3% tax withholding rule cleared for repeal

The IRS regulation, scheduled to take effect in 2013, would have held back a portion of some Medicare payments to physicians.

By David Glendinning — Posted Nov. 17, 2011

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The House on Nov. 16 approved a Senate-passed bill to repeal a tax withholding statute widely opposed by physicians for its potential to reduce Medicare doctor pay starting in 2013. The 422-0 vote sent the measure to President Obama, who has said he would sign it into law.

The tax withholding rule was approved by Congress in 2006 as a way to collect outstanding tax bills from delinquent government contractors. The government was authorized to withhold 3% of any federal payments to contractors of $10,000 or more as an advance on any tax liabilities for the year. Any amount withheld that exceeded the final tax bill would be sent back to the contractor in its next tax return.

But small businesses complained that the withholding language was written too broadly and would interfere with the cash flow of smaller firms. Physician practices worried that by aggregating Medicare claims, they easily could exceed the $10,000 threshold and be subject to the 3% pay reduction. Although the government eventually would pay everything the practices were owed by Medicare, the withholding would amount to an interest-free loan to the government, they said.

"The AMA applauds Congress for passing this important piece of legislation that removes the 3% withholding provision that would have burdened physicians who care for Medicare patients," said American Medical Association President Peter W. Carmel, MD. He noted, however, that the repeal does nothing to address the 27.4% Medicare pay cut that is set to go into effect in 2012 because of Medicare's sustainable growth rate formula, which is a reduction that the government would not pay back.

The withholding repeal is projected to cost the federal government about $11 billion in lost tax collections. Lawmakers agreed to offset that cost by closing what they consider a coverage loophole in the health system reform law. Under the reform provision that is corrected by the repeal measure, some people with incomes up to four times the poverty level might have become eligible for Medicaid when the program expanded starting in 2014.

The House initially voted in October to eliminate the 3% withholding rule, but during its consideration of the bill, the Senate added new provisions authorizing tax credits for certain businesses that hire military veterans. That necessitated another House vote before the final package could go to the White House for Obama's signature.

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