On April 15, H.R.1473, the “Department of Defense and Full-Year Continuing Appropriations Act, 2011” (the Act), was signed into law by President Obama. The Act, which includes a repeal of sections of the Patient Protection and Affordable Care Act (PPACA) and associated Code provisions dealing with “free choice vouchers,” had previously been approved on April 14 by a vote of 260-167 in the House and 81-19 in the Senate. The Act has also been assigned a public law number of P.L. 112-10.
Here are highlights of the tax changes in the Act.
After Dec. 31, 2013, under the PPACA, employers that offered minimum essential coverage through an eligible employer-sponsored plan and paid a portion of that coverage would have been required to provide “qualified employees” with a voucher, the value of which could be applied to the purchase of a qualified health plan (QHP) through the Insurance Exchange (i.e., a federally supervised marketplace for health insurance policies meeting specific eligibility and benefit criteria).
Qualified employees included those:
... who did not participate in the employer's health plan;
... whose required contribution for employer-sponsored minimum essential coverage (if they did participate in the plan) was greater than 8%, but did not exceed 9.8%, of household income (indexed to reflect the rate of premium growth over income growth between the preceding calendar year and 2013); and
... whose total household income did not exceed 400% of the poverty line for the family.
In effect, free choice vouchers would have allowed a qualified employee to take the funds that his employer would have contributed towards his employer-sponsored insurance and use these funds to buy more affordable insurance on the exchange.
Observation: An employee whose total household income is at or below 400% of the poverty line, and whose share of his employer-sponsored health insurance premiums exceeds 9.8% of his total household income, will be eligible to acquire more affordable, subsidized health insurance in the Insurance Exchange. (PPACA Sec. 1401) Under prior law, an employee whose household income is at or below 400% of the poverty line, and whose share of his employer-sponsored health insurance premiums is 8 to 9.8% of his total household income, would have qualified for so-called “free choice” vouchers. Thus, the Act eliminates the availability of vouchers to those employees whose share of insurance premiums falls in the 8 to 9.8% range.
The voucher program was reflected in numerous provisions throughout the Code. These included:
... Code Sec. 36B, which allowed a refundable “premium assistance” credit for coverage under a QHP;
... Code Sec. 139D, which excluded from gross income the value of any free choice voucher provided by an employer to the extent that the amount of the voucher doesn't exceed that amount paid for a QHP;
... Code Sec. 162, which provided in Code Sec. 162(a) that the amount of a free choice voucher is treated as compensation for personal services for business deduction purposes;
... Code Sec. 4980H, which imposed an excise tax on “large employers” (generally, employers with at least 50 full-time employees) that don't offer affordable health insurance coverage after 2013; and
... Code Sec. 6056, which imposed information reporting requirements on certain employers that are required to offer their full-time employees and their dependents the opportunity to enroll in “minimal essential coverage” under an eligible employer-sponsored plan.
New law. The Act eliminates free choice vouchers by repealing subsections (a), (b), (c), (d), and (e) of PPACA Sec. 10108 (Act Sec. 1858(a)). The Act also:
... amends Code Sec. 36B(c)(2) by striking Code Sec. 36B(c)(2)(D), which, for purposes of calculating a taxpayer's premium assistance credit, excluded from the definition of “coverage month” any month in which a qualified employee has a free choice voucher (Act Sec. 1858(b)(1));
... repeals Code Sec. 139D (Act Sec. 1858(b)(2));
... amends Code Sec. 162(a) by striking the last sentence which treated the amount of a free choice voucher as compensation for Code Sec. 162 purposes (Act Sec. 1858(b)(3));
... amends Code Sec. 4980H(b) by striking Code Sec. 4980H(b)(3), which provided that in computing the excise tax under Code Sec. 4980H, no payment will be imposed for any month with respect to any employee to whom the employer provides a free choice voucher (Act Sec. 1858(b)(4)); and
... amends Code Sec. 6056 by striking language relating to offering and large employers (Act Sec. 1858(b)(5)).
Observation: The Act does not provide any sort of replacement mechanism for free choice vouchers to help certain lower-income employees who determine that participation in employer-sponsored insurance is too expensive.
Effective date. The Act provides that, upon signature into law, these changes will be effective “as if included in the provisions of” the PPACA. In other words, the law will be applied as if these provisions had never been enacted (Act Sec. 1858(d)).
President's policy statement. On April 12, the Administration issued a Statement of Administration Policy (SAP) saying that it supported passage of the Act. The SAP stated that although the Administration “would not have agreed to many of these cuts under better fiscal circumstances, the bill reflects a compromise that will help the Federal Government live within its means while protecting those investments that will help America compete for new jobs.”
Observation: The Act reflects the second time that last year's health care legislation has been cut back. The first time was the repeal of broadened information reporting provisions that had been designed to help raise revenue to offset the cost of health care overhaul.
References: For free choice vouchers, see FTC 2d/FIN ¶A-4246; United States Tax Reporter ¶36B4.01; TaxDesk ¶569,471; TG ¶12849.