Tax-Exempt Organizations and The Healthcare Industry Will Benefit From New Law

Friday, December 20, 2019, President Trump signed into law two appropriation bills following passage in both the House of Representatives and the Senate.

Along with many folks in the tax-exempt community, we too were starting to lose hope that it would never happen. However, we were pleasantly surprised when legislative gifts from the government arrived early Friday, December 20, 2019 as President Trump signed into law two appropriation bills following passage in both the House of Representatives and the Senate. Both H.R. 1158, Consolidated Appropriation Act and H.R. 1865, Further Consolidated Appropriations Act, also averted a government shutdown that would have commenced December 21, 2019.

Parking Tax Repeal

The passing of H.R. 1865 brought fantastic news to many tax-exempt organizations through the retroactive repeal of Internal Revenue Code (“IRC”) §512(a)(7). This widely unpopular Code Section was implemented by the Tax Cuts and Jobs Act of 2017, and had previously treated the value of qualified transportation fringe (“QTF”) benefits (both pre-tax commuter reimbursement and certain parking benefits) to employees as unrelated business taxable income (“UBTI”).

With the repeal of IRC §512(a)(7), QTF benefits will no longer be treated as UBIT on the Form 990-T. The repeal is effective retroactive to December 22, 2017, and therefore any organization that incurred UBTI as a result of section 512(a)(7) should be eligible to seek a refund (and presumably any associated penalties and interest, if applicable).

Please note that June 30, 2018 and September 30, 2018 fiscal year ends and December 31, 2018 calendar year end filers will need to amend their Forms 990-T to claim this refund. However, the Internal Revenue Service (“IRS”) may establish a separate consolidated refund process for claims related to the parking tax repeal. Withum will keep you updated with any additional guidance from the IRS.

Repeal of Three Affordable Care Act (“ACA”) Taxes

The bill, in its entirety, is a $1.4 trillion Federal spending package, which also includes the repeal of three ACA related taxes as outlined below:

1. Cadillac Tax Repeal – The Cadillac Tax, a 40% excise tax on certain employer sponsored health insurance plans that exceed certain thresholds was set to go into effect in 2020. Despite being delayed twice, the incoming Cadillac tax forced companies to invest financial resources into planning and devising strategies to keep their health plans below the government thresholds. The repeal of the Cadillac Tax is a win for many as many employers struggle to keep healthcare coverage affordable for the millions of Americans that rely on their employer sponsored health insurance.
2. Medical Device Tax Repeal – The Medical Device Tax, a 2.3% excise tax on the sale of certain medical devices has been permanently repealed. This tax has also been temporarily suspended several times since 2016. This unpopular tax was only in effect from January 2013 to December 2015, but was set to resume in January 2020. A report released by the Tax Foundation earlier this month showed that the return of the medical device excise tax in 2020 would have resulted in a decline of over 21,000 jobs and a reduction in U.S. GDP of $1.7 billion.
3. Health Insurance Tax Repeal – The Health Insurance Tax (“HIT”), an excise tax on health insurance providers was temporarily in effect before being suspended in 2017 and 2019. Unlike some of the other taxes repealed, the HIT is in effect for 2020, as the permanent repeal does not take effect until January 1, 2021. While the HIT is a tax levied on insurance providers, the Congressional Budget Office noted that the cost of the tax is ultimately passed on to consumers through increased health insurance costs.

Please do not hesitate to contact a member of Withum’s Healthcare Services Group with questions.