3% tax withholding on Medicare pay repealed

The IRS regulation, set to take effect in 2013, was designed to target delinquent government contractors but would have affected some Medicare physician payments.

By — Posted Nov. 28, 2011

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President Obama on Nov. 21 signed into law a repeal of a tax withholding statute opposed by physicians for its potential to reduce Medicare doctor pay starting in 2013.

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 bills would be sent back to the contractors in their next tax returns.

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 Medicare eventually would pay everything the practices were owed, the withholding would amount to an interest-free loan to the government, they said.

Organized medicine and business associations hailed the enactment of the withholding repeal.

"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.

The U.S. Chamber of Commerce also pushed for the repeal on behalf of its members. "By repealing the 3% tax withholding provision that was scheduled to take effect in 2013, Congress took an important step in lifting a cloud of uncertainty hanging over the business community," said Bruce Josten, the chamber's executive vice president for government affairs. "With passage of this legislation, many small businesses that operate on tight margins will feel more comfortable making decisions to hire and invest in their companies knowing that the government won't be allowed to hold 3% of their revenues."

Dr. Carmel noted, however, that the repeal does nothing to address the 27.4% Medicare pay cut 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 time is now for Congress to fix this formula. Physicians and their Medicare patients deserve better."

The withholding repeal is projected to cost the federal government about $11 billion in lost tax collections. Lawmakers and Obama agreed to offset that cost by closing what they consider a coverage loophole in the health system reform law. Under the provision corrected by the repeal measure, some people with annual incomes up to about $60,000 might have become eligible for Medicaid when the program expanded in 2014.

Because the health reform law did not count Social Security benefits toward Medicaid income eligibility, it would have allowed retirees with significant annual Social Security payments to become eligible for Medicaid after the expansion. Rolling back this provision is the most significant change to the health reform statute since Obama signed a measure in April repealing a small-business tax reporting provision in the law.

The House initially voted in October to eliminate the 3% withholding rule and close the Medicaid loophole, but on Nov. 10, the Senate approved new provisions authorizing tax credits for certain businesses that hire military veterans. That necessitated another House vote on Nov. 16 before the final package could go to the White House for Obama's signature.

The Returning Heroes Tax Credit will offer a 40% credit on wages, up to $2,400, to businesses that hire veterans who have been unemployed for at least four weeks. For firms hiring veterans who have been out of a job for longer than six months, the 40% wage credit can go up to $5,600, or up to $9,600 if the veterans have service-connected disabilities.

"Some of our most patriotic businesses have pledged to hire 135,000 more veterans and military spouses," Obama said at the bill signing. "Today, we're giving those businesses one more reason to give veterans a job."

Sen. Scott Brown (R, Mass.) was the author of both the 3% tax withholding repeal and the veterans tax credits, both of which were packaged together as a jobs act. "I'm honored to join President Obama as he signs this important jobs legislation into law," he said. "This signing ceremony is possible only because partisan politics were put aside and both parties worked together in good faith."

But the veterans tax credits were the only provisions in Obama's American Jobs Act that have received congressional approval. The remainder have been blocked by Republicans who say the measures would increase federal spending too much.

Obama also issued executive orders to create an online veterans job bank, encourage community health centers to hire 8,000 veterans in three years, and give grant approval priority to schools that train veterans to be physician assistants. The actions were part of the White House's "We Can't Wait on Congress" strategy to implement elements of the president's agenda through administrative actions that sidestep congressional approval.

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