Last year, the Pennsylvania Medical Society and the Hospital & Health System Association of Pennsylvania settled litigation with the Commonwealth of Pennsylvania regarding the administration of the Mcare Fund. The dispute arose in 2009 after the transfer of $100 million to the Commonwealth general fund. The agreement requires a total of $200 million be returned to physicians, hospitals, and other health care providers - $139 million in refunds (related to Mcare premiums paid in 2009 and through 2012 and 2014) and $61 million in reduced future Mcare assessments.
For physicians, the Mcare assessment was layered on top of their base professional liability premium. Therefore, it is likely that the refunds will be paid in the name of the physician, which creates some interesting tax implications.
Unless the physician was self-employed, the Mcare premium was probably paid by a business entity (corporation, partnership, LLC, or for-profit or not for profit hospital system) with a corresponding deduction on the business entity tax return. In group practice settings, the physician may have been an owner/employee of the business entity or may have been a non-owner employee. And, some of the owner/employees may have retired between 2009 and 2015.
Since Mcare will make a payment to the named, insured physician, any payment related to an item for which a tax deduction was taken will be considered gross income to the recipient. Consequently, it very well may be reported on a Form 1099 from the Commonwealth.
Additionally, the business entities may have a claim to the refund, particularly if the physician was a non-owner. If this claim is made, the physician will need to exercise care to properly report both the income and a corresponding expense or possibly an assignment of the income to the business entity (assuming the assignment is a legal obligation). This would make the tax payment and remittance to an organization tax neutral to the physician.
In this case, the practice group will face a situation in which the normal business receipts are enhanced by a one-time windfall. Many physician practices have formulae or productivity-driven compensation arrangements and will need to provide for this rebate. Indeed, some may have to look back to the years of payment to determine how physician compensation was impacted in the year when the Mcare premium was paid.
If a physician has retired or withdrawn from a practice, management may need to look at the terms of employment contracts, stock purchase arrangements, and any deferred compensation agreements to determine whether the rebate has an impact on the physician. They also need to examine whether this exposes the practice group to additional liability to the retiree.
It is a good idea to take a common sense approach to assessing the implications by reviewing relevant documents, framing the possible consequences before the rebates are made, and plotting a course of action before 2015 tax planning.
Timothy C. Hilbert can be reached at Email or 215.441.4600.
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