President Signs Health Care, Climate, Tax Bill into Law

On August 16, the President signed a $700 billion+ bill into law. Even though this budget reconciliation bill, generally referred to as the Inflation Reduction Act (IRA), is pared back compared to its predecessor, the Build Back Better Act, there are still significant policies included. Please read CLA’s full article to find other insights, particularly on key tax provisions.

Health Care Policy

The health care provisions in the IRA focus on three groups – pharmaceutical companies, Medicare beneficiaries and individuals accessing coverage on the federal marketplace or state exchange. We’ll look at each a bit below.

Pharmaceutical companies. Historically, Medicare was not able to negotiate with drug manufacturers on the cost of drugs. The IRA changes that for the first time. The Department of Health & Human Services (HHS) is now authorized to negotiate on certain drugs (brand-name and biologics) in Medicare Parts B and D. That said, there are limitations to this authority, such as the brand-name or biologic cannot have a generic or biosimilar available and the drugs have to have been on the market at least nine or 13 years, depending on drug type. Additionally, the number of drugs HHS can negotiate is capped at 10 Part D drugs beginning in 2026. That number rises to 20 Part D and B drugs by 2029. Other policies cover how the negotiated price works and financial penalties for drug companies that fail to negotiate.

Beginning 2023, pharmaceutical companies will owe a rebate if certain drug prices increase more than the rate of inflation (CPI-U). The base year is set at 2021. Rebates would apply to single-source drugs or biologics under Part B and all drugs under Part D (except if annual cost is under $100).

Medicare Beneficiaries. The law assists beneficiaries with the cost of drugs through a variety of policies. One of the more high-profile issues in the press over the past few years has been the cost of insulin. While the legislation initially tried to cap insulin costs for Medicare and privately insured, the latter was struck from the bill. As enacted, the IRA caps cost sharing in Medicare for insulin at $35 monthly beginning in 2023. Also starting in 2023 are policies that eliminate cost-sharing for adult vaccines in Medicare and require state Medicaid/CHIP programs to cover approved vaccines and administration without cost sharing. Beginning in 2025, the law places a $2,000 cap on out-of-pocket spending in Part D among other policy changes.

Marketplace, State Exchanges/Premium Tax Credits. Another group impacted by the law are those who seek health insurance coverage on the federal marketplace or a state exchange. As originally enacted under the Affordable Care Act, individuals without government insurance or affordable private insurance and within certain income levels (up to 400% of the federal poverty level (FPL)) could access more affordable coverage through the marketplace or a state-based exchange due to assistance like the premium tax credits.

The American Rescue Plan Act (ARPA) expanded various aspects of the premium tax credits, including eliminating the 400% FPL upper bound for eligibility. For individuals over 400% FPL, they are eligible for the premium tax credit if premium costs are over 8.5% of household income. The 8.5% was also an ARPA change. These ARPA expansions were set to expire at the end of this year. The IRA extends them another three years to 2025.

Other Policies

There are several tax changes that apply to either corporations (minimum tax) or publicly traded companies (excise tax), but one change that’s been under the radar is the existing limit on excess business losses. It applies to business owners operating as sole proprietor or pass-through entities (i.e., entities taxed as partnerships, S corps or LLCs). This tax policy would have sunset in 2026 but the IRA now extends it to January 1, 2029.

Also of interest will be the $80 billion in funding (a very large increase) for the Internal Revenue Service. The largest chunk of this funding – $45.6 billion – must be used to determine and collect owed taxes, conduct criminal investigations, digital asset monitoring and other compliance activities. Another $25 billion is directed at operations support with roughly $10 billion for taxpayer services and modernization.

While we don’t provide details in our blog today, the IRA includes many new or modified energy/climate tax incentives for businesses and individuals, along with specific appropriations to various federal agencies to advance climate, environmental and energy changes and programs.

Next Steps

1. Watch for increased/heightened scrutiny from the IRS. Estimates are that well over $100 billion in revenues will be raised due to the IRS’ increased activities.
2. For larger businesses (50 employees), remember there is still the employer mandate penalty that could apply for failing to provide affordable coverage (defined as premium costs less than 8.5% of income) to employees and an employee accesses coverage on the marketplace/exchange and receives a premium tax credit.
3. Consider all the potential credits or program funding where you – either personally or as a business – could benefit. Contact your CLA advisor for these insights.