S. 1783 (Enzi) - Tax Credit

Target population(s)
The tax provisions of the bill would affect taxpayers with employer-sponsored and individually purchased health insurance, including certain lower-income uninsured individuals who would be newly eligible for refundable health insurance tax credits.

Eligibility
Standard Deduction for Health Insurance (SDHI): In general, any taxpayer would be eligible for the deduction if they have qualified health insurance (see below) with certain exceptions. These include taxpayers who elect the health insurance tax credit; and those who are covered under Medicare, Medicaid, SCHIP or, an employer-sponsored retiree health plan with coverage beginning prior to January 1, 2010.

Health Insurance Tax Credit (HITC): Lower-income Americans who obtained qualified core plans or qualified compatible core plans (see below) would be eligible for the tax credit. The sliding scale credit would phase out to $0 at 300% of poverty. Individuals eligible for Medicare and the Health Coverage Tax Credit (created by the Trade Adjustment Assistance Act of 2002), and those enrolled in employer-sponsored health plans would not be eligible for the HITC.

Annual amount of credit/deduction
SDHI: Would establish a new standard deduction allowing those taxpayers with qualified health insurance to take an annual deduction for health insurance of $7,500. In general, families would be limited to two deductions ($15,000). These amounts would be increased annually for inflation. The deduction would be reduced for insurance purchased with MSA or HSA funds. The deduction would be above the line, i.e., available whether or not the individual itemized other deductions.

Employers would be required to report the value of health insurance coverage to their employees on their annual Form W-2 and such amounts would be subject to withholding and employment taxes. Employers would exclude a pro-rated portion of the standard deduction for health insurance (SDHI) for employment tax purposes for their employees who have qualified coverage. Tax withholding amounts could be adjusted to reflect the SDHI.

HITC: Eligible lower-income individuals who obtained qualified core plans or qualified compatible core plans (see below) would be eligible for a tax credit up to $2,500 for an individual and $5,000 for a family (indexed for inflation to the CPI-U). Individuals with Medicaid/SCHIP coverage (or under a state program created under a federal waiver) could opt out of these programs and use the HI tax credit to purchase qualified private insurance. Additional premium subsidies would be available to the extent that the private coverage’s actuarial value was less than their previous public insurance.

Qualified health insurance coverage
SDHI: Coverage that is qualified for a standard deduction would have to meet the following requirements: have a reasonable annual or lifetime benefit maximum; cover inpatient and outpatient care, emergency benefits, and physician care; include no pre-existing condition limitations; and have coverage which meaningfully limits individual economic exposure to extraordinary medical expenses. Long-term care insurance and Medicare would not qualify for the SDHI. Insurers and employers of qualified health plans would be required to file a return with the IRS with respect to each covered individual, containing specified information. Penalties would apply for noncompliance.

HITC: Qualified coverage would include qualified core plans (QCPs) and qualified compatible core plans (QCCPs). A QCP would have to provide coverage for benefits as required by the state in which it is sold; include basic preventive services; and cover medical self-management. In the first year, premiums for QCPs would be set at $2,500 for individual coverage and $5,000 for family coverage. These amounts would be increased annually for inflation. The plan would also have to comply with specific limits on cost-sharing: the annual deductible could not exceed $2,500 (as indexed for inflation); the copayment could not exceed 20%; and the maximum on out-of-pocket costs could not exceed $5,000 (also indexed for inflation). Cost-sharing requirements could not be imposed on preventive and medical self-management services. A QCCP is a plan that allow for a similar set of benefits that met a national standard actuarial value. Cost-sharing amounts and any restrictions on premiums would be subject to state law (and not the federal minimum requirements applicable to the QCPs).

Tax credit refundability
The tax credit would be refundable.

Availability of tax credit advance payment
tax credit advance payment The tax credit would be available on an advance payable basis.

Requirements on employers to maintain existing coverage
No provision.

Changes to the tax treatment of health insurance
Would eliminate the employer exclusion for coverage and amounts received (i.e., employer contributions for health benefits or insurance would be counted as taxable income). A taxpayer’s employment taxes would be reduced by the amount of any SDHI.

Would also eliminate the deduction for individual medical expenses that is currently available to taxpayers who itemize their returns and pay more than 7.5% of their adjusted gross incomes for medical expenses (including health insurance premiums).

(The employer exclusion and individual medical expense deduction would continue to be available for individuals covered by Medicare, Medicaid, SCHIP, or certain (i.e., grandfathered) employer-sponsored retiree health plans.)

New federal requirements on the health insurance market (e.g., underwriting, rating or marketing).
As a condition of state licensure, each health insurance issuer offering coverage in a state would be required to offer at least one certified QCP (see above). In addition, each issuer offering coverage in a state could offer one or more certified QCCPs.

States would be required to use risk adjustment to lessen such material risk selection as might occur among QCPs, QCCPs, and other licensed health insurance products. HHS would be required to certify state risk adjustment mechanisms as meeting federal standards.

States would enforce the above requirements on health insurers and their QCP and QCCP offerings. If a state failed to provide for enforcement (through enactment of conforming state laws), the bill’s requirements relating to qualified coverage would be enforced by the federal government.

Related changes to public insurance programs (Medicare, Medicaid, SCHIP)
No provision.

Effective date
The SDHI and HITC would apply to taxable years beginning on or after the requirements of the bill relating to obtaining insurance coverage would apply, which would be no later than three years after the bill’s enactment.

Other provisions in bill
The bill would require the federal government to simplify enrollment forms for health programs. The IRS would provide information on the SDHI, the HITC, enrollment processes, and default enrollment in tax return booklets in advance of the availability of the tax subsidies. HHS would be required to develop a website to link people to state insurance commissioner websites that would include information on available QCP and QCCPs, the SDHI, the HITC, and enrollment processes. Taxpayers would report their source of coverage, if any, on their tax returns. Health care providers and facilities would be required to provide basic information, given to them by HHS, to uninsured individuals presenting for services to encourage their enrollment.

Title II of the bill would require the states to merge their individual and group insurance markets to apply more broadly the portability protections established under the Health Insurance Portability and Availability Act of 1996 (HIPAA). Title II would also provide for limits on the variations in premiums for private insurance policies, provide for small business and other pooling arrangements, and provide for “harmonization” of state insurance laws applicable to the individual and group health insurance markets relating to form filing and rate filing, market conduct review, prompt payment of claims, and internal review. Title III includes initiatives relating to health care quality improvements and cost containment, increased access to health care services, and medical malpractice reform.