Excerpts Available of Healthcare Reconciliation Act Committee Report

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 being made in order by the Rules Committee when it grants a rule for floor consideration of this reconciliation bill.

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.

The amendment is as follows:

Strike out all after the enacting clause (other than title VII of division B and division C) and insert the following:

SECTION 1. SHORT TITLE; TABLE OF DIVISIONS, TITLES, AND SUBTITLES.

(a) SHORT TITLE. -- This Act may be cited as the "America's Affordable Health Choices Act of 2009".

(b) TABLE OF DIVISIONS, TITLES, AND SUBTITLES. -- This Act is divided into divisions, titles, and subtitles as follows:

             DIVISION A -- AFFORDABLE HEALTH CARE CHOICES

(a) IN GENERAL. -- Subchapter A of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new part:

"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.".

(b) INFORMATION REPORTING. --

(1) IN GENERAL. -- Subpart B of part III of subchapter A of chapter 61 of such Code is amended by inserting after section 6050W the following new section:

"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.".

(2) PENALTY FOR FAILURE TO FILE. --

(A) RETURN. -- Subparagraph (B) of section 6724(d)(1) of such Code is amended by striking "or" at the end of clause (xxii), by striking "and" at the end of clause (xxiii) and inserting "or", and by adding at the end the following new clause:

"(xxiv) section 6050X (relating to returns relating to health insurance coverage), and".

(B) STATEMENT. -- Paragraph (2) of section 6724(d) of such Code is amended by striking "or" at the end of subparagraph (EE), by striking the period at the end of subparagraph (FF) and inserting ", or", and by inserting after subparagraph (FF) the following new subparagraph:

"(GG) section 6050X (relating to returns relating to health insurance coverage).".

(c) RETURN REQUIREMENT. -- Subsection (a) of section 6012 of such Code is amended by inserting after paragraph (9) the following new paragraph:

"(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.".

(d) CLERICAL AMENDMENTS. --

(1) The table of parts for subchapter A of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new item:

"Sec. 6050X. Returns relating to health insurance coverage.".

(e) SECTION 15 NOT TO APPLY. -- The amendment made by subsection (a) shall not be treated as a change in a rate of tax for purposes of section 15 of the Internal Revenue Code of 1986.

(f) EFFECTIVE DATE. --

(1) IN GENERAL. -- The amendments made by this section shall apply to taxable years beginning after December 31, 2012.

(2) RETURNS. -- The amendments made by subsection (b) shall apply to calendar years beginning after December 31, 2012.

(a) IN GENERAL. -- Chapter 43 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:

"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).".

(b) CLERICAL AMENDMENT. -- The table of sections for chapter 43 of such Code is amended by adding at the end the following new item:

"Sec. 4980H. Election with respect to health coverage participation requirements.".

(c) EFFECTIVE DATE. -- The amendments made by this section shall apply to periods beginning after December 31, 2012.

SEC. 412. RESPONSIBILITIES OF NONELECTING EMPLOYERS.

(a) IN GENERAL. -- Section 3111 of the Internal Revenue Code of 1986 is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:

"(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

"(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.".

(b) DEFINITIONS. -- Section 3121 of such Code is amended by adding at the end the following new subsection:

"(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.".

(c) CONFORMING AMENDMENT. -- Subsection (d) of section 3111 of such Code, as redesignated by this section, is amended by striking "this section" and inserting "subsections (a) and (b)".

(d) APPLICATION TO RAILROADS. --

(1) IN GENERAL. -- Section 3221 of such Code is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:

"(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.".

(2) DEFINITIONS. -- Subsection (e) of section 3231 of such Code is amended by adding at the end the following new paragraph:

"(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.".

(3) CONFORMING AMENDMENT. -- Subsection (d) of section 3221 of such Code, as redesignated by this section, is amended by striking "subsections (a) and (b), see section 3231(e)(2)" and inserting "this section, see paragraphs (2) and (13)(B) of section 3231(e)".

(e) EFFECTIVE DATE. -- The amendments made by this section shall apply to periods beginning after December 31, 2012.

(a) IN GENERAL. -- Subpart D of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to business-related credits) is amended by adding at the end the following new section:

"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.".

(b) CREDIT TO BE PART OF GENERAL BUSINESS CREDIT. -- Subsection (b) of section 38 of such Code (relating to general business credit) is amended by striking "plus" at the end of paragraph (34), by striking the period at the end of paragraph (35) and inserting ", plus", and by adding at the end the following new paragraph:

"(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).".

(c) CLERICAL AMENDMENT. -- The table of sections for subpart D of part IV of subchapter A of chapter 1 of such Code is amended by inserting after the item relating to section 45Q the following new item:

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

(d) EFFECTIVE DATE. -- The amendments made by this section shall apply to taxable years beginning after December 31, 2012.

(a) IN GENERAL. -- Subsection (l) of section 6103 of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:

"(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.".

(b) PROCEDURES AND RECORDKEEPING RELATED TO DISCLOSURES. -- Paragraph (4) of section 6103(p) of such Code is amended --

(1) by inserting ", or any entity described in subsection (l)(21)," after "or (20)" in the matter preceding subparagraph (A),

(2) by inserting "or any entity described in subsection (l)(21)," after "or (o)(1)(A)," in subparagraph (F)(ii), and

(3) by inserting "or any entity described in subsection (l)(21)," after "or (20)," both places it appears in the matter after subparagraph (F).

(c) UNAUTHORIZED DISCLOSURE OR INSPECTION. -- Paragraph (2) of section 7213(a) of such Code is amended by striking "or (20)" and inserting "(20), or (21)".

(a) IN GENERAL. -- Part VIII of subchapter A of chapter 1 of the Internal Revenue Code of 1986, as added by this title, is amended by adding at the end the following new subpart:

"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.".

(b) CLERICAL AMENDMENT. -- The table of subparts for part VIII of subchapter A of chapter 1 of such Code, as added by this title, is amended by inserting after the item relating to subpart A the following new item:

(d) EFFECTIVE DATE. -- The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

SEC. 442. DISTRIBUTIONS FOR MEDICINE QUALIFIED ONLY IF FOR PRESCRIBED DRUG OR INSULIN.

(a) HSAS. -- Subparagraph (A) of section 223(d)(2) of the Internal Revenue Code of 1986 is amended by adding at the end the following: "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.".

(b) ARCHER MSAS. -- Subparagraph (A) of section 220(d)(2) of such Code is amended by adding at the end the following: "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.".

(c) HEALTH FLEXIBLE SPENDING ARRANGEMENTS AND HEALTH REIMBURSEMENT ARRANGEMENTS. -- Section 106 of such Code is amended by adding at the end the following new subsection:

"(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.".

(d) EFFECTIVE DATES. -- The amendment made by this section shall apply to expenses incurred after December 31, 2009.

SEC. 443. DELAY IN APPLICATION OF WORLDWIDE ALLOCATION OF INTEREST.

(a) IN GENERAL. -- Paragraphs (5)(D) and (6) of section 864(f) of the Internal Revenue Code of 1986 are each amended by striking "December 31, 2010" and inserting "December 31, 2019".

(b) TRANSITION. -- Subsection (f) of section 864 of such Code is amended by striking paragraph (7).

(a) IN GENERAL. -- Section 894 of the Internal Revenue Code of 1986 (relating to income affected by treaty) is amended by adding at the end the following new subsection:

"(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.".

(b) EFFECTIVE DATE. -- The amendment made by this section shall apply to payments made after the date of the enactment of this Act.

SEC. 452. CODIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

(a) IN GENERAL. -- Section 7701 of the Internal Revenue Code of 1986 is amended by redesignating subsection (o) as subsection (p) and by inserting after subsection (n) the following new subsection:

"(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 pretax 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.".

(b) EFFECTIVE DATE. -- The amendments made by this section shall apply to transactions entered into after the date of the enactment of this Act.

SEC. 453. PENALTIES FOR UNDERPAYMENTS.

(a) PENALTY FOR UNDERPAYMENTS ATTRIBUTABLE TO TRANSACTIONS LACKING ECONOMIC SUBSTANCE. --

(1) IN GENERAL. -- Subsection (b) of section 6662 of the Internal Revenue Code of 1986 is amended by inserting after paragraph (5) the following new paragraph:

"(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.".

(2) INCREASED PENALTY FOR NONDISCLOSED TRANSACTIONS. -- Section 6662 of such Code is amended by adding at the end the following new subsection:

"(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.".

(3) CONFORMING AMENDMENT. -- Subparagraph (B) of section 6662A(e)(2) of such Code is amended --

(A) by striking "section 6662(h)" and inserting "subsections (h) or (i) of section 6662", and

(B) by striking "GROSS VALUATION MISSTATEMENT PENALTY" in the heading and inserting "CERTAIN INCREASED UNDERPAYMENT PENALTIES".

(b) REASONABLE CAUSE EXCEPTION NOT APPLICABLE TO NONECONOMIC SUBSTANCE TRANSACTIONS, TAX SHELTERS, AND CERTAIN LARGE OR PUBLICLY TRADED PERSONS. -- Subsection (c) of section 6664 of such Code is amended --

(1) by redesignating paragraphs (2) and (3) as paragraphs (3) and (4), respectively,

(2) by striking "paragraph (2)" in paragraph (4)(A), as so redesignated, and inserting "paragraph (3)", and

(3) by inserting after paragraph (1) the following new paragraph:

"(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)).".

(c) APPLICATION OF PENALTY FOR ERRONEOUS CLAIM FOR REFUND OR CREDIT TO NONECONOMIC SUBSTANCE TRANSACTIONS. -- Section 6676 of such Code is amended by redesignating subsection (c) as subsection (d) and inserting after subsection (b) the following new subsection:

"(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.".

(d) SPECIAL UNDERSTATEMENT REDUCTION RULE FOR CERTAIN LARGE OR PUBLICLY TRADED PERSONS. --

(1) IN GENERAL. -- Paragraph (2) of section 6662(d) of such Code is amended by adding at the end the following new subparagraph:

"(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).".

(2) CONFORMING AMENDMENT. -- Subparagraph (C) of section 6662(d)(2) of such Code is amended by striking "Subparagraph (B)" and inserting "Subparagraphs (B) and (D)(i)(II)".

(e) EFFECTIVE DATE. -- The amendments made by this section shall apply to transactions entered into after the date of the enactment of this Act.

(a) APPLICATION OF ACCIDENT AND HEALTH PLANS TO ELIGIBLE BENEFICIARIES. --

(1) EXCLUSION OF CONTRIBUTIONS. -- Section 106 of the Internal Revenue Code of 1986, as amended by section 442, (relating to contributions by employer to accident and health plans) is amended by adding at the end the following new subsection:

"(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.".

(2) EXCLUSION OF AMOUNTS EXPENDED FOR MEDICAL CARE. -- The first sentence of section 105(b) of such Code (relating to amounts expended for medical care) is amended --

(A) by striking "and his dependents" and inserting "his dependents", and

(B) by inserting before the period the following: "and any eligible beneficiary (within the meaning of section 106(f)) with respect to the taxpayer".

(3) PAYROLL TAXES. --

(A) Section 3121(a)(2) of such Code is amended --

(i) by striking "or any of his dependents" in the matter preceding subparagraph (A) and inserting ", any of his dependents, or any eligible beneficiary (within the meaning of section 106(g)) with respect to the employee",

(ii) by striking "or any of his dependents," in subparagraph (A) and inserting ", any of his dependents, or any eligible beneficiary (within the meaning of section 106(g)) with respect to the employee,", and

(iii) by striking "and their dependents" both places it appears and inserting "and such employees' dependents and eligible beneficiaries (within the meaning of section 106(g))".

(B) Section 3231(e)(1) of such Code is amended --

(i) by striking "or any of his dependents" and inserting ", any of his dependents, or any eligible beneficiary (within the meaning of section 106(g)) with respect to the employee,", and

(ii) by striking "and their dependents" both places it appears and inserting "and such employees' dependents and eligible beneficiaries (within the meaning of section 106(g))".

(C) Section 3306(b)(2) of such Code is amended --

(i) by striking "or any of his dependents" in the matter preceding subparagraph (A) and inserting ", any of his dependents, or any eligible beneficiary (within the meaning of section 106(g)) with respect to the employee,",

(ii) by striking "or any of his dependents" in subparagraph (A) and inserting ", any of his dependents, or any eligible beneficiary (within the meaning of section 106(g)) with respect to the employee", and

(iii) by striking "and their dependents" both places it appears and inserting "and such employees' dependents and eligible beneficiaries (within the meaning of section 106(g))".

(D) Section 3401(a) of such Code is amended by striking "or" at the end of paragraph (22), by striking the period at the end of paragraph (23) and inserting "; or", and by inserting after paragraph (23) the following new paragraph:

"(24) for any payment made to or for the benefit of an employee or any eligible beneficiary (within the meaning of section 106(g)) 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(g).".

(b) EXPANSION OF DEPENDENCY FOR PURPOSES OF DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-EMPLOYED INDIVIDUALS. --

(1) IN GENERAL. -- Paragraph (1) of section 162(l) of the Internal Revenue Code of 1986 (relating to special rules for health insurance costs of self-employed individuals) is amended to read as follows:

"(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) CONFORMING AMENDMENT. -- Subparagraph (B) of section 162(l)(2) of such Code is amended by inserting ", any dependent, or individual described in subparagraph (D) or (E) of paragraph (1) with respect to" after "spouse".

(c) EXTENSION TO ELIGIBLE BENEFICIARIES OF SICK AND ACCIDENT BENEFITS PROVIDED TO MEMBERS OF A VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATION AND THEIR DEPENDENTS. -- Section 501(c)(9) of the Internal Revenue Code of 1986 (relating to list of exempt organizations) is amended by adding at the end the following new sentence: "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.".

(d) FLEXIBLE SPENDING ARRANGEMENTS AND HEALTH REIMBURSEMENT ARRANGEMENTS. -- The Secretary of Treasury shall issue guidance of general applicability providing that medical expenses that otherwise qualify --

(1) for reimbursement from a flexible spending arrangement under regulations in effect on the date of the enactment of this Act may be reimbursed from an employee's flexible spending arrangement, notwithstanding the fact that such expenses are attributable to any individual who is not the employee's spouse or dependent (within the meaning of section 105(b) of the Internal Revenue Code of 1986) but is an eligible beneficiary (within the meaning of section 106(f) of such Code) under the flexible spending arrangement with respect to the employee, and

(2) for reimbursement from a health reimbursement arrangement under regulations in effect on the date of the enactment of this Act may be reimbursed from an employee's health reimbursement arrangement, notwithstanding the fact that such expenses are attributable to an individual who is not a spouse or dependent (within the meaning of section 105(b) of such Code) but is an eligible beneficiary (within the meaning of section 106(f) of such Code) under the health reimbursement arrangement with respect to the employee.

(e) EFFECTIVE DATE. -- The amendments made by this section shall apply to taxable years beginning after December 31, 2009.

The table of contents for this division is as follows:

           DIVISION B -- MEDICARE AND MEDICAID IMPROVEMENTS

(a) IN GENERAL. -- Section 1888(e)(4)(E)(ii) of the Social Security Act (42 U.S.C. 1395yy(e)(4)(E)(ii)) is amended --

(1) in subclause (III), by striking "and" at the end;

(2) by redesignating subclause (IV) as subclause (VI); and

(3) by inserting after subclause (III) the following new subclauses:

"(IV) for each of fiscal years 2004 through 2009, the rate computed for the previous fiscal year increased by the skilled nursing facility market basket percentage change for the fiscal year involved;

"(V) for fiscal year 2010, the rate computed for the previous fiscal year; and".

(b) DELAYED EFFECTIVE DATE. -- Section 1888(e)(4)(E)(ii)(V) of the Social Security Act, as inserted by subsection (a)(3), shall not apply to payment for days before January 1, 2010.

SEC. 1102. INPATIENT REHABILITATION FACILITY PAYMENT UPDATE.

(a) IN GENERAL. -- Section 1886(j)(3)(C) of the Social Security Act (42 U.S.C. 1395ww(j)(3)(C)) is amended by striking "and 2009" and inserting "through 2010".

(b) DELAYED EFFECTIVE DATE. -- The amendment made by subsection (a) shall not apply to payment units occurring before January 1, 2010.

(1) IN GENERAL. -- Notwithstanding any other provision of law, during the one year period that begins on the effective date specified in subsection (e)(1), the information described in paragraph (2) shall be available from the National Practitioner Data Bank (described in section 1921 of the Social Security Act) to the Secretary of Veterans Affairs without charge.

(2) INFORMATION DESCRIBED. -- For purposes of paragraph (1), the information described in this paragraph is the information that would, but for the amendments made by this section, have been available to the Secretary of Veterans Affairs from the Healthcare Integrity and Protection Data Bank.

(d) FUNDING. -- Notwithstanding any provisions of this Act, sections 1128E(d)(2) and 1817(k)(3) of the Social Security Act, or any other provision of law, there shall be available for carrying out the transition process under section 1128E(h) of the Social Security Act over the period required to complete such process, and for operation of the National Practitioner Data Bank until such process is completed, without fiscal year limitation --

(1) any fees collected pursuant to section 1128E(d)(2) of such Act; and

(2) such additional amounts as necessary, from appropriations available to the Secretary and to the Office of the Inspector General of the Department of Health and Human Services under clauses (i) and (ii), respectively, of section 1817(k)(3)(A) of such Act, for costs of such activities during the first 12 months following the date of the enactment of this Act.

(e) EFFECTIVE DATE. -- The amendments made --

(1) by subsection (a)(2) shall take effect on the first day after the Secretary of Health and Human Services certifies that the process implemented pursuant to section 1128E(h) of the Social Security Act (as added by subsection (a)(3)) is complete; and

(2) by subsection (b) shall take effect on the earlier of the date specified in paragraph (1) or the first day of the second succeeding fiscal year after the fiscal year during which this Act is enacted.

SEC. 1653. COMPLIANCE WITH HIPAA PRIVACY AND SECURITY STANDARDS.

The provisions of sections 262(a) and 264 of the Health Insurance Portability and Accountability Act of 1996 (and standards promulgated pursuant to such sections) and the Privacy Act of 1974 shall apply with respect to the provisions of this subtitle and amendments made by this subtitle.

(a) IN GENERAL. -- Paragraph (19) of section 6103(l) of the Internal Revenue Code of 1986 is amended to read as follows:

"(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.".

(b) SAFEGUARDS. -- Paragraph (4) of section 6103(p) of such Code is amended --

(1) by striking "(19)," each place it appears, and

(2) by striking "or (17)" each place it appears and inserting "(17), or (19)".

(c) CONFORMING AMENDMENT. -- Paragraph (3) of section 6103(a) of such Code is amended by striking "(19),".

(d) EFFECTIVE DATE. -- The amendments made by this section shall apply to disclosures made after the date which is 12 months after the date of the enactment of this Act.

SEC. 1802. COMPARATIVE EFFECTIVENESS RESEARCH TRUST FUND; FINANCING FOR TRUST FUND.

(a) ESTABLISHMENT OF TRUST FUND. --

(1) IN GENERAL. -- Subchapter A of chapter 98 of the Internal Revenue Code of 1986 (relating to trust fund code) is amended by adding at the end the following new section:

"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.".

(2) CLERICAL AMENDMENT. -- The table of sections for such subchapter A is amended by adding at the end thereof the following new item:

"Sec. 9511. Health Care Comparative Effectiveness Research Trust Fund.".

(b) FINANCING FOR FUND FROM FEES ON INSURED AND SELF-INSURED HEALTH PLANS. --

(1) GENERAL RULE. -- Chapter 34 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subchapter:

"(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.".

(2) CLERICAL AMENDMENTS. --

(A) Chapter 34 of such Code is amended by striking the chapter heading and inserting the following:

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 Commissioner ²⁷ 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 coverage ²⁹ 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 pro-rated 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.

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 pretax 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 pre-existing 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

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 package ⁵¹ (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.

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

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.

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 pretax basis through salary reduction.⁶⁵ Such salary reduction contributions are treated as employer contributions and thus also are excluded from gross income.

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 compensation ⁶⁶ 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 to 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 ("CPIU"). 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.

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

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.

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.

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.

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.

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.

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

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.

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.

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.

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

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 provisions ¹⁰² 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.

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).

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).

J. Codification of Economic Substance Doctrine (sec. 452 of the bill and sec. 7701 of the Code)

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

Application by the courts

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

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.

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 long-standing judicial and administrative practice are respected, merely because the choice between meaningful economic alternatives is largely or entirely based on comparative tax advantages. Among ¹²⁵ 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 purpose ¹³³ 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.

K. Penalties for Underpayments Attributable to Transactions Lacking Economic Substance (sec. 453 of the bill and sec. 6662 and sec. 6664 of the Code)

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

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

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

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

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.

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.

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).

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.

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.

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)

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.

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 provi-

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 nontax 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

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.

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 policy ¹⁷⁸ 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.

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 microsimulation 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 Macro economic 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 in come. 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.

 

Figure 1. -- Effect of Tax Title on Marginal and Average

 

Tax Rates on Certain Types of Income

 

 

 

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 re form 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

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.

 

Figure 2. -- Effect of Tax Title and Subsidies on Marginal

 

and Averages Tax Rates on Certain Types of Income

 

 

 

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

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

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.

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.

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 re turns 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 optout 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.

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).

³⁹Sec. 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.

⁷⁵ Foreign 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)).

¹⁰⁶See, 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.

¹⁰⁸See 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.

¹¹⁵See, 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).

¹¹⁶See, 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).

¹¹⁷See, 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").

¹¹⁸See, 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).

¹¹⁹See 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.

¹²¹See, 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).

¹²²See, 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 C.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).

¹³⁰See, 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 Fad 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).

¹⁵² For 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.

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 5206, 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.

(a) * * *

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

(1) * * *

(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).

(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

(A) 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.

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 tax able 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 de scribed 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 deter mined 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 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.

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

(A) 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.

(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.

(a) * * *

(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.

(a) * * *

[(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 calendar year --  The applicable percentage

(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) * * *

(a) * * *

(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.

(a) * * *

(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.

(a) * * *

(1) * * *

(a) * * *

(1) * * *

[(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.]

(a) * * *

(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.

(a) * * *

(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 employer for the pre-     The applicable per-

(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.

(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 --

(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.

(a) * * *

(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).

(a) * * *

(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.

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

(B) Paragraph (2) shall not apply.

(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) 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) * * *

(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).

(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, govern-mental 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.

(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).

(a) GENERAL RULE. -- Returns with respect to income taxes under subtitle A shall be made by the following:

(1) * * *

(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.

(a) GENERAL RULE. -- Returns and return information shall be confidential, and except as authorized by this title --

(1) * * *

(1) * * *

[ (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.

(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.

(1) * * *

(A) * * *

(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) * * *

(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) * * *

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.

(1) * * *

(2) UNDERSTATEMENT. --

(A) * * *

(i) IN GENERAL. -- [ Subparagraph (B) ] Subparagraphs (B) and (D)(i)(II) shall not apply to any item attributable to a tax shelter.

(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).

(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) * * *

(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.

(a) * * *

(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) * * *

(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.

(a) * * *

[(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.

(a) * * *

(1) INFORMATION RETURN. -- The term "information return" means --

(A) * * *

(B) any return required by --

(i) * * *

(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

(A) * * *

(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).

(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.

(a) * * *

(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) * * *

(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.

(a) DELAY IN PHASE OUT OF MEDICARE HOSPICE BUDGET NEUTRALITY ADJUSTMENT FACTOR DURING FISCAL YEAR 2009. -- Notwithstanding any other provision of law, including the final rule published on August 8, 2008, 73 Federal Register 46464 et seq., relating to Medicare Program; Hospice Wage Index for Fiscal Year 2009, the Secretary of Health and Human Services shall not phase out or eliminate the budget neutrality adjustment factor in the Medicare hospice wage index before [ October 1, 2009 ] October 1, 2010, and the Secretary shall recompute and apply the final Medicare hospice wage index [ for fiscal year 2009 ] for fiscal years 2009 and 2010 as if there had been no reduction in the budget neutrality adjustment factor.

(a) * * *

[ (1) DEVELOPMENT. -- For purposes of section 1848(c)(2)(C)(ii) of the Social Security Act, the Secretary of Health and Human Services shall develop new resource-based relative value units. In developing such units the Secretary shall --

[ (A) utilize, to the maximum extent practicable, generally accepted cost accounting principles which (i) recognize all staff, equipment, supplies, and expenses, not just those which can be tied to specific procedures, and (ii) use actual data on equipment utilization and other key assumptions;

[ (B) consult with organizations representing physicians regarding methodology and data to be used; and

[ (C) develop a refinement process to be used during each of the 4 years of the transition period.

[ (2) REPORT. -- The Secretary shall transmit a report by March 1, 1998, on the development of resource-based relative value units under paragraph (1) to the Committee on Ways and Means and the Committee on Commerce of the House of Representatives and the Committee on Finance of the Senate. The report shall include a presentation of data to be used in developing the value units and an explanation of the methodology.

[ (3) NOTICE OF PROPOSED RULEMAKING. -- The Secretary shall publish a notice of proposed rulemaking with the new resource-based relative value units on or before May 1, 1998, and shall allow for a 90-day public comment period.

[ (4) ITEMS INCLUDED. -- The new proposed rule shall consider the following:

[ (A) Impact projections which compare new proposed payment amounts on data on actual physician practice expenses.

[ (B) Impact projections for hospital-based and other specialties, geographic payment localities, and urban versus rural localities. ]

(a) CORRECTION OF MID-YEAR RECLASSIFICATION EXPIRATION. -- Notwithstanding any other provision of law, in the case of a subsection (d) hospital (as defined for purposes of section 1886 of the Social Security Act (42 U.S.C. 1395ww)) with respect to which a reclassification of its wage index for purposes of such section would (but for this subsection) expire on March 31, 2007, such reclassification of such hospital shall be extended through [ September 30, 2009 ] September 30, 2011. The previous sentence shall not be effected in a budget-neutral manner.

[ (a) IN GENERAL. -- The Secretary of Health and Human Services (in this section referred to as the "Secretary") shall establish under title XVIII of the Social Security Act a medical home demonstration project (in this section referred to as the "project") to redesign the health care delivery system to provide targeted, accessible, continuous and coordinated, family-centered care to high-need populations and under which --

[ (1) care management fees are paid to persons performing services as personal physicians; and

[ (2) incentive payments are paid to physicians participating in practices that provide services as a medical home under subsection (d).

For purposes of this subsection, the term "high-need population" means individuals with multiple chronic illnesses that require regular medical monitoring, advising, or treatment.

[ (b) DETAILS. --

[ (1) DURATION; SCOPE. -- Subject to paragraph (3), the project shall operate during a period of three years and shall include urban, rural, and underserved areas in a total of no more than 8 States.

[ (2) ENCOURAGING PARTICIPATION OF SMALL PHYSICIAN PRACTICES. -- The project shall be designed to include the participation of physicians in practices with fewer than three full-time equivalent physicians, as well as physicians in larger practices particularly in rural and underserved areas.

[ (3) EXPANSION. -- The Secretary may expand the duration and the scope of the project under paragraph (1), to an extent determined appropriate by the Secretary, if the Secretary determines that such expansion will result in any of the following conditions being met:

[ (A) The expansion of the project is expected to improve the quality of patient care without increasing spending under the Medicare program (not taking into account amounts available under subsection (g)).

[ (B) The expansion of the project is expected to reduce spending under the Medicare program (not taking into account amounts available under subsection (g)) without reducing the quality of patient care.

[ (c) PERSONAL PHYSICIAN DEFINED. --

[ (1) IN GENERAL. -- For purposes of this section, the term "personal physician" means a physician (as defined in section 1861(r)(1) of the Social Security Act (42 U.S.C. 1395x(r)(1)) who --

[ (A) meets the requirements described in paragraph (2); and

[ (B) performs the services described in paragraph (3). Nothing in this paragraph shall be construed as preventing such a physician from being a specialist or subspecialist for an individual requiring ongoing care for a specific chronic condition or multiple chronic conditions (such as severe asthma, complex diabetes, cardiovascular disease, rheumatologic disorder) or for an individual with a prolonged illness.

[ (2) REQUIREMENTS. -- The requirements described in this paragraph for a personal physician are as follows: [ (A) The physician is a board certified physician who provides first contact and continuous care for individuals under the physician's care.

[ (B) The physician has the staff and resources to manage the comprehensive and coordinated health care of each such individual.

[ (3) SERVICES PERFORMED. -- A personal physician shall perform or provide for the performance of at least the following services:

[ (A) Advocates for and provides ongoing support, oversight, and guidance to implement a plan of care that provides an integrated, coherent, cross-discipline plan for ongoing medical care developed in partnership with patients and including all other physicians furnishing care to the patient involved and other appropriate medical personnel or agencies (such as home health agencies).

[ (B) Uses evidence-based medicine and clinical decision support tools to guide decision-making at the point-of-care based on patient-specific factors.

[ (C) Uses health information technology, that may include remote monitoring and patient registries, to monitor and track the health status of patients and to provide patients with enhanced and convenient access to health care services.

[ (D) Encourages patients to engage in the management of their own health through education and support systems.

[ (d) MEDICAL HOME DEFINED. -- For purposes of this section, the term "medical home" means a physician practice that --

[ (1) is in charge of targeting beneficiaries for participation in the project; and

[ (2) is responsible for --

[ (A) providing safe and secure technology to promote patient access to personal health information;

[ (B) developing a health assessment tool for the individuals targeted; and

[ (C) providing training programs for personnel involved in the coordination of care.

[ (e) PAYMENT MECHANISMS. --

[ (1) PERSONAL PHYSICIAN CARE MANAGEMENT FEE. -- Under the project, the Secretary shall provide for payment under section 1848 of the Social Security Act (42 U.S.C. 1395w-4) of a care management fee to personal physicians providing care management under the project. Under such section and using the relative value scale update committee (RUC) process under such section, the Secretary shall develop a care management fee code for such payments and a value for such code.

[ (2) MEDICAL HOME SHARING IN SAVINGS. -- The Secretary shall provide for payment under the project of a medical home based on the payment methodology applied to physician group practices under section 1866A of the Social Security Act (42 U.S.C. 1395cc-1). Under such methodology, 80 percent of the reductions in expenditures under title XVIII of the Social Security Act resulting from participation of individuals that are attributable to the medical home (as reduced by the total care managements fees paid to the medical home under the project) shall be paid to the medical home. The amount of such reductions in expenditures shall be determined by using assumptions with respect to reductions in the occurrence of health complications, hospitalization rates, medical errors, and adverse drug reactions.

[ (3) SOURCE. -- Payments paid under the project shall be made from the Federal Supplementary Medical Insurance Trust Fund under section 1841 of the Social Security Act (42 U.S.C. 1395t).

[ (f) EVALUATIONS AND REPORTS. --

[ (1) ANNUAL INTERIM EVALUATIONS AND REPORTS. -- For each year of the project, the Secretary shall provide for an evaluation of the project and shall submit to Congress, by a date specified by the Secretary, a report on the project and on the evaluation of the project for each such year.

[ (2) FINAL EVALUATION AND REPORT. -- The Secretary shall provide for an evaluation of the project and shall submit to Congress, not later than one year after completion of the project, a report on the project and on the evaluation of the project.

[ (g) FUNDING FROM SMI TRUST FUND. -- There shall be available, from the Federal Supplementary Medical Insurance Trust Fund (under section 1841 of the Social Security Act (42 U.S.C. 1395t)), the amount of $100,000,000 to carry out the project.

[ (h) APPLICATION. -- Chapter 35 of title 44, United States Code, shall not apply to the conduct of the project. ]

(a) * * *

(a) PAYMENT ADJUSTMENT. --

(1) IN GENERAL. -- For purposes of payment for services furnished under the physician fee schedule under section 1848 of the Social Security Act (42 U.S.C. 1395w-4) during the period beginning on July 1, 2008, and ending on [ December 31, 2009 ] December 31, 2011, the Secretary of Health and Human Services shall increase the fee schedule otherwise applicable for specified services by 5 percent.

(a) * * *

(1) TREATMENT OF CERTAIN AREAS FOR PAYMENT FOR AIR AMBULANCE SERVICES UNDER THE AMBULANCE FEE SCHEDULE. -- Notwithstanding any other provision of law, for purposes of making payments under section 1834(l) of the Social Security Act (42 U.S.C. 1395m(l)) for air ambulance services furnished during the period beginning on July 1, 2008, and [ ending on December 31, 2009 ] ending on December 31, 2011, any area that was designated as a rural area for purposes of making payments under such section for air ambulance services furnished on December 31, 2006, shall be treated as a rural area for purposes of making payments under such section for air ambulance services furnished during such period.

(a) * * *

(b) CONFORMING PROVISIONS. -- (1) * * *

(2) Chapter 35 of title 44, United States Code, shall not apply with respect to applications under [ section 1886(h)(7) of the Social Security Act, as added by subsection (a)(3). ] paragraphs (4)(H)(vi), (7), and (8) of subsection (h) of section 1886 of the Social Security Act.

[ (a) DETERMINATIONS OF EXCESS GENERAL REVENUE MEDICARE FUNDING. --

[ (1) IN GENERAL. -- The Board of Trustees of each medicare trust fund shall include in the annual reports submitted under subsection (b)(2) of sections 1817 and 1841 of the Social Security Act (42 U.S.C. 1395i and 1395t) --

[ (A) the information described in subsection (b); and

[ (B) a determination as to whether there is projected to be excess general revenue medicare funding (as defined in subsection (c)) for the fiscal year in which the report is submitted or for any of the succeeding 6 fiscal years.

[ (2) MEDICARE FUNDING WARNING. -- For purposes of section 1105(h) of title 31, United States Code, and this subtitle, an affirmative determination under paragraph (1)(B) in 2 consecutive annual reports shall be treated as a medicare funding warning in the year in which the second such report is made.

[ (3) 7-FISCAL-YEAR REPORTING PERIOD. -- For purposes of this subtitle, the term "7-fiscal-year reporting period" means, with respect to a year in which an annual report described in paragraph (1) is made, the period of 7 consecutive fiscal years beginning with the fiscal year in which the report is submitted.

[ (b) INFORMATION. -- The information described in this subsection for an annual report in a year is as follows:

[ (1) PROJECTIONS OF GROWTH OF GENERAL REVENUE SPENDING. -- A statement of the general revenue medicare funding as a percentage of the total medicare outlays for each of the following:

[ (A) Each fiscal year within the 7-fiscal-year reporting period.

[ (B) Previous fiscal years and as of 10, 50, and 75 years after such year.

[ (2) COMPARISON WITH OTHER GROWTH TRENDS. -- A comparison of the trend of such percentages with the annual growth rate in the following:

[ (A) The gross domestic product.

[ (B) Private health costs.

[ (C) National health expenditures.

[ (D) Other appropriate measures.

[ (3) PART D SPENDING. -- Expenditures, including trends in expenditures, under part D of title XVIII of the Social Security Act, as added by section 101.

[ (4) COMBINED MEDICARE TRUST FUND ANALYSIS. -- A financial analysis of the combined medicare trust funds if general revenue medicare funding were limited to the percentage specified in subsection (c)(1)(B) of total medicare outlays.

[ (c) DEFINITIONS. -- For purposes of this section:

[ (1) EXCESS GENERAL REVENUE MEDICARE FUNDING. -- The term "excess general revenue medicare funding" means, with respect to a fiscal year, that --

[ (A) general revenue medicare funding (as defined in paragraph (2)), expressed as a percentage of total medicare outlays (as defined in paragraph (4)) for the fiscal year; exceeds

[ (B) 45 percent.

[ (2) GENERAL REVENUE MEDICARE FUNDING. -- The term "general revenue medicare funding" means for a year --

[ (A) the total medicare outlays (as defined in paragraph (4)) for the year; minus

[ (B) the dedicated medicare financing sources (as defined in paragraph (3)) for the year.

[ (3) DEDICATED MEDICARE FINANCING SOURCES. -- The term "dedicated medicare financing sources" means the following:

[ (A) HOSPITAL INSURANCE TAX. -- Amounts appropriated to the Hospital Insurance Trust Fund under the third sentence of section 1817(a) of the Social Security Act (42 U.S.C. 1395i(a)) and amounts transferred to such Trust Fund under section 7(c)(2) of the Railroad Retirement Act of 1974 (45 U.S.C. 231f(c)(2)).

[ (B) TAXATION OF CERTAIN OASDI BENEFITS. -- Amounts appropriated to the Hospital Insurance Trust Fund under section 121(e)(1)(B) of the Social Security Amendments of 1983 (Public Law 98-21), as inserted by section 13215(c) of the Omnibus Budget Reconciliation Act of 1993 (Public Law 103-66).

[ (C) STATE TRANSFERS. -- The State share of amounts paid to the Federal Government by a State under section 1843 of the Social Security Act (42 U.S.C. 1395v) or pursuant to section 1935(c) of such Act.

[ (D) PREMIUMS. -- The following premiums:

[ (i) PART A. -- Premiums paid by non-Federal sources under sections 1818 and section 1818A (42 U.S.C. 1395i-2 and 1395i-2a) of such Act.

[ (ii) PART B. -- Premiums paid by non-Federal sources under section 1839 of such Act (42 U.S.C. 1395r), including any adjustments in premiums under such section.

[ (iii) PART D. -- Monthly beneficiary premiums paid under part D of title XVIII of such Act, as added by section 101, and MA monthly prescription drug beneficiary premiums paid under part C of such title insofar as they are attributable to basic prescription drug coverage.

Premiums under clauses (ii) and (iii) shall be determined without regard to any reduction in such premiums attributable to a beneficiary rebate under section 1854(b)(1)(C) of such title, as amended by section 222(b)(1), and premiums under clause (iii) are deemed to include any amounts paid under section 1860D-13(b) of such title, as added by section 101.

[ (E) GIFTS. -- Amounts received by the medicare trust funds under section 201(i) of the Social Security Act (42 U.S.C. 401(i)).

[ (4) TOTAL MEDICARE OUTLAYS. -- The term "total medicare outlays" means total outlays from the medicare trust funds and shall --

[ (A) include payments made to plans under part C of title XVIII of the Social Security Act that are attributable to any rebates under section 1854(b)(1)(C) of such Act (42 U.S.C. 1395w-24(b)(1)(C)), as amended by section 222(b)(1);

[ (B) include administrative expenditures made in carrying out title XVIII of such Act and Federal outlays under section 1935(b) of such Act, as added by section 103(a)(2); and

[ (C) offset outlays by the amount of fraud and abuse collections insofar as they are applied or deposited into a medicare trust fund.

[ (5) MEDICARE TRUST FUND. -- The term "medicare trust fund" means --

[ (A) the Federal Hospital Insurance Trust Fund established under section 1817 of the Social Security Act (42 U.S.C. 1395i); and

[ (B) the Federal Supplementary Medical Insurance Trust Fund established under section 1841 of such Act (42 U.S.C. 1395t), including the Medicare Prescription Drug Account under such Trust Fund.

[ (d) CONFORMING AMENDMENTS. --

[ (1) FEDERAL HOSPITAL INSURANCE TRUST FUND. -- Section 1817(b)(2) (42 U.S.C. 1395i(b)(2)) is amended by adding at the end the following: "Each report provided under paragraph (2) beginning with the report in 2005 shall include the information specified in section 801(a) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.".

[ (2) FEDERAL SUPPLEMENTARY MEDICAL INSURANCE TRUST FUND. -- Section 1841(b)(2) (42 U.S.C. 1395t(b)(2)) is amended by adding at the end the following: "Each report provided under paragraph (2) beginning with the report in 2005 shall include the information specified in section 801(a) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.".

[ (e) NOTICE OF MEDICARE FUNDING WARNING. -- Whenever any report described in subsection (a) contains a determination that for any fiscal year within the 7-fiscal-year reporting period there will be excess general revenue medicare funding, Congress and the President should address the matter under existing rules and procedures.

[SEC. 802. PRESIDENTIAL SUBMISSION OF LEGISLATION.

[ (a) IN GENERAL. -- Section 1105 of title 31, United States Code, is amended by adding at the end the following new subsection:

[ "(h)(1) If there is a medicare funding warning under section 801(a)(2) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 made in a year, the President shall submit to Congress, within the 15-day period beginning on the date of the budget submission to Congress under subsection (a) for the succeeding year, proposed legislation to respond to such warning.

[ "(2) Paragraph (1) does not apply if, during the year in which the warning is made, legislation is enacted which eliminates excess general revenue medicare funding (as defined in section 801(c) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003) for the 7-fiscal-year reporting period, as certified by the Board of Trustees of each medicare trust fund (as defined in section 801(c)(5) of such Act) not later than 30 days after the date of the enactment of such legislation.".

[ (b) SENSE OF CONGRESS. -- It is the sense of Congress that legislation submitted pursuant to section 1105(h) of title 31, United States Code, in a year should be designed to eliminate excess general revenue medicare funding (as defined in section 801(c)) for the 7-fiscal-year period that begins in such year.

[SEC. 803. PROCEDURES IN THE HOUSE OF REPRESENTATIVES.

[ (a) INTRODUCTION AND REFERRAL OF PRESIDENT'S LEGISLATIVE PROPOSAL. --

[ (1) INTRODUCTION. -- In the case of a legislative proposal submitted by the President pursuant to section 1105(h) of title 31, United States Code, within the 15-day period specified in paragraph (1) of such section, the Majority Leader of the House of Representatives (or his designee) and the Minority Leader of the House of Representatives (or his designee) shall introduce such proposal (by request), the title of which is as follows: "A bill to respond to a medicare funding warning." Such bill shall be introduced within 3 legislative days after Congress receives such proposal.

[ (2) REFERRAL. -- Any legislation introduced pursuant to paragraph (1) shall be referred to the appropriate committees of the House of Representatives.

[ (b) DIRECTION TO THE APPROPRIATE HOUSE COMMITTEES. --

[ (1) IN GENERAL. -- In the House, in any year during which the President is required to submit proposed legislation to Congress under section 1105(h) of title 31, United States Code, the appropriate committees shall report medicare funding legislation by not later than June 30 of such year.

[ (2) MEDICARE FUNDING LEGISLATION. -- For purposes of this section, the term "medicare funding legislation" means --

[ (A) legislation introduced pursuant to subsection (a)(1), but only if the legislative proposal upon which the legislation is based was submitted within the 15-day period referred to in such subsection; or

[ (B) any bill the title of which is as follows: "A bill to respond to a medicare funding warning.".

[ (3) CERTIFICATION. -- With respect to any medicare funding legislation or any amendment to such legislation to respond to a medicare funding warning, the chairman of the Committee on the Budget of the House shall certify --

[ (A) whether or not such legislation eliminates excess general revenue medicare funding (as defined in section 801(c)) for each fiscal year in the 7-fiscal-year reporting period; and

[ (B) with respect to such an amendment, whether the legislation, as amended, would eliminate excess general revenue medicare funding (as defined in section 801(c)) for each fiscal year in such 7-fiscal-year reporting period.

[ (c) FALLBACK PROCEDURE FOR FLOOR CONSIDERATION IF THE HOUSE FAILS TO VOTE ON FINAL PASSAGE BY JULY 30. --

[ (1) After July 30 of any year during which the President is required to submit proposed legislation to Congress under section 1105(h) of title 31, United States Code, unless the House of Representatives has voted on final passage of any medicare funding legislation for which there is an affirmative certification under subsection (b)(3)(A), then, after the expiration of not less than 30 calendar days (and concurrently 5 legislative days), it is in order to move to discharge any committee to which medicare funding legislation which has such a certification and which has been referred to such committee for 30 calendar days from further consideration of the legislation.

[ (2) A motion to discharge may be made only by an individual favoring the legislation, may be made only if supported by one-fifth of the total membership of the House (a quorum being present), and is highly privileged in the House. Debate thereon shall be limited to not more than one hour, the time to be divided in the House equally between those favoring and those opposing the motion. An amendment to the motion is not in order, and it is not in order to move to reconsider the vote by which the motion is agreed to or disagreed to.

[ (3) Only one motion to discharge a particular committee may be adopted under this subsection in any session of a Congress.

[ (4) Notwithstanding paragraph (1), it shall not be in order to move to discharge a committee from further consideration of medicare funding legislation pursuant to this subsection during a session of a Congress if, during the previous session of the Congress, the House passed medicare funding legislation for which there is an affirmative certification under subsection (b)(3)(A).

[ (d) FLOOR CONSIDERATION IN THE HOUSE OF DISCHARGED LEGISLATION. --

[ (1) In the House, not later than 3 legislative days after any committee has been discharged from further consideration of legislation under subsection (c), the Speaker shall resolve the House into the Committee of the Whole for consideration of the legislation.

[ (2) The first reading of the legislation shall be dispensed with. All points of order against consideration of the legislation are waived. General debate shall be confined to the legislation and shall not exceed five hours, which shall be divided equally between those favoring and those opposing the legislation. After general debate the legislation shall be considered for amendment under the five-minute rule. During consideration of the legislation, no amendments shall be in order in the House or in the Committee of the Whole except those for which there has been an affirmative certification under subsection (b)(3)(B). All points of order against consideration of any such amendment in the Committee of the Whole are waived. The legislation, together with any amendments which shall be in order, shall be considered as read. During the consideration of the bill for amendment, the Chairman of the Committee of the Whole may accord priority in recognition on the basis of whether the Member offering an amendment has caused it to be printed in the portion of the Congressional Record designated for that purpose in clause 8 of Rule XVIII of the Rules of the House of Representatives. Debate on any amendment shall not exceed one hour, which shall be divided equally between those favoring and those opposing the amendment, and no pro forma amendments shall be offered during the debate. The total time for debate on all amendments shall not exceed 10 hours. At the conclusion of consideration of the legislation for amendment, the Committee shall rise and report the legislation to the House with such amendments as may have been adopted. The previous question shall be considered as ordered on the legislation and amendments thereto to final passage without intervening motion except one motion to recommit with or without instructions. If the Committee of the Whole rises and reports that it has come to no resolution on the bill, then on the next legislative day the House shall, immediately after the third daily order of business under clause 1 of Rule XIV of the Rules of the House of Representatives, resolve into the Committee of the Whole for further consideration of the bill.

[ (3) All appeals from the decisions of the Chair relating to the application of the Rules of the House of Representatives to the procedure relating to any such legislation shall be decided without debate.

[ (4) Except to the extent specifically provided in the preceding provisions of this subsection, consideration of any such legislation and amendments thereto (or any conference report thereon) shall be governed by the Rules of the House of Representatives applicable to other bills and resolutions, amendments, and conference reports in similar circumstances.

[ (e) LEGISLATIVE DAY DEFINED. -- As used in this section, the term "legislative day" means a day on which the House of Representatives is in session.

[ (f) RESTRICTION ON WAIVER. -- In the House, the provisions of this section may be waived only by a rule or order proposing only to waive such provisions.

[ (g) RULEMAKING POWER. -- The provisions of this section are enacted by the Congress --

[ (1) as an exercise of the rulemaking power of the House of Representatives and, as such, shall be considered as part of the rules of that House and shall supersede other rules only to the extent that they are inconsistent therewith; and

[ (2) with full recognition of the constitutional right of that House to change the rules (so far as they relate to the procedures of that House) at any time, in the same manner, and to the same extent as in the case of any other rule of that House.

[SEC. 804. PROCEDURES IN THE SENATE.

[ (a) INTRODUCTION AND REFERRAL OF PRESIDENT'S LEGISLATIVE PROPOSAL. --

[ (1) INTRODUCTION. -- In the case of a legislative proposal submitted by the President pursuant to section 1105(h) of title 31, United States Code, within the 15-day period specified in paragraph (1) of such section, the Majority Leader and Minority Leader of the Senate (or their designees) shall introduce such proposal (by request), the title of which is as follows: "A bill to respond to a medicare funding warning." Such bill shall be introduced within 3 days of session after Congress receives such proposal.

[ (2) REFERRAL. -- Any legislation introduced pursuant to paragraph (1) shall be referred to the Committee on Finance.

[ (b) MEDICARE FUNDING LEGISLATION. -- For purposes of this section, the term "medicare funding legislation" means --

[ (1) legislation introduced pursuant to subsection (a)(1), but only if the legislative proposal upon which the legislation is based was submitted within the 15-day period referred to in such subsection; or

[ (2) any bill the title of which is as follows: "A bill to respond to a medicare funding warning.".

[ (c) QUALIFICATION FOR SPECIAL PROCEDURES. --

[ (1) IN GENERAL. -- The special procedures set forth in subsections (d) and (e) shall apply to medicare funding legislation, as described in subsection (b), only if the legislation --

[ (A) is medicare funding legislation that is passed by the House of Representatives; or

[ (B) contains matter within the jurisdiction of the Committee on Finance in the Senate.

[ (2) FAILURE TO QUALIFY FOR SPECIAL PROCEDURES. -- If the medicare funding legislation does not satisfy paragraph (1), then the legislation shall be considered under the ordinary procedures of the Standing Rules of the Senate.

[ (d) DISCHARGE. --

[ (1) IN GENERAL. -- If the Committee on Finance has not reported medicare funding legislation described in subsection (c)(1) by June 30 of a year in which the President is required to submit medicare funding legislation to Congress under section 1105(h) of title 31, United States Code, then any Senator may move to discharge the Committee of any single medicare funding legislation measure. Only one such motion shall be in order in any session of Congress.

[ (2) DEBATE LIMITS. -- Debate in the Senate on any such motion to discharge, and all appeals in connection therewith, shall be limited to not more than 2 hours. The time shall be equally divided between, and controlled by, the maker of the motion and the Majority Leader, or their designees, except that in the event the Majority Leader is in favor of such motion, the time in opposition thereto shall be controlled by the Minority Leader or the Minority Leader's designee. A point of order under this subsection may be made at any time. It is not in order to move to proceed to another measure or matter while such motion (or the motion to reconsider such motion) is pending.

[ (3) AMENDMENTS. -- No amendment to the motion to discharge shall be in order.

[ (4) EXCEPTION IF CERTIFIED LEGISLATION ENACTED. -- Notwithstanding paragraph (1), it shall not be in order to discharge the Committee from further consideration of medicare funding legislation pursuant to this subsection during a session of a Congress if the chairman of the Committee on the Budget of the Senate certifies that medicare funding legislation has been enacted that eliminates excess general revenue medicare funding (as defined in section 801(c)) for each fiscal year in the 7-fiscal-year reporting period.

[ (e) CONSIDERATION. -- After the date on which the Committee on Finance has reported medicare funding legislation described in subsection (c)(1), or has been discharged (under subsection (d)) from further consideration of, such legislation, it is in order (even though a previous motion to the same effect has been disagreed to) for any Member of the Senate to move to proceed to the consideration of such legislation.

[ (f) RULES OF THE SENATE. -- This section is enacted by the Senate --

[ (1) as an exercise of the rulemaking power of the Senate and as such it is deemed a part of the rules of the Senate, but applicable only with respect to the procedure to be followed in the Senate in the case of a bill described in this paragraph, and it supersedes other rules only to the extent that it is inconsistent with such rules; and

[ (2) with full recognition of the constitutional right of the Senate to change the rules (so far as relating to the procedure of the Senate) at any time, in the same manner, and to the same extent as in the case of any other rule of the Senate. ]

(a) * * *

(1) * * *

(e) REPORTS. --

(1) * * *

(4) FINAL REPORT. -- By not later than [ May 1, 2010 ] March 31, 2013, the Secretary shall submit to Congress a final report on the information described in paragraph (3).

(f) FUNDING. --

(1) IN GENERAL. -- Out of any funds in the Treasury not otherwise appropriated, there are appropriated to the Secretary for fiscal year 2006 $6,000,000, and for fiscal year 2010, $1,600,000, to carry out this section.

(2) AVAILABILITY. -- Funds appropriated under paragraph (1) shall remain available for expenditure through fiscal year [ 2010 ] 2014 or until expended.

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:

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.

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.

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.

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.

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.

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.

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.

Committee Republicans agree that health care reform legislation should make health care more affordable, improve quality, and reduce the number of uninsured Americans. As policymakers, we should be doing all that we can to make positive reforms to the health care system that would use private markets to lower the cost of health care insurance; improve affordability and accessibility for both employers and employees; give employers and employees the tools they need to encourage healthier behavior; change health care provider reimbursement structures to reward high-quality results; and address the long-term solvency of existing entitlement programs, like Medicare and Medicaid.

Considering that the majority of Americans obtain health insurance coverage through their employers, the employment-based system plays a central role in the delivery of health care. Recognizing the importance of employment-based health coverage, Committee Republicans have led efforts in recent years to lower the cost and increase the affordability of employment-based health coverage. Committee Republicans continue to support efforts to assist employers and employees in obtaining cost-effective, high quality coverage.

In assessing health care reform legislation, Committee Republicans bear in mind a number of important principles. Foremost, reform efforts should allow individuals who are satisfied with their current coverage to keep it, and give Americans the freedom to choose the health plans and medical providers that best fit their needs. Second, reforms should make quality health care coverage affordable and accessible for every American, regardless of pre-existing health conditions. Third, we must guard against a new government-run health care plan that would eliminate the health coverage that more than 100 million Americans currently receive through their job, or limit their choice of doctors and medical treatment options. Fourth, reform efforts must ensure that medical decisions are made by patients and doctors, not government bureaucrats. Finally, reforms must improve Americans' lives through effective prevention, wellness, and disease management programs, while developing new treatments and cures for life-threatening diseases.

Measured against these principles, H.R. 3200, as reported from the Committee on Education and Labor, wholly fails to meet the mark. For these reasons, and as set forth more fully below, Committee Republicans oppose the bill.

H.R. 3200, Procedural History

On the afternoon of Friday, June 19, 2009, House Democrats circulated the "Tri-Committee Draft Proposal for Health Care Reform," an 852-page health care plan crafted behind closed doors by the Democrat Chairmen of three House committees with jurisdiction over health care issues. The draft proposal was not formally introduced or assigned a legislative bill number. There were vast shortcomings and gaps in the draft proposal, including the lack of a cost estimate and the absence of several key provisions, including specific financing mechanisms. House Republicans were denied the opportunity to provide meaningful input on the "draft proposal," and met for the first time with Committee Democrats only two days before the proposal was publicly circulated.

On Tuesday, June 23, 2009, the Committee on Education and Labor held a hearing on the draft proposal. Although Committee Republicans and invited witnesses provided valuable commentary, the short time frame for review and the significant gaps in the draft proposal hindered the ability to comprehensively analyze the Democrat health care reform plan prior to the hearing on June 23.

Thereafter, on July 14, 2009, House Democrat Leaders formally introduced their health care reform bill, H.R. 3200, the "America's Affordable Health Choices Act of 2009." The introduced bill totaled 1,017 pages (an increase of 165 pages) and contained numerous technical and substantive changes. No formal estimate of the cost of H.R. 3200 has been provided; rather, prior to the Committee's consideration of the bill a "preliminary," incomplete score of H.R. 3200 prepared by the Congressional Budget Office (CBO) was provided. This "preliminary" analysis was not based on H.R. 3200, but rather on "technical specifications" of the June 19 Tri-Committee draft proposal that were provided to CBO by House Democrats.

On the afternoon of July 15, 2009, the full Committee on Education and Labor commenced its markup of H.R. 3200 with Member opening statements. Late on that same afternoon, Committee Republicans were provided with the Chairman's Amendment in the Nature of a Substitute, which totaled 1,040 pages (adding another 23 pages) and contained further substantive changes to H.R. 3200. Not one hearing was held on the Democrat-generated health care reform provisions of H.R. 3200, or on the Chairman's Amendment in the Nature of a Substitute. On the morning of July 17, 2009, after consideration of 42 amendments, the Committee completed its consideration of H.R. 3200, and the bill was ordered favorably reported to the House of Representatives by a vote of 26-22. Three Democrats joined with all Committee Republicans in opposing the bill.

General Concerns Regarding H.R. 3200

Committee Republicans are concerned about the inexplicable rush to legislate on this important issue. The changes contemplated by H.R. 3200 will significantly impact more than one-sixth of the American economy, yet House Democrats drafted the partisan bill behind closed doors and without any meaningful participation by Republicans and even many Democrats. Committee Republicans have not been provided with an adequate amount of time to fully analyze the complex provisions of H.R. 3200. Further, we expect that the bill will change yet again following consideration by the three House Committees of jurisdiction, and prior to consideration by the full House, if it should occur. However, our review to date reveals numerous and significant policy concerns.

In general, Committee Republicans are concerned that H.R. 3200 fails to address the problems in the U.S. health care system, and in fact will only serve to exacerbate these problems through the adoption of misguided and historically ineffective policies. Moreover, the bill's true cost is unknown, but will likely be excessive. The cost will likely exceed $1.3 trillion over ten years, and the latest CBO estimate indicates that the bill will add more than $239 billion to the federal deficit over a ten-year period. More troubling is the fact that under H.R. 3200, the federal government starts collecting new taxes and revenues within a year or two of enactment, but implementation of many of the programs (i.e., the creation of a new federal bureaucracy and insurance coverage subsidies) is delayed, which artificially lowers the "cost" of the legislation under consideration by CBO. Further, in the later years of the CBO ten-year estimate, the costs of the program significantly outstrip new revenues, meaning the true costs of the Democrat legislation are much higher over the long term (i.e., beyond CBO's limited ten-year period). This is a cost the country cannot afford to bear.

The specific problems of the bill are numerous. For instance, Democrats attempt to pay for some of the cost through significantly higher taxes on individuals and businesses, with small business owners (those who create the majority of American jobs) appearing to shoulder a disproportionate share of the burden. It creates a massive new federal bureaucracy with unprecedented powers to determine "acceptable" health care coverage, and tax those who fail to comply with the bill's numerous legal mandates. The bill essentially eliminates current state-based private markets for health insurance. H.R. 3200 creates a "public health insurance option" (i.e., government-run health insurance plan) controlled by the new federal bureaucracy that is based on the flawed Medicare payment structure, and will undermine the private health insurance coverage currently enjoyed by millions of Americans. H.R. 3200 does little, if anything, to change the flawed health care delivery and payment structure, which is critical to control health care costs, increase affordability, and make coverage more accessible to Americans. The goal of H.R. 3200 appears to be nothing less than centralization of the country's health care sector in the federal government. It should be rejected.

Concerns Relating to ERISA Group Health Plans

The 1,040-page bill is divided into three separate Divisions: Division A, entitled "Affordable Health Care Choices"; Division B, "Medicare and Medicaid Improvements"; and Division C, "Public Health and Workforce Development". The Committee on Education and Labor maintains jurisdiction over much of Division A, and a portion of Division C. Considering this Committee's jurisdiction over the Employee Retirement Income and Security Act of 1974 (ERISA) and the provision of employer-sponsored group health coverage, this Committee's consideration of H.R. 3200 focused primarily on Division A.

Division A of H.R. 3200 contains several controversial Democrat proposals, including the establishment of a new federal bureaucracy which would be charged with defining "acceptable" health benefits, creating and regulating a new national health insurance exchange, distributing massive new federal subsidies for low and middle-income individuals to purchase "acceptable" health insurance through the exchange, and regulating the provision of insurance nationally. Also, Division A contains a provision creating a new government-run health insurance plan option, which would be a federally-created and administered government-run insurance plan based on Medicare, allegedly designed to "compete" with private insurance plans.

Democrats attempt to pay for this new bureaucracy through a number of new tax provisions that affect all Americans. For instance, H.R. 3200 institutes a new mandate on every individual to obtain "acceptable" coverage or pay a 2.5 percent tax. It creates a "pay or play" mandate on virtually all employers to provide "acceptable" insurance coverage or pay a new 8 percent payroll tax to the federal government. The introduced bill also provides some details left out of the June 19 Tri-Committee draft proposal, such as a provision exempting only the very smallest businesses, and new tax increases that are intended to pay for this massive new federal entitlement program. Many of the new taxes set forth in H.R. 3200 disproportionately impact small businesses and small business owners. Even so, Democrats' attempt to pay for the cost of this legislation falls far short as the bill's costs increase substantially over time and will likely result in at least a $239 billion increase in the federal deficit.¹ The overwhelming cost of the Democrat bill, and its bevy of new taxes, has raised significant concerns among many Americans. Committee Republicans believe that the bill creates a massive new federal bureaucracy and places significant new liabilities and tax burdens on all Americans and virtually all American employers, even those that are not profitable, which will likely have a negative impact on future economic growth.

As reported, H.R. 3200 imposes an unprecedented new tax on virtually all employers. Specifically, Title III, Subtitle B, "Employer Responsibility," mandates that all employers offer "acceptable" coverage under a "qualified health benefits plan" to each of their employees, or pay an 8 percent payroll tax to the federal government.² The "acceptable" coverage will be designed and determined by the new Health Benefits Advisory Committee and the Health Choices Commissioner. Section 312 provides that for full-time employees, employers have to contribute at least 72.5 percent of the applicable premium of the lowest cost plan for individuals, and 65 percent of the applicable premium of the lowest cost plan for family coverage. The mandate is also extended to part-time employees, but the bill fails to specify who is a part-time employee and leaves it to the federal government to define this term and create new employer contribution rules for such employees. In a provision only trial lawyers could like, the bill subjects ERISA group health plans to state court lawsuits. Finally, under Section 321, employers will be subjected to fines of up to $500,000 in the event they are found to be in non-compliance with the Act's onerous new mandates.

The new taxes on employers pose multiple problems, and have been the subject of much commentary from the representatives of those employers who will be directly impacted by the Democrats' new tax plan. For example, in a letter dated July 9, 2009 to Chairman Miller and Ranking Member Kline, Steve Pfister, the Senior Vice President of the National Retail Federation stated:

Finally, some Committee and House Democrats have expressed serious reservations regarding the onerous requirements on employers. For example, in a letter dated July 9, 2009 from the fiscally conservative Blue Dog Coalition to Speaker Nancy Pelosi and Majority Leader Steny Hoyer, forty "Blue Dog" Democrats stated that "any additional requirements for employers must be carefully considered and done so within the context of what is currently offered. Small business owners and their employees lack coverage because of high and unstable costs -- not because of an unwillingness to provide or purchase it. We cannot support a bill that further exacerbates the challenges faced by small businesses." ³

Committee Republicans believe that the employer "pay or play" mandate is simply flawed policy that will destroy the voluntary, employer-sponsored ERISA health benefits structure, limit future flexibility to design affordable health plans, increase costs and cause significant job losses, and depress wage growth, especially for low-income Americans. This mandate would be especially hard on smaller or mid-sized firms that may not be eligible for an exemption, and who may struggle to reach and maintain profitability. Further, the proposed tax penalty percentage (eight percent for most employers) could increase in the future at the whim of Congress, especially if the federal government needs additional revenues to cover shortfalls in this massive new entitlement program, potentially increasing the burdens on employers.

In addition, numerous structural components of the proposed mandate are problematic for employers and the current ERISA structure. In the fifth year of the exchange, employers whose workers choose coverage through an exchange will be forced to pay the eight percent tax to finance their workers' exchange policy, even if they provide coverage to their employees. This will certainly place increasing pressure on employer group health plans in the form of adverse risk selection, since employees could leave the group health plan for the exchange and shrink the size of the group plan's pool of participants. Many employers may simply choose to drop coverage and pay the tax, rather than administer and pay for an increasingly inefficient group health plan.

Further, under the Democrat bill, there is no way of knowing whether the coverage currently enjoyed by tens of millions of employees and their families, including health savings accounts used in conjunction with high deductible health plans (HSA/HDHP), will meet the future "acceptable" benefit and employer contribution requirements. For example, an HSA/HDHP individual plan with an actuarial value of 69 percent will not meet the requirements of this bill. Employers would have to change this benefit to comply with the new mandates, or the individual employee could face the individual tax for noncompliance.⁴ Also, employers who contribute less than the statutory amounts (72.5 percent and 65 percent for individual and family coverage, respectively) will have to change or be subjected to a new tax. This could cause some employers to drop coverage altogether.

Clearly, the employer "pay or play" provisions are designed to make it more difficult for employers to offer ERISA-based group health plan coverage, and direct more employees and their families to the new federal health insurance exchange and its government plan, Medicare-based, option. Contrary to Democrat political rhetoric, there is a substantial likelihood that employees who like their current coverage will not be able to keep it.

For these reasons, Committee Republicans object to the employer "pay or play" mandate in H.R. 3200.

The Tri-Committee bill raises serious questions and concerns regarding the continued viability of the current ERISA regulatory structure, and whether H.R. 3200 exposes employers and group health plans to new liabilities for claim decisions. Under current law, group health plans are required to comply with the requirements of ERISA, and any disputes are governed and resolved under its provisions. This ensures that employers, who may provide health insurance coverage for workers in all 50 states, must comply with the federal law only, which permits the delivery of uniform benefits and saves administrative costs. They cannot be sued in state courts, under different laws.

The bill appears to change this by creating two different penalty regimes inside the new insurance exchanges; for group health plans and their beneficiaries, there would be varied and unlimited penalties set forth under 50 different state laws. To the extent that group health plans are permitted to purchase through the insurance exchanges, they will be subjected to potentially expansive new state court liabilities.

At the same time that they are subjecting private plans to a patchwork of state laws, Democrats chose to apply a uniform federal scheme similar to Medicare to the government-run health insurance plan. This would provide an unfair financial advantage to the government-run health plan since, unlike ERISA group health plans, the government-run plan would not have to face lawsuits and comply with up to 50 different sets of state laws.

Two groups appear to benefit from this proposed structure: trial lawyers and the government bureaucrats running the government-run health plan. Further, ERISA group health plans would face significant new liabilities and costs which would likely cause them to drop coverage altogether, accelerating the movement from private, employer-sponsored health insurance to a government-run plan.

For these reasons, Committee Republicans object to new liabilities imposed on ERISA employers and group health plans in H.R. 3200.

Under H.R. 3200, the Department of Health and Human Services (HHS) will be charged with creating a public health insurance option that would only be available in a national health insurance exchange. Although the plan would have to comply with requirements on private, exchange-available plans, the exchange would have no power under the bill to reject, sanction or terminate the government option run by HHS. Further, the government plan would be subject to lawsuit only in federal courts; this differs substantially from private plans, including employer-sponsored group health plans currently regulated under the federal ERISA law, which would be subject to state court lawsuits (raising the costs for private plans).

With respect to government-plan funding, "start-up" funds in the amount of $2 billion in taxpayer money would be provided from the Treasury. Although the plan's premium rates would be required to cover the cost of the benefits and administration, going forward there is no requirement that the government plan maintain a certain "reserve" level, similar to those required of state-based private insurance companies. This could give the government plan a potentially significant competitive advantage over private insurers.

Importantly, the government plan would be based on the failed Medicare payment structure. Specifically, the plan would pay Medicare rates for at least the first three years, with Medicare-participating physicians getting a five percent bonus for the first three years. The problems with this structure are numerous. First, Medicare pays on a fee-for-service basis, which rewards those providers that increase the volume of medical services, as opposed to those providers that limit utilization and provide high quality care. The Medicare reimbursement structure is historically inflexible when it comes to designing and implementing more innovative policies and reimbursement structures. Private innovations, like paying for health care provider performance, and the adoption of prevention and wellness programs, are exceedingly difficult to duplicate in the Medicare structure given that it is a government-administered program which is highly resistant to change.

Second, government health entitlement programs, like Medicare and Medicaid, routinely underpay health care providers, resulting in a cost-shift to private plans and private payers. This was confirmed in the testimony of a New Jersey hospital executive at a hearing before the Subcommittee on Health, Education, Labor and Pensions in March 2009. Reliance on existing Medicare payment rates, with minor adjustments, will, according to an estimate by The Lewin Group, an independent consulting company, significantly underpay health care providers, compensating them at rates 20-30 percent below what private plans pay for the same services. Even if adjustments are made to lower the underpayment rates, by design, the government-run plan will underpay providers to reduce premium costs, in order to increase enrollment and crowd-out private insurers. This inherent cost advantage built into the government plan created by H.R. 3200 will result in a government plan with artificially low premiums, which will likely have a negative impact on health care quality.

These concerns were expressed in a letter from 13 health care providers and associations, including the Mayo Clinic, in a letter dated July 16, 2009 to Representative Ron Kind (D-WI). Specifically, these groups expressed concern that:

The new federal health care bureaucracy, with its myriad rules for private plans and government-run insurance option, will ultimately decrease the competitiveness of private insurance and group health plans, essentially resulting in a government takeover of the health care system. The government's track record on health care is not one to be duplicated; the Medicaid program does not pay for the full cost of medical care, is routinely under-funded, and places a substantial burden on states. The Democrat answer in H.R. 3200 is to increase Medicaid eligibility to 133 percent of the federal poverty level, which would exacerbate health care provider underpayments, create a new entitlement mentality, and substantially increase the federal government's Medicaid payments in perpetuity. Medicare underpays health care providers, is an outdated and inflexible benefit design, and has unfunded obligations totaling $37.8 trillion. The House Democrat answer is not to first fix Medicare but to create a new federal entitlement program for those under 65 based on Medicare, spend more than $1.3 trillion, and raise taxes on Americans. These policies do nothing to control existing health care costs, and only serve to worsen the nation's long-term fiscal outlook while removing decisions from the hands of doctors and patients and placing them in the hands of Washington bureaucrats.

Clearly, if Americans like their current coverage and the quality of their health care, it will be in jeopardy under the Democrats' plan as set forth in H.R. 3200.

Republicans agree with Democrats that the problem of the uninsured must be addressed. The Majority notes that 47 million individuals are uninsured; however, this population is not homogenous. According to a report released by the Congressional Research Service on September 14, 2009, approximately 20 percent of the uninsured are non-citizens. Further, approximately 10 million more individuals may already be eligible for existing government insurance programs, but are not enrolled, and many millions more are young or voluntarily choose to go without coverage. Rather than creating a massive new federal entitlement program, Republicans believe underlying costs must be addressed in order to make coverage more affordable and accessible, with implementation of targeted approaches to address the specific characteristics of the uninsured population.

The first step to lower health care costs is to address over-spending in the current system.⁶ To lower costs, Committee Republicans would consider: changes to the tax code to permit individuals to share some of the same advantages as those with employer-sponsored coverage; promote incentives to save for future health care costs; promote meaningful medical liability reforms to reduce costly and unnecessary defensive medicine practices; provide existing government programs with additional authority and resources to stop fraud and abuse; and permit small business to band together to offer health insurance at lower costs.

Republicans and Democrats agree that small businesses face unique and difficult challenges in securing affordable health insurance coverage. Yet the Democrat response to this challenge is to construct an elaborate new federal bureaucracy and entitlement program, with the imposition of massive new taxes, administrative requirements and penalties on all but the very smallest employers, Republicans have tirelessly advocated for targeted, less costly measures to address the specific problems confronting small businesses -- small business, or association, health plans constitutes one such measure that can be enacted immediately and would permit small businesses to band together to pool their purchasing power and enjoy the same benefits as larger employers.

Additionally, Committee Republicans support policies that would provide employers with greater flexibility to promote prevention and wellness programs, and financially reward employees who seek to achieve or maintain a healthy weight, quit smoking, and better manage chronic diseases like diabetes. Changing payment structures to reward high quality care, rather than volume of medical services, and increasing care coordination, can also help control health care costs. Further, before creating another federal entitlement program and adding to the federal deficit, Committee Republicans believe it is necessary to address the long-term fiscal solvency of existing federal entitlement programs.

Committee Republicans would also seek to expand access by strengthening employer-sponsored coverage to millions of people who are already eligible, encourage states to create or modify programs to guarantee all Americans have access to affordable coverage regardless of pre-existing medical conditions, promote policies to increase portability of coverage regardless of employment status, and help employers offer coverage by reducing administrative costs through a small business tax credit.

In short, Committee Republicans support policies that promote individual behavior and responsibility for health care and coverage decisions, and maintain the doctor-patient relationship, while keeping the federal government out of the business of dictating health care coverage requirements or favoring a government-insurance model over private coverage. Committee Republicans remain willing to work with Democrats in developing a compromise bipartisan health care reform bill.

Specifically, Committee Republicans offered amendments intended to:

• Strike provisions creating the new "Health Choices Administration;"

• Strike provisions creating the national health insurance exchange;

• Strike the employer "pay or play" mandate;

• Strike the government-run insurance plan;

• Ensure that the coverage provided by ERISA group health plans, now and in the future, would be preserved under the plan;

• Ensure deficit neutrality;

• Suspend the bill where the national unemployment rate exceeded 8% in two consecutive months;

• Preserve the protective remedies of ERISA for ERISA-governed plans;

• Prevent mandated coverage of abortion services;

• Prohibit federal funding for abortion services under the bill;

• Prohibit any tax increase on American families with annual incomes under $250,000;

• Provide employers and employees with greater flexibility to promote prevention and wellness programs, which are proven to increase personal responsibility and lower health care costs;⁷

• Permit consumer-directed health plans to remain viable options;⁸ and

• Permit small businesses to pool together to purchase health insurance through Association Health Plans.

Although some amendments were adopted in an attempt to improve the legislation,⁹ many attempts to amend and improve a flawed bill were rejected. Committee Republicans are concerned that the bill remains fundamentally flawed; nevertheless, Committee Republicans continue to stand ready to work with Committee Democrats to draft and enact bipartisan health care reform legislation.

Conclusion

Committee Republicans support the voluntary, private health care system and meaningful reforms to that structure, while opposing measures that would serve to increase federal government control over the health care system. Committee Republicans are also committed to ensuring that the costs of health care reform efforts do not add to the federal deficit or result in higher taxes, which will have the effect of restricting American economic growth. The goal of controlling health care spending is not accomplished by adding more than $1.3 trillion in new spending to America's health care bill. While perhaps well-intentioned, H.R. 3200 is not an acceptable health care reform bill. For all of the foregoing reasons, we respectfully oppose enactment of H.R. 3200 as reported from the Committee on Education and Labor.

² The only exception to the mandate considered by the Committee was a sliding scale wage tax in Section 313, exempting only the very smallest employers with annual payrolls of less than $250,000, and limiting the payroll tax for companies with payroll of less than $400,000 annually. Under Section 313, employers with a payroll of less than $250,000 are not subject to any payroll tax. Companies with payrolls of $250,000 to less than $300,000 are subject to a 2 percent payroll tax; $300,000 to under $350,000 at 4 percent; and employers with payroll of $350,000 to less than $400,000 are taxed at 6 percent. Companies with payroll of more than $400,000 are taxed the full eight percent.

³ See, letter from "Democratic Blue Dog Coalition" to The Honorable Nancy Pelosi, Speaker, and The Honorable Steny Hoyer, Majority Leader, dated July 9, 2009. The letter, signed by forty Democrat Members of Congress, stated their belief that the tri-committee health care reform proposal "lacks a number of elements essential to preserving what works and fixing what is broken" in the health care system, and that legislation must include provisions to ensure deficit neutrality, delivery system reform, small business protections, rural health equity, and bipartisanship.

⁴See, H.R. 3200, Sections 301, 401, July 14, 2009, regarding the new tax on individuals who fail to obtain acceptable insurance coverage.

⁵ See, The Impact of the House Health Reform Legislation on Coverage and Provider Incomes, Testimony of John Sheils, Vice President, The Lewin Group, before the Energy and Commerce Committee, U.S. House of Representatives, June 25, 2009. http://www.lewin.com/content/publications/June25TestimonyUpdateJul09.pdf .

⁶ In testimony before the Senate Health, Education, Labor and Pensions Committee on July 16, 2009, 030 Director Douglas Elmendorf stated that all of the Democrat proposals reviewed to date, including H.R. 3200, do little, if anything, to control health care costs.

⁷ Specifically, Republicans offered an amendment to permit employers to vary employees' health insurance premiums by up to 50 percent to encourage participation in health promotion and disease prevention programs. Current law already permits variations up to 20 percent. Employer-based prevention and wellness programs have a proven-track record of improving employee health and lowering health care expenses and insurance coverage premiums. See, Paul Speranza, Jr., Testimony before the Committee on Education and Labor, "The Tri-Committee Draft for Health Care Reform" (June 23, 2009) at 3-4. This amendment was voluntarily withdrawn in the hope that the Majority would work with Republicans to adopt this common-sense provision; Republicans continue to urge that this provision be included in any reform legislation.

⁸ During this Committee's consideration of H.R. 3200, Republicans introduced an amendment to permanently grandfather consumer-directed health plans and arrangements, so that millions of individuals could continue to save for future health care needs and benefit from this coverage. The Majority rejected this amendment, which highlights the fact that if you like your current coverage, you will not be able to keep it under H.R. 3200.

⁹ A limited number of amendments were adopted. For example, the Committee accepted language to exclude TRICARE (the Department of Defense's civilian healthcare program for active and retired military personnel) from the provisions of the bill; to express the sense of Congress that Members who vote for the bill enroll in the new government-run plan; to ensure non-discrimination for spiritual care; and to maintain the private right to contract for medical services.

Relying on my experiences as a physician, I can attest to how current federal laws and incentives retard access to health care and often put a bureaucrat in between a patient, his family, and their doctor. The tax code institutes a third-party health care model making it difficult for those to gain coverage outside of an employer or government entity. And the federal health care programs that do exist dictate to patients which doctors they may see and how frequently, and which procedures or tests doctors may or may not order or provide.

H.R. 3200, America's Affordable Health Choices Act of 2009, marks the latest attempt to fundamentally alter our health care financing and delivery structure. This measure, however, is a transformational piece of legislation intended to erode personal and private decision-making while further institutionalizing the very errors of current federal health care laws and programs. The end result will be a system built on penalties, mandates, rationing, and bureaucracy -- all of which are fundamental threats to quality care. For example:

• Sec. 102 of H.R. 3200 grandfathers out health insurance coverage on the individual market. Issuers of existing coverage may not enroll new individuals, alter benefits and cost-sharing, and increase premiums. These plans will no longer be available.

• Sec. 123 of H.R. 3200 creates the Health Benefits Advisory Committee, a new panel to recommend covered benefit standards, including treatments, items and services, and cost-sharing. The Committee is comprised primarily of either political appointees or federal bureaucrats, and these are the folks who will be making these critical decisions.

• Sec. 141 of H.R. 3200 creates the Health Choices Administration, a new federal agency charged with establishing the Health Insurance Exchange. The Administration is the final arbitrator of what is a qualified health benefits plan (i.e. "acceptable") under the exchange and is charged with enforcement.

• Sec. 301 and Sec. 401 of H.R. 3200 impose a "personal responsibility" on every American to obtain "acceptable" health insurance coverage or face a tax of 2.5 percent on gross income.

• Sec. 313 and Sec. 412 of H.R. 3200 impose a tax of eight percent of average wages paid on employers. Providing health care to employees is no longer a voluntary benefit and only the smallest businesses are exempt.

• Sec. 221 of H.R. 3200 creates a public health insurance option, available through the Health Insurance Exchange, to "compete" against privately run health insurance coverage. Independent analysis by both the Congressional Budget Office and the Lewin Group has concluded that millions of Americans would lose their existing coverage as a result of this government-run plan.

Before consideration of H.R. 3200, a bipartisan, fundamental rethinking of this nation's health care delivery system could have been possible if reform focused on a patient-centered approach and championed personal ownership and coverage over government control. Further, any effort needed to embrace the same health care principles most Americans embrace: accessibility, affordability, choices, innovation, quality and responsiveness.

As the leader of a group of conservative Republicans in the House of Representatives faithfully committed to these principles and the implementation of reform, I introduced H.R. 3400, the Empowering Patients First Act. It represents the possibility of a new patient-centered era in American health care without putting the government in charge.

For starters, the measure ensures all Americans have access to affordable coverage through a series of tax credits, deductions, and tax equity. It makes it feasible for individuals to pick any health care plan, not just what is offered by the government or at work, meaning that no matter who is paying the bill, patients own and control their own health plan. This puts Americans in a position whereby insurance companies are responsive to them rather than a third-party.

There is portability to maintain coverage if someone changes jobs or moves across state lines. To establish a viable marketplace, barriers are knocked down so coverage can be purchased across state lines.

And since one cannot be serious about reform without addressing the medical liability crisis, the Empowering Patients First Act provides for the creation of specialized health care courts relying on the expertise of medical specialty societies to relieve upward pressure on medical costs.

This same commitment to principles and reform by dedicated Republicans inspired my personal efforts during the mark up of the America's Affordable Health Choices Act of 2009 before the Committee on Education and Labor. Yet every attempt to offer common sense amendments was defeated by Committee Democrats on near party line votes. For example:

• An amendment to ensure current coverage provided by employer-sponsored group plans would be considered a qualified health benefits plan. Rejecting the amendment flies in the face of "If you like what you have, you can keep it," and restricts access to existing, affordable plans. (Amendment #11, defeated 18-29).

• An amendment to permit states a waiver out of Division A of the Act, which contains the new health care bureaucracies, the individual and employer mandates, and the public health insurance option. Various states have already taken innovative steps to adopt comprehensive health care reform. (Amendment #29, defeated 19-28)

• An amendment to enable employers to contribute to a worker's account and permit that worker to purchase insurance coverage of his choice. (Amendment #40, defeated 19-29)

• An amendment to eliminate the "tiered" payment structure for "preferred" and "non-preferred" physicians who participate in the public health insurance option. Without it, the existing provision forces health care providers to accept payments mandated by the federal government which are well below the actual cost and would likely result in the deterioration of quality care. (Amendment #41, defeated 19-29)

It is why the end product is so terribly flawed and, if adopted, Congress will end up revisiting soon thereafter to correct many of its faults. It is with the sentiments outlined here that I oppose this legislation, and ask all House Republicans to do the same.