By wide margins, both houses of Congress repealed both (i) the expanded Form 1099 information-reporting requirements mandated by last year’s Patient Protection Affordability and Care Act (PPACA, aka ObamaCare) and (ii) the expansion of 1099 reporting requirements to rental operations pursuant to the Small Business Jobs Act of 2010. The bill (H.R. 4) passed the House by a 314-112 vote, and the Senate by a 87-12 vote. Despite some reservations over the payment offset provision described below, President Obama is widely expected to sign it. The PPACA’s controversial 1099 requirement included reporting all payments from businesses aggregating $600 or more in a calendar year to a single payee, including corporations (payments to corporations were previously excluded). This additional requirement would have required business systems for 1099 reporting that most business do not have, and received immediate criticism.
Both of the 1099 reporting requirements were intended to raise taxes that are currently not being paid – $22 billion over the next ten years. The substantial problem with the 1099 repeal involved how to make up for the expected uncollected tax from cheats who would not be receiving 1099s.
The PPACA requires most individuals to own a minimum level of health coverage starting in 2014. Each state is required to establish a state health benefit exchange to provide such insurance. Lower-income people who do not received health insurance through an employer or a spouse’s employer will be provided a new premium assistance tax credit to ease the cost of the required coverage.
The credit amount is determined by the Secretary of Health and Human Services, based on the amount by which premiums exceed a threshold amount. The threshold rises from 2% of income for those at 100% of the federal poverty level for the family size involved, to 9.5% of income for those at 400% of the federal poverty level. To put this in context, the poverty level varies based on one’s family size. For example, in 2011, the poverty level for a single person is $10,890, and for a family of four is 22,350. The PPACA provides inflation adjustments in these amounts for future years.
An eligible individual will enroll in a plan offered through an exchange and report his income to the exchange. Based on the stated income, the individual will receive a premium assistance credit. The Treasury Department will pay the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual will then pay to the plan in which he or she is enrolled the dollar difference between the premium tax credit amount and the total premium charged for the plan. Alternatively, if the full amount of the assistance had not been received, eligible individuals can pay for the insurance out of pocket and then claim a refundable credit on their tax returns.
However, a considerable problem occurs because the credits will be established at the beginning of the year. This allows people who are being forced to purchase insurance to not come out-of-pocket for more money than the law desires. But, the credits established at the beginning of the year almost certainly will be incorrect because income changes during the year due to new jobs, promotions, etc.
The PPACA includes a clawback provision for these overpayments of government-provided insurance credits. But everyone knew that some people would spend all their money they had, and therefore not have the resources necessary to repay what never should have been paid in the first place. To avoid this unpleasantness, the PPACA limits the size of premium assistance credit repayment that must occur.
To pay for taxes lost caused by the diminished 1099 reporting, these PPACA clawback limits were altered. Those who do not estimate their income accurately, and hence receive more assistance than they should receive, will now have to pay back more (but in many cases still not all) of the overpayment. The clawback limits contained in the PPACA, and as now amended, are as follows:
Somewhat surprisingly, these relatively modest changes in the expected repayment are expected to generate the full $22 billion lost taxes from the relaxed 1099 reporting.
Under both the original and amended plan, the repayment obligation occurs as a charge on one’s tax return. This is addressed under new Internal Revenue Code §36B.