (Mem.) (2007); Long Term Capital Holdings LP v. United States, 330 F. Supp. 2d 122 (D. Conn. 2004), aff'd, 150 Fed. Appx. 40 (2d Cir. 2005); Klamath Strategic Investment Fund, LLC v. United States, 472 F. Supp. 2d 885 (E.D. Texas 2007); aff'd, 568 F.3D 537 (5th Cir. 2009); Santa Monica Pictures LLC v. Commissioner, 89 T.C.M. 1157 (2005).

132 See, e.g., Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006), cert. denied 127 S. Ct. 1261 (Mem.) (2007) ("the first asserted business purpose focuses on the wrong transaction--the creation of Garrison as a separate subsidiary to manage asbestos liabilities. ... [W]e must focus on the transaction that gave the taxpayer a high basis in the stock and thus gave rise to the alleged benefit upon sale...") 454 F.3d 1340, 1358 (Fed. Cir. 2006). See also ACM Partnership v. Commissioner, 157 F.3d at 256 n.48; Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613 (1938) ("A given result at the end of a straight path is not made a different result because reached by following a devious path.").

133 For purposes of these tests, any State or local income tax effect which is related to a Federal income tax effect shall be treated in the same manner as a Federal income tax effect.

134 The provision defines "economic substance doctrine" as the common law doctrine under which tax benefits under subtitle A with respect to a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose. Thus, the definition includes any doctrine that denies tax benefits for lack of economic substance, for lack of business purpose, or for lack of both.

135 See, e.g., Treas. Reg. sec. 1.269-2(b) (stating that a distortion of tax liability indicating the principal purpose of tax evasion or avoidance might be evidenced by the fact that "the transaction was not undertaken for reasons germane to the conduct of the business of the taxpayer"). Similarly, in ACM Partnership v. Commissioner, 73 T.C.M. (CCH) 2189 (1997), the court stated:

Key to [the determination of whether a transaction has economic substance] is that the transaction must be rationally related to a useful nontax purpose that is plausible in light of the taxpayer's conduct and useful in light of the taxpayer's economic situation and intentions. Both the utility of the stated purpose and the rationality of the means chosen to effectuate it must be evaluated in accordance with commercial practices in the relevant industry. A rational relationship between purpose and means ordinarily will not be found unless there was a reasonable expectation that the nontax benefits would be at least commensurate with the transaction costs. [Citations omitted.]

136 Claiming that a financial accounting benefit constitutes a substantial non-tax purpose fails to consider the origin of the accounting benefit (i.e., reduction of taxes) and significantly diminishes the purpose for having a substantial non-tax purpose requirement. See, e.g., American Electric Power, Inc. v. United States, 136 F. Supp. 2d 762, 791-92 (S.D. Ohio 2001) ("AEP's intended use of the cash flows generated by the [corporate-owned life insurance] plan is irrelevant to the subjective prong of the economic substance analysis. If a legitimate business purpose for the use of the tax savings 'were sufficient to breathe substance into a transaction whose only purpose was to reduce taxes, [then] every sham tax-shelter device might succeed,'...") (citing Winn-Dixie v. Commissioner, 113 T.C. 254, 287 (1999)); aff'd, 326 F2d 737 (6th Cir. 2003).

137 Thus, a "reasonable possibility of profit" alone will not be sufficient to establish that a transaction has economic substance.

138 Sec. 6662.

139 A tax shelter is defined for this purpose as a partnership or other entity, an investment plan or arrangement, or any other plan or arrangement if a significant purpose of such partnership, other entity, plan, or arrangement is the avoidance or evasion of Federal income tax. Sec. 6662(d)(2)(C).

140 Sec. 6664(c).

141 Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec. 1.6664-4(c).

142 See Treas. Reg. Sec. 1.6664-4(c). In addition to the requirements applicable to taxpayers under the regulations, advisors may be subject to potential penalties under section 6694 (applicable to return preparers), and to monetary penalties and other sanctions under Circular 230 (which provides rules governing persons practicing before the IRS). Under Circular 230, if a transaction is a "covered transaction" (a term that includes listed transactions and certain non-listed reportable transactions) a "more likely than not" confidence level is required for written tax advice that may be relied upon by a taxpayer for the purpose of avoiding penalties, and certain other standards must also be met. Treasury Dept. Circular 230 (Rev. 4- 2008) Sec. 10.35. For other tax advice, Circular 230 generally requires a lower "realistic possibility" confidence level or a "non-frivolous" confidence level coupled with advising the client of any opportunity to avoid the accuracy related penalty under section 6662 by adequate disclosure. Treasury Dept. Circular 230 (Rev. 4-2008) Sec. 10.34.

143 Sec. 6662A(b)(2).

144 Sec. 6707A(c)(1).

145 Sec. 6707A(c)(2).

146 Sec. 6662A(a).

147 Section 6664(d)(3)(B) would not allow a reasonable belief to be based on a "disqualified opinion" or on an opinion from a "disqualified tax advisor".

148 Sec. 6662A(c).

149 Sec. 6664(d).

150 Sec. 6707A(d).

151 Sec. 6707A(e).

152For this purpose, any reduction in the excess of deductions allowed for the taxable year over gross income for such year, and any reduction in the amount of capital losses which would (without regard to section 1211) be allowed for such year, shall be treated as an increase in taxable income. Sec. 6662A(b).

153 Sec. 6662A(e)(3).

154 See the previous discussion regarding the penalty for failing to disclose a reportable transaction.

155 Sec. 6664(d).

156 The term "material advisor" means any person who provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, or carrying out any reportable transaction, and who derives gross income in excess of $50,000 in the case of a reportable transaction substantially all of the tax benefits from which are provided to natural persons ($250,000 in any other case). Sec. 6111(b)(1).

157 This situation could arise, for example, when an advisor has an arrangement or understanding (oral or written) with an organizer, manager, or promoter of a reportable transaction that such party will recommend or refer potential participants to the advisor for an opinion regarding the tax treatment of the transaction.

158 An advisor should not be treated as participating in the organization of a transaction if the advisor's only involvement with respect to the organization of the transaction is the rendering of an opinion regarding the tax consequences of such transaction. However, such an advisor may be a "disqualified tax advisor" with respect to the transaction if the advisor participates in the management, promotion, or sale of the transaction (or if the advisor is compensated by a material advisor, has a fee arrangement that is contingent on the tax benefits of the transaction, or as determined by the Secretary, has a continuing financial interest with respect to the transaction). See Notice 2005-12, 2005-1 C.B. 494 regarding disqualified compensation arrangements.

159 Sec. 6676.

160 That provision generally provides that in any case in which a court determines that the economic substance doctrine is relevant, a transaction has economic substance only if: (1) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position, and (2) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction. Specific other rules also apply. See "Explanation of Provision" for the immediately preceding provision, "Codification of the economic substance doctrine.".

161 For example, the penalty would apply to a transaction that is disregarded as a result of the application of the same factors and analysis that is required under the provision for an economic substance analysis, even if a different term is used to describe the doctrine.

162 I.e., section 6662(b) of present law applies to the new penalty as well.

163 As under present law, the penalties under section 6662 (including the new penalty) do not apply to any portion of an underpayment on which a fraud penalty is imposed.

164 For purposes of this rule, all persons treated as a single employer under section 52(a) are treated as one person.

165 The rules and exceptions of section 6662(d) do not apply to any understatement attributable to a transaction that lacks economic substance or fails to meet the requirements of any similar rule of law.

166 Sec. 106 and proposed Treas. Reg. sec. 1.106-1.

167 Sec. 105(b).

168 This requirement is provide in section 152(d)(l)(B) and thus is disregarded for purposes of determining whether an individual is a taxpayer's dependent for purposes of the exclusions for employer-provided health coverage.

169 Generally, same-sex partners do not qualify as dependents under section 152. In addition, same-sex partners are not recognized as spouses for purposes of the Code. Defense of Marriage Act, Pub. L. No. 104-199.

170 Secs. 3121(a)(2) and 3306(b)(2).

171 Secs. 419(e) and 501(c)(9).

172 The provision does not modify the present law dependency exemption.

173 Secs. 3121(a)(2), 3231(e)(1), 3306(b)(2), 3401(a)(24).

174 Documents which may be disclosed under this provision include but are not limited to:

 

Schedule C, Form 1040, Profit (or Loss) from Business or Profession

Schedule E, Form 1040, Supplemental Income Schedule-Part 111, Income or Loss from Partnerships

Schedule F, Form 1040, Farm Income and Expenses Schedule SE, Form 1040, Computation of Social Security Self-Employment Tax

Form 1065, U.S. Partnership Return of Income Form 941, Employer's Quarterly Federal Tax Return

Form 942, Employer's Quarterly Tax Return for Household Employees or portions Schedule H, Form 1040

Form 943, Employer's Annual Tax Return for Agricultural Employees

Form W-2, Wage and Tax Statement.

 

See Internal Revenue Service, Internal Revenue Manual, sec. 11.3.29.3--Administration of the Social Security Act--Social Security Administration (May 27, 2005).

175 The information returns that may be disclosed under section 6103(1)(5) are those filed under Part Subchapter A, Chapter 61 of the Code. These include, primarily, Form W-2, Form W-3, and Form 1099-R. See Internal Revenue Service, Internal Revenue Manual, sec. 11.3.29.3.2--Disclosure of Information Returns to Social Security Administration (May 27, 2005).

176 Sec. 6103(1)(20).

177 Department of the Treasury, Office of Tax Analysis, Value of IRS Information for Determining Eligibility for the Low Income Subsidy Program (LIS) of the Medicare Prescription Drug Program (Medicare Part D) (December 2008) at 1 and 3.

178 A specified health insurance policy does not include insurance if substantially all of the coverage provided under such policy consists of excepted benefits described in section 9832(c) of the Code. Examples of excepted benefits described in section 9832(c) are coverage for only accident, or disability insurance, or any combination thereof; liability insurance, including general liability insurance and automobile liability insurance; workers' compensation or similar insurance; automobile medical payment insurance; coverage for on-site medical clinics; limited scope dental or vision benefits; benefits for long term care, nursing home care, community based care, or any combination thereof; coverage only for a specified disease or illness; hospital indemnity or other fixed indemnity insurance; and Medicare supplemental coverage.

179 Under the provision, the United States includes any possession of the United States.

180 Descriptions of the macroeconomic equilibrium growth model and other models used by the Joint Committee staff may be found in Joint Committee on Taxation, Overview of the Work of the Staff of the Joint Committee on Taxation to Model the Macroeconomic Effects of Proposed Tax Legislation to Comply with House Rule XIII.3(h)(2), JCX-105-03, December 22, 2003, and Background Information about the Dynamic Stochastic General Equilibrium Model Used by the staff of the Joint Committee on Taxation in the Macroeconomic Analysis of Tax Policy, JCX-52-06, December 14, 2006.

181 For a thorough discussion of the issues and empirical evidence of the likely impacts of reforms similar to those in this bill, see Congressional Budget Office, Key Issues in Analyzing Major Health Insurance Proposals, December, 2008, and Effects of Changes to the Health Insurance System on Labor Markets, Economic and Budget Issue Brief, July 13, 2009.

182 These models are described in Joint Committee on Taxation, Overview of Revenue Estimating Procedures and Methodologies Used by the Staff of the Joint Committee on Taxation, JCX-1-05, February 2, 2005.

183 To get a more complete picture of the range of possible macroeconomic effects from policy changes, it would generally be optimal to use additional models that are designed to examine the long-term growth effects of tax policy in a computable, general equilibrium framework, with either partial or perfect foresight. The Joint Committee staff has used such models in past analyses. But given the current size and projected present-law growth of deficits, the use of such models would require making very strong counterfactual assumptions about present law fiscal policy that may distort the analysis. That is, there would have to be an assumption that the Federal debt is reduced to sustainable levels in the foreseeable future in a computable general equilibrium framework. Because the policy being implemented either reduces the debt (in the case of the revenue provisions analyzed by themselves) or is close to deficit neutral (in the case of the revenue items combined with the spending provisions), in a simulation that assumed some additional provision that would reduce Federal government debt by the required amount, the effects of the debt-closing policy would overwhelm the effects of the provision being analyzed.

 

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