New Healthcare Legislation Provides Tax Exclusion for Tribal Health Benefits

Kathleen Nilles is a Partner and Telly Meier is an Associate in our Washington D.C. office.

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA). One week later, on March 30, 2010, the President signed into law the Health Care and Education Reconciliation Act, which amends certain PPACA provisions, such as lessening the effects of an excise tax on high-cost insurance plans.

PPACA requires individuals, with some exceptions, to have health insurance beginning in 2014. Those individuals who do not have coverage will be required to pay a yearly financial penalty. The penalty will be phased in between 2014 and 2016. The full penalty will be the greater of $695 per individual ($2,085 per family), or 2.5 percent of household income. However, section 1501(e)(3) of PPACA provides that individuals who are members of an Indian tribe are not subject to the penalty if they do not have insurance coverage.

In addition, section 9021 of PPACA adds a new section 139D to the Internal Revenue Code (Code). This new Code section excludes from gross income the value of Indian health care benefits. The exclusion applies to the value of:

• health services or benefits provided or purchased by the Indian Health Service (IHS), either directly or indirectly, through a grant to or a contract with an Indian tribe or tribal organization or through programs of third parties funded by the IHS
• medical care (in the form of provided or purchased medical care services, accident or health insurance or an arrangement having the same effect, or amounts paid directly or indirectly to reimburse the member for expenses incurred for medical care) provided by an Indian tribe or tribal organization to a member of an Indian tribe, including the member's spouse or dependents
• accident or health plan coverage (or an arrangement having the same effect) provided by an Indian tribe or tribal organization for medical care to a member of an Indian tribe, including the member's spouses or dependents
• any other medical care provided by an Indian tribe or tribal organization that supplements, replaces or substitutes for the programs and services provided by the federal government to Indian tribes or Indians

For purposes of section 139D, the term "medical care" generally includes amounts paid for the diagnosis, cure, mitigation, treatment, prevention of disease, or for the purpose of affecting any structure or function of the body, as well as transportation for essential medical care. See Code Section 213(d). IRS Publication 502 (Medical and Dental Expenses) provides a list of medical expenses that are included and excluded under Code Section 213.

This exclusion applies to benefits and coverage provided after the date of enactment (i.e., after March 23, 2010).

PPACA May Require Additional Reporting

PPACA was not all good news, however, as Indian tribes may have up to three additional reporting requirements:

First, starting in 2011, Forms W-2 issued by employers, including tribal employers, must include the aggregate cost of employer-sponsored health benefits.

Second, starting in 2014, new Code Section 6055 provides that insurers, employers who self insure, and governmental units must report when they provide minimum essential coverage. The term "minimum essential coverage" is very broad and includes governmental plans. By reference, the term "governmental plan" includes plans established and maintained by an Indian tribal government, a subdivision of an Indian tribal government, or an agency or instrumentality of either, and all of the participants of which are employees of such entity – substantially all of whose services as an employee are in the performance of essential governmental functions, but not in the performance of commercial activities (whether or not an essential government function). See Section 2791(d)(8) of the Public Health Service Act (codified at 42 U.S.C. Section 300gg-91; see also 29 U.S.C. Section 1002(32). Further, the term "grandfathered plan" means any health insurance coverage or employee welfare benefit plan that provides medical care to employees or dependents directly or through insurance, reimbursement, or otherwise. See Sections 1251(e) and 1301(b)(3) of the PPACA; Section 2791(a) of the Public Health Service Act (codified at 42 U.S.C. Section 300gg-91); 29 U.S.C. Section 1002(1). Thus, Indian tribes may have to report on the health care benefits provided to employees – if they have a "grandfathered" plan.

Code Section 6055 requires the following information be reported:

• the name, address and taxpayer identification number of the primary insured, and the name and taxpayer identification number of each other individual obtaining coverage under the policy
• the dates during which the individual was covered under the policy during the calendar year
• whether the coverage is a qualified health plan offered through an exchange
• the amount of any premium tax credit or cost-sharing reduction received by the individual with respect to such coverage
• such other information as the Secretary may require

Third, also starting in 2014, there is a new reporting requirement for large employers. For such purposes, the term "large employers" means an employer that employed an average of at least 50 full-time employees on business days during the preceding calendar year (and the aggregation rules set forth in Code Section 414 apply). These requirements also apply to governmental units. See Code Section 6056(e).

New Code Section 6056 requires large employers to file a return and issue a statement to each employee with respect to whom information is reported. The return shall include:

• the name, date, and employer's tax identification number
• a certification as to whether the employer offers its full-time employees an opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan
• if the employer does offer its full-time employees (and their dependents) an opportunity to enroll:
  
  
  • the length of the waiting period before enrollment
  • the months during which the coverage was available
  • the monthly premium for the lowest-cost option in each of the enrollment categories under the plan
  • the employer's share of the total allowed costs of benefits provided under the plan
  • in the case of employers in which its required contribution exceeds 8 percent of wages paid to the employee, the option for which the employer pays the largest portion of the cost of the plan and the portion of the cost paid by the employer under each enrollment category
    
    
• the number of full-time employees for each month during the calendar year
• the name, address and tax identification number of each full-time employee during the calendar year and the months during which such employee (and any dependents) were covered under the plan
• other information the Secretary may require

New Code Section 4080H(a) encourages large employers to provide health care coverage to their employees and penalizes employers that do not offer minimum essential coverage, offer it at unaffordable rates, or pay less than 60 percent of the cost of such coverage. The purpose of the penalties is to recover any cost savings the employer may have by not offering insurance. A large employer that fails to offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage is subject to a penalty if at least one full-time employee enrolls in health insurance purchased through a state exchange and is receiving a premium tax credit or is under a cost-sharing reduction. The penalty is $2,000 per year (one-twelfth of $2,000 per month) per employee. It is calculated by finding the number of full-time employees exceeding 30 and applying the penalty. For example, if a large employer with 100 full-time employees does not offer minimum essential coverage for an entire year and one of the full-time employees purchases coverage through a state exchange and is eligible for a premium tax credit because of the purchase, the employer's penalty will be $140,000 (70 employees x $2,000).

Further, if a large employer offers its full-time employees and their dependents the opportunity to enroll in minimum essential coverage the employer will be subject to a penalty if any full-time employee enrolls in a state exchange and receives a premium tax credit or is under a cost-sharing reduction. The amount of the penalty is $3,000 per year (one-twelfth per month) per employee that enrolled in the state exchange. For example, if an employer has 100 employees and 20 enroll in the state exchange and receive a premium tax credit, the employer's penalty will be $60,000 (20 employees x $3,000). Furthermore, this penalty is capped at the amount the penalty would have been had the employer not provided coverage (i.e., $140,000 under these examples).

These penalty provisions also start in 2014.

In addition, employer-provided coverage under any group health plan that is excludable from the employee's gross income under Code Section 106, which applies to tribal employee plans, will potentially be subject to the 40 percent excise tax on excess benefits under new Code Section 9001. This tax is imposed on insurers and plan administrators for self-insured plans. The Reconciliation Act set forth the threshold amounts as $10,200 for an individual and $27,500 for a family. These thresholds would apply starting in 2018. When determining whether the threshold applies, not only are the employer's contributions taken into account, but also the employee contributions to coverage. However, this so-called "Cadillac health plan" excise tax would not apply to non-employment-based plans sponsored by tribes for tribal members.

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