Tax Implications for EHR Incentive Payments to Physicians

March 21, 2014

CMS considers EHR incentive payments to be income, not reimbursement for expenses incurred through system implementation. Physicians need to be aware of this distinction.

Not only has spring arrived, but we are thick in the midst of tax season. One important issue for physicians to think about is how to allocate the income they have received from CMS in the form of electronic health record (EHR) incentive payments. Two important pieces of legislation that will affect physicians this year are: the U.S. Department of Health and Human Services' (HHS) hardship waiver and the March 5 release of the final rules by the U.S. Department of the Treasury, which related to Sections 6055 and 6056 of the Internal Revenue Code as added by the Affordable Care Act.

The Stage 2 hardship waiver provides an avenue for providers to avoid a reduction in Medicare reimbursement for failing to demonstrate meaningful use requirements in 2014. As Rachel Maisler, a CMS spokeswoman said, "HHS will implement a flexible hardship exception policy so those who legitimately tried to upgrade their EHR product to the 2014 edition, but may have not had time to implement the system, would not be penalized in 2015." However, the hardship exemption must be requested and substantiated.

The Department of Treasury Final Rules, which are scheduled to be published in the March 10 Federal Register, cover reporting requirements for certain large employers, governments, and other entities (including self-insured employers) that provide "minimum essential coverage" to individuals. According to the Treasury's press release, "the final rules provide for a single, consolidated form that employers will use to report to the IRS and employees under both sections 6055 and 6056, thereby simplifying the process and avoiding duplicative reporting." These final regulations are critical because they clarify what information is required under Sections 6055 and 6056.

In terms of how EHR incentive payments from HHS are addressed from a tax perspective, the American Recovery and Reinvestment Act of 2009 (ARRA) did not expressly address taxation. The Office of the Chief Counsel of the IRS did issue a Memorandum (No. 201307005) on February 15, 2013. "According to the payer, CMS, the incentive payment is based on the provider's meaningful use of EHRs and does not constitute reimbursement for the expenses incurred in establishing EHRs. Thus, an incentive payment is a clear accession to wealth and not a return of capital. Further, the payments do not fall within any exclusion provided by the Code. Consequently, a recipient must include incentive payments in gross income under section 61 of the Code unless he or she receives the payments as a conduit or an agent of the recipient's practice group, or someone else, and is thus not allowed to keep the payments."

In sum, there are a multitude of tax items on the horizon, which should be discussed with an accountant, who is well versed in healthcare. Failure to do so can mean penalties and audits.