1. 1 ©2011 Foley & Lardner LLP Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients but may be representative of clients 321 N. Clark Street, Suite 2800, Chicago, IL 60654 312.832.4500 August 2, 2011 ______________________ Health Law Committee of the Association of Corporate Counsel “Legal Quick Hit” ______________________________ TAX LAW CHANGES UNDER THE AFFORDABLE CARE ACT _________________________

2. ©2011 Foley & Lardner LLP Overview PPACA uses the tax laws in three significant ways: It seeks to achieve its central objective of “near universal coverage” primarily through a series of “carrots” and “sticks” that are tax based Some aimed at the individual Others aimed at employers It seeks to cover some of added governmental costs of “near universal coverage” through a series of revenue raisers It uses the tax laws to guide the activities of providers in ways deemed beneficial and supportive of health care reform

3. ©2011 Foley & Lardner LLP Individual Mandate Starting in 2014, every individual, with limited exceptions, will be expected to have “minimal essential health coverage” for themselves and their dependents Individuals who fail to maintain required health coverage are subject to a penalty under the Internal Revenue Code, declared and payable as part of normal tax filing obligations Penalty starts in 2014 at greater of $285 or 1% of household income Penalty escalates to greater of $2,085 or 2.5% of household income But not more than the national average cost of basic health coverage

4. ©2011 Foley & Lardner LLP Individual Mandate (con’t) Low and moderate income individuals (between 100% and 400% of federal poverty limit) may qualify for government assistance Premium Assistance Refundable Credit – if cost of coverage exceeds sliding scale percentage of household income, federal government will pay excess Cost Sharing Reductions – low and moderate individual also may qualify for federal subsidies to cover sliding scale percentages of “out of pocket” costs (i.e. deductibles, copayments and similar charges) of qualifying health coverage But only if not offered “affordable” employer sponsored coverage Employer sponsored coverage is “unaffordable” if either employee’s share of premium exceeds 9.5% of household income or if employer’s share of premium is less than 60%

5. ©2011 Foley & Lardner LLP “Shared Responsibility” for Large Employers Although PPACA does not required employers to offer health coverage, “large” employers may be subject to penalties if they do not offer affordable coverage “Large employer” is one who employed an average of 50 full-time employees on business days during the preceding calendar year (with certain exclusions for seasonal employees) A large employer who does not offer minimum essential coverage but has at least one full- time employee who enrolls in an exchange offered plan and who receives either a Premium Assistance Refundable Credit or Cost Sharing Reductions is subject to a penalty in the nature of an excise tax. Penalty is $2,000 (adjusted for inflation) times the number of full-time employees in excess of 30 A large employer who offers minimum essential coverage, but that coverage is “unaffordable,” and the employer has at least one full-time employee who enrolls in an exchange offered plan and who receives either a Premium Assistance Refundable Credit or Cost Sharing Reductions is also subject to a penalty in the nature of an excise tax Penalty is $3,000 (adjusted for inflation) times the number of full-time employees who enroll in exchange offered plan and who receive either a Premium Assistance Refundable Credit or Cost Sharing Reductions, but not more than $2,000 times the number of full-time employees. These excise taxes are nondeductible for income tax purposes. As under current law, cost of providing health coverage is deductible

6. ©2011 Foley & Lardner LLP Small Employer Health Insurer Credit “Small” employers may qualify to receive a 35% tax credit for premiums paid for employee health coverage (currently in effect) “Small employer” is one with no more than 25 full time employees whose average annual compensation is not more than $50,000 But, for every employee in excess of 10, credit is reduced by 6.667% and by 4% for each $1,000 that average annual compensation exceeds $25,000

7. ©2011 Foley & Lardner LLP Revenue Raisers Additional Hospital Insurance Tax on the Wealthy Beginning in 2013, individuals earning wages in excess of $200,000 ($250,000 married filing jointly) subject to an additional.9% hospital insurance tax on wages in excess of that amount (in addition to existing 2.9% hospital insurance tax split equally between employer and employee) Self –employed individuals also subject to additional.9% tax starting in 2013 on self-employment income in excess of $200,000 ($250,000 married filing jointly) New Medicare Tax on Unearned Income 3.8% tax on net investment income starting in 2013 Net investment income is income from interest, dividends, annuities, rents, etc., together with gains from dispositions of property (other than property held in trade or business), but not more than excess of modified adjusted gross income over a threshold amount Increase in Itemized Deduction Threshold for Medical Expenses Current threshold of 7.5% percent of adjusted gross income increased to 10% starting in 2013

8. ©2011 Foley & Lardner LLP Revenue Raisers (con’t) HSAs, MSAs, FSAs and HRAs Non-prescription drugs no longer qualified medical expenses Penalty tax on distributions for uses other than qualified medical expenses increased to 20% Cafeteria Plans Starting in 2014, cafeteria plans may not include qualified health plan coverage offered through an exchange unless the sponsoring employer is an “eligible small” employer (generally not more than 100 employees) Eligible small employers also may offer simplified cafeteria plans that are not subject to classic discrimination testing

9. ©2011 Foley & Lardner LLP Revenue Raisers (con’t) Annual Fee on Branded Prescription Drug Makers and Importers New fee is imposed on entities in the business of making or importing branded prescription drugs for sale to specified government programs or pursuant to coverage under such programs There is a specified aggregate fee amount for each year -- $2.5 billion in 2011, $2.8 billion in 2012, etc. – and aggregate fees is allocated among each maker or importer based on market share Annual Fee on Health Insurers New fee is imposed on health insurers starting in 2014 There is a specified aggregate fee amount for each year -- $8 billion in 2014, $11.3 billion in 2015, etc. – and aggregate fees is allocated among each insurer based on market share

10. ©2011 Foley & Lardner LLP Revenue Raisers (con’t) “Cadillac Plan” Excise Tax – Employer sponsored health plans deemed overly generous are subject to an excise tax Tax applies if the “value” of coverage exceeds a threshold amount Tax is 40% of excess value Paid by insurer Tanning Salon Tax New excise tax of 10% of amounts paid for indoor tanning services

11. ©2011 Foley & Lardner LLP Revenue Raisers (con’t) Economic Substance Doctrine Codified Vehicle for disallowing tax shelter benefits long recognized by courts Treasury viewed effectiveness as limited by inconsistencies among Circuits Codification designed to eliminate inconsistencies Now, must be objective economic consequences without regard to income taxes as well as valid subjective motivation for entering transaction 20% strict liability penalty

12. ©2011 Foley & Lardner LLP Provider Regulation Tax-Exempt Hospitals Since 1969 exemption based on community benefit standard; standard questioned in Grassley hearings New Section 501(r) imposes specific requirements in furtherance of community benefit standard Each “hospital facility” operated by 501(c)(3) organization required to conduct “community health needs assessment” at least once every three years, with input from persons who represent the broad interests of the community as well as those with specialized knowledge of health issues Required to include on annual Form 990 a description of how the organization is addressing needs identified and of any needs not being addressed $50,000 excise tax for failure to perform needs assessment Hospital organizations required to establish and publicize a financial assistance policy Criteria for qualifying for assistance Basis for calculating amounts charged (generally may not exceed those charged to insured individuals --best or average of 3 best) Method of applying for Extraordinary collection actions (lawsuits, liens on residences) prohibited until eligibility determined Emergency care without discrimination

13. ©2011 Foley & Lardner LLP Provider Regulation (con’t) New Section 501(c)(29) provides tax exemption to “qualified nonprofit health insurance issuers” Limited to organizations that receive grants or loans under Consumer Operated and Oriented Plan program