How Health Care Reform Affects Companies
The recently passed health care legislation provides a few provisions that will affect companies across various industries.
Effective in 2010
- Investment Tax Credit or Grant for Qualifying Therapeutic Discovery Projects
The tax credits available for expenditures for drug development or other medical advances are the research tax credit and the “orphan drug” tax credit for clinical testing expenses for rare diseases and condition. These two tax credits are non-refundable and not available for alternative minimum tax purposes. For biotech companies who do not generate taxable income, they will not benefit from these two tax credits. Instead, the credits are carried forward.
For expenses paid or incurred after Dec. 31, 2008, there is a new 50% nonrefundable investment tax credit or a tax-free federal grant for qualified investments in qualifying therapeutic discovery projects (“QTDP”). The credit is available only to companies with 250 or fewer employees. The total credits that can be allocated under the QTDP program cannot exceed $1 billion for a two-year period including 2009 and 2010.
A QTDP is to develop a product, process, or therapy to diagnose, treat, or prevent diseases and afflictions by:
- conducting pre-clinical activities, clinical trials, clinical studies, and research protocols, or
- by developing technology or products designed to diagnose diseases and conditions, including molecular and companion drugs and diagnostics, or
- to further the delivery or administration of therapeutics.
The costs must satisfy the IRS’s timing and certification requirements and can't be excluded costs.
- Timing – A qualified investment is made in a tax year beginning in 2009 or 2010.
- Certification – The IRS will establish a competitive QTDP certification program by May 2010. Within 30 days, each applicant must submit an application. It is first come, first served until the $1 billion runs out.
QTDP expenditures do not qualify for the research credit, orphan drug credit, or bonus depreciation. QTDP expenditures reduce the amount of the QTDP credit. If the QTDP expenditures are related to property of a character subject to depreciation, the basis of the property must be reduced by the amount of the QTDP credit.
Which companies may potentially benefit from the QTDP tax credit?
This tax credit will help biotech companies that are research-intensive and struggle from the tight funding markets continue their therapeutic development activities, which include hiring scientists and performing clinical studies.
- Small Employer Health Insurance Credit
There is no tax credit for employers that provide health coverage for their employees. Employers can deduct the cost of health coverage provided to employees.
For tax years beginning in 2010 through 2015, a tax credit is available for an eligible small employer (“ESE”) and tax-exempt employer for the purchase of health insurance coverage for its employees.
An ESE is an employer with no more than 25 full-time equivalent employees (“FTEs”) during its tax year, pays average annual wages no more than $50,000 per employee, and contributes at least 50 percent of the health care premium for employees.
The credit is based upon a percentage of employer-provided health insurance premiums. The percentage for ESE and tax-exempt employer is 35 percent and 25 percent, respectively, for 2010 through 2013. In 2014, the percentage for ESE and tax-exempt employer is increased to 50 percent and 35 percent, respectively.
The full amount of the credit is available only to an employer with 10 or fewer FTEs and the average annual wages is less than $25,000 per employee.
The credit reduces the employer's deduction for contributions to purchase health insurance coverage. The credit is a non-refundable general business tax credit, and can be carried back for one year and carried forward for 20 years. The credit is also available to reduce alternative minimum tax.
Effective in 2011
- Form W-2 Reporting
An employer is not required to report the total value of employer sponsored health insurance coverage on the Form W-2. Some employers report the amount of tax-free employee benefits under a cafeteria plan in box 14.
For tax years beginning after December 31, 2010, an employer must disclose the value of the health insurance coverage sponsored by the employer on each employee’s annual Form W-2. If an employee enrolls in an employer sponsored health insurance coverage under multiple plans (i.e. a medical plan, a dental plan, and a vision plan), the employer must report the total value of the multiple plans which is the aggregate premium.
- Medicine is Limited to Prescribed Drugs for the Health Reimbursement Arrangements
Under a health reimbursement arrangement such as Flexible Spending Accounts, or Health Savings Accounts, amounts paid for both prescription and over-the-counter medicine are qualified medical expenses. Reimbursement for these amounts is excludible from an employee’s gross income.
Cost of over-the-counter medicines is not a qualified medical expense. Over-the-counter drugs will no longer be paid for with pre-tax dollars.
- Nondeductible Annual Fee on Branded Prescription Pharmaceutical Manufacturers and Importers
For calendar years beginning after December 31, 2010, covered entities, generally manufacturers or importers of branded prescription drugs, must pay an annual nondeductible fee. The aggregate annual fee will be $2.5 billion for 2011, increases to $4.1 billion for 2018, and decreases to $2.8 billion for 2019 and later. The aggregate annual fee will be allocated by the IRS to each covered entity based upon its share of branded prescription drug sales incurred during the preceding calendar year. Covered entities with branded prescription drug sales that are $5 million or less are exempt from this fee.
Effective in 2012
- Form 1099 Reporting for Payments to Corporations
Any person or entity who conducts a trade or business, makes payments to another person for salaries, wages, commissions, fees, interest, rents, royalties, annuities, pensions, and other gains, profits, and income. If the aggregate payments are $600 or more per recipient in any tax year, the payor must file Form 1099 Information Return with the IRS. However, payments made to corporations are generally exempt from the 1099 reporting except for the attorney’s fees, medical and health care payments, and a few other items.
For payments made after December 31, 2011, payments made to corporations are no longer exempt from 1099 reporting.
Effective in 2013
- Contribution Cap on Flexible Spending Accounts
There is no IRS cap on the amount that an employer may allow an employee to contribute to a pre-tax health flexible spending account maintained through a cafeteria plan for each plan year. Employers may limit the annual amount each employee may contribute.
For tax years beginning after December 31, 2012, the maximum amount available for reimbursement of medical expenses of an employee cannot exceed $2,500. The $2,500 limit is inflation indexed after December 31, 2013.
- Excise Tax on Medical Device Manufacturers
An excise tax, which is 2.3% of the sales price, is imposed on the sale of any taxable medical device by the manufacturer, producer, or importer after December 31, 2012. The excise tax does not apply to certain medical device determined by the IRS that is generally purchased by the general public at retail for individual use, such as eyeglasses, contact lenses, or hearing aids. The IRS will publish a list of medical devices which will be exempt from the excise tax.
- Compensation Deduction Limit of $500,000 for Health Insurance Providers
For publicly-held corporations, the tax deduction for executive compensation is limited to $1 million per executive. The limitation does not apply to performance-based compensation. Many corporations have done an incredible amount of stuffing into “performance-based” compensation. Corporations deduct the excessive executive compensation as ordinary business expense and pay less tax.
For tax years beginning after December 31, 2012, a covered health insurance provider is denied a compensation deduction on any executive pay in excess of $500,000. The performance-based compensation exception does not apply.
- Subsidy on Medicare Part D Drug Coverage
Companies receive a tax-free federal subsidy to help pay for prescription drug coverage, up to $1,330 per retiree. When companies spend the tax-free federal subsidy on benefits, they are allowed to take a tax deduction for the cost of the benefits.
Beginning in 2013, the federal subsidy will be taxable. This permanent book/tax difference will increase a company’s effective tax rate.
The new law requires the subsidy received to be offset against a company’s deduction for health care expenses. The deferred tax asset associated with the benefit plan will be reduced immediately which is the first quarter of 2010.
Effective in 2014
- Nondeductible Annual Fee on Health Insurance Providers
For calendar years beginning after December 31, 2013, covered entities, generally health insurance companies, will be assessed an annual fee. The aggregate annual flat fee will be $8 billion for 2014 and increases to $14.3 billion for 2018. The aggregate annual fee will be allocated by IRS to each covered entity based upon its share of the net premiums written during the preceding calendar year. Covered entities with net premiums written during the year that are $25 million or less are exempt from this fee.
Effective in 2018
- Excise Tax on High Cost (“Cadillac”) Employer Sponsored Health Coverage
For tax years beginning after December 31, 2017, a health insurance company or a plan administrator who offers high-cost health coverage with the annual premium in excess of $10,200 for single and $27,500 for family, is assessed an excise tax. The excise tax is calculated by a complex formula which is 40% of the aggregate value of the health insurance coverage that exceeds the threshold amount, and adjusted by health cost adjustment percentage and age and gender adjusted excess premium amount.
For questions on any of these issues, please contact your EisnerAmper Tax Representative.