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not properly treated as such may be identified and 
properly treated. 
‘‘(c) HEALTH COVERAGE PARTICIPATION REQUIRE-
MENTS.—For purposes of this section, the term ‘health 
coverage participation requirements’ means the require-
ments of part 1 of subtitle B of title IV of division A of 
the (as in effect on the date of the enactment of this sec-
tion). 
‘‘(d) SEPARATE ELECTIONS.—Under regulations pre-
scribed by the Secretary, separate elections may be made 
under subsection (a) with respect to full-time employees 
and employees who are not full-time employees. 
‘‘(e) TERMINATION OF ELECTION IN CASES OF SUB-
STANTIAL NONCOMPLIANCE.—The Secretary may termi-
nate the election of any employer under subsection (a) if 
the Secretary (in coordination with the Health Choices 
Commissioner) determines that such employer is in sub-
stantial noncompliance with the health coverage participa-
tion requirements and shall refer any such determination 
to the Secretary of the Treasury as appropriate. 
‘‘(f) ENFORCEMENT OF HEALTH COVERAGE PAR-
TICIPATION REQUIREMENTS.— 
‘‘(1) CIVIL PENALTIES.—In the case of any em-
ployer who fails (during any period with respect to 
which the election under subsection (a) is in effect) 
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to satisfy the health coverage participation require-
ments with respect to any employee, the Secretary 
may assess a civil penalty against the employer of 
$100 for each day in the period beginning on the 
date such failure first occurs and ending on the date 
such failure is corrected. 
‘‘(2) LIMITATIONS ON AMOUNT OF PENALTY.— 
‘‘(A) PENALTY
NOT
TO
APPLY
WHERE 
FAILURE
NOT
DISCOVERED
EXERCISING
REA-
SONABLE DILIGENCE.—No penalty shall be as-
sessed under paragraph (1) with respect to any 
failure during any period for which it is estab-
lished to the satisfaction of the Secretary that 
the employer did not know, or exercising rea-
sonable diligence would not have known, that 
such failure existed. 
‘‘(B) PENALTY NOT TO APPLY TO FAIL-
URES CORRECTED WITHIN 30 DAYS.—No pen-
alty shall be assessed under paragraph (1) with 
respect to any failure if— 
‘‘(i) such failure was due to reason-
able cause and not to willful neglect, and 
‘‘(ii) such failure is corrected during 
the 30-day period beginning on the 1st 
date that the employer knew, or exercising 
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reasonable diligence would have known, 
that such failure existed. 
‘‘(C) OVERALL LIMITATION FOR UNINTEN-
TIONAL
FAILURES.—In the case of failures 
which are due to reasonable cause and not to 
willful neglect, the penalty assessed under para-
graph (1) for failures during any 1-year period 
shall not exceed the amount equal to the lesser 
of— 
‘‘(i) 10 percent of the aggregate 
amount paid or incurred by the employer 
(or predecessor employer) during the pre-
ceding taxable year for group health plans, 
or 
‘‘(ii) $500,000. 
‘‘(3) ADVANCE
NOTIFICATION
OF
FAILURE 
PRIOR TO ASSESSMENT.—Before a reasonable time 
prior to the assessment of any penalty under para-
graph (1) with respect to any failure by an em-
ployer, the Secretary shall inform the employer in 
writing of such failure and shall provide the em-
ployer information regarding efforts and procedures 
which may be undertaken by the employer to correct 
such failure. 
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‘‘(4) ACTIONS
TO
ENFORCE
ASSESSMENTS.— 
The Secretary may bring a civil action in any Dis-
trict Court of the United States to collect any civil 
penalty under this subsection. 
‘‘(5) COORDINATION
WITH
EXCISE
TAX.— 
Under regulations prescribed in accordance with sec-
tion 424 of the Affordable Health Care for America 
Act, the Secretary and the Secretary of the Treasury 
shall coordinate the assessment of penalties under 
paragraph (1) in connection with failures to satisfy 
health coverage participation requirements with the 
imposition of excise taxes on such failures under sec-
tion 4980H(b) of the Internal Revenue Code of 
1986 so as to avoid duplication of penalties with re-
spect to such failures. 
‘‘(6) DEPOSIT OF PENALTY COLLECTED.—Any 
amount of penalty collected under this subsection 
shall be deposited as miscellaneous receipts in the 
Treasury of the United States. 
‘‘(g) REGULATIONS.—The Secretary may promulgate 
such regulations as may be necessary or appropriate to 
carry out the provisions of this section, in accordance with 
section 424(a) of the Affordable Health Care for America 
Act. The Secretary may promulgate any interim final rules 
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as the Secretary determines are appropriate to carry out 
this section.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
subsection (a) shall apply to periods beginning after De-
cember 31, 2012. 
SEC. 424. ADDITIONAL RULES RELATING TO HEALTH COV-
ERAGE PARTICIPATION REQUIREMENTS. 
(a) ASSURING COORDINATION.—The officers con-
sisting of the Secretary of Labor, the Secretary of the 
Treasury, the Secretary of Health and Human Services, 
and the Health Choices Commissioner shall ensure, 
through the execution of an interagency memorandum of 
understanding among such officers, that— 
(1) regulations, rulings, and interpretations 
issued by such officers relating to the same matter 
over which two or more of such officers have respon-
sibility under subpart B of part 8 of subtitle B of 
title I of the Employee Retirement Income Security 
Act of 1974, section 4980H of the Internal Revenue 
Code of 1986, and section 2793 of the Public Health 
Service Act are administered so as to have the same 
effect at all times; and 
(2) coordination of policies relating to enforcing 
the same requirements through such officers in 
order to have a coordinated enforcement strategy 
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that avoids duplication of enforcement efforts and 
assigns priorities in enforcement. 
(b) MULTIEMPLOYER PLANS.—In the case of a group 
health plan that is a multiemployer plan (as defined in 
section 3(37) of the Employee Retirement Income Secu-
rity Act of 1974), the regulations prescribed in accordance 
with subsection (a) by the officers referred to in subsection 
(a) shall provide for the application of the health coverage 
participation requirements to the plan sponsor and con-
tributing employers of such plan. For purposes of this di-
vision, contributions made pursuant to a collective bar-
gaining agreement or other agreement to such a group 
health plan shall be treated as amounts paid by the em-
ployer. 
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TITLE V—AMENDMENTS TO IN-
TERNAL REVENUE CODE OF 
1986 
Subtitle A—Provisions Relating to 
Health Care Reform 
PART 1—SHARED RESPONSIBILITY 
Subpart A—Individual Responsibility 
SEC. 501. TAX ON INDIVIDUALS WITHOUT ACCEPTABLE 
HEALTH CARE COVERAGE. 
(a) IN GENERAL.—Subchapter A of chapter 1 of the 
Internal Revenue Code of 1986 is amended by adding at 
the end the following new part: 
‘‘PART VIII—HEALTH CARE RELATED TAXES 
‘‘SUBPART A. TAX ON INDIVIDUALS WITHOUT ACCEPTABLE HEALTH CARE 
COVERAGE. 
‘‘Subpart A—Tax on Individuals Without Acceptable 
Health Care Coverage 
‘‘Sec. 59B. Tax on individuals without acceptable health care coverage. 
‘‘SEC. 59B. TAX ON INDIVIDUALS WITHOUT ACCEPTABLE 
HEALTH CARE COVERAGE. 
‘‘(a) TAX IMPOSED.—In the case of any individual 
who does not meet the requirements of subsection (d) at 
any time during the taxable year, there is hereby imposed 
a tax equal to 2.5 percent of the excess of— 
‘‘(1) the taxpayer’s modified adjusted gross in-
come for the taxable year, over 
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‘‘(2) the amount of gross income specified in 
section 6012(a)(1) with respect to the taxpayer. 
‘‘(b) LIMITATIONS.— 
‘‘(1) TAX LIMITED TO AVERAGE PREMIUM.— 
‘‘(A) IN
GENERAL.—The tax imposed 
under subsection (a) with respect to any tax-
payer for any taxable year shall not exceed the 
applicable national average premium for such 
taxable year. 
‘‘(B) APPLICABLE
NATIONAL
AVERAGE 
PREMIUM.— 
‘‘(i) IN
GENERAL.—For purposes of 
subparagraph (A), the ‘applicable national 
average premium’ means, with respect to 
any taxable year, the average premium (as 
determined by the Secretary, in coordina-
tion with the Health Choices Commis-
sioner) for self-only coverage under a basic 
plan which is offered in a Health Insur-
ance Exchange for the calendar year in 
which such taxable year begins. 
‘‘(ii) FAILURE TO PROVIDE COVERAGE 
FOR MORE THAN ONE INDIVIDUAL.—In the 
case of any taxpayer who fails to meet the 
requirements of subsection (d) with respect 
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to more than one individual during the tax-
able year, clause (i) shall be applied by 
substituting ‘family coverage’ for ‘self-only 
coverage’. 
‘‘(2) PRORATION FOR PART YEAR FAILURES.— 
The tax imposed under subsection (a) with respect 
to any taxpayer for any taxable year shall not exceed 
the amount which bears the same ratio to the 
amount of tax so imposed (determined without re-
gard to this paragraph and after application of para-
graph (1)) as— 
‘‘(A) the aggregate periods during such 
taxable year for which such individual failed to 
meet the requirements of subsection (d), bears 
to 
‘‘(B) the entire taxable year. 
‘‘(c) EXCEPTIONS.— 
‘‘(1) DEPENDENTS.—Subsection (a) shall not 
apply to any individual for any taxable year if a de-
duction is allowable under section 151 with respect 
to such individual to another taxpayer for any tax-
able year beginning in the same calendar year as 
such taxable year. 
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‘‘(2) NONRESIDENT
ALIENS.—Subsection (a) 
shall not apply to any individual who is a non-
resident alien. 
‘‘(3) INDIVIDUALS RESIDING OUTSIDE UNITED 
STATES.—Any qualified individual (as defined in 
section 911(d)) (and any qualifying child residing 
with such individual) shall be treated for purposes of 
this section as covered by acceptable coverage during 
the period described in subparagraph (A) or (B) of 
section 911(d)(1), whichever is applicable. 
‘‘(4) INDIVIDUALS
RESIDING
IN
POSSESSIONS 
OF THE UNITED STATES.—Any individual who is a 
bona fide resident of any possession of the United 
States (as determined under section 937(a)) for any 
taxable year (and any qualifying child residing with 
such individual) shall be treated for purposes of this 
section as covered by acceptable coverage during 
such taxable year. 
‘‘(5) RELIGIOUS CONSCIENCE EXEMPTION.— 
‘‘(A) IN
GENERAL.—Subsection (a) shall 
not apply to any individual (and any qualifying 
child residing with such individual) for any pe-
riod if such individual has in effect an exemp-
tion which certifies that such individual is a 
member of a recognized religious sect or divi-
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sion thereof described in section 1402(g)(1) and 
an adherent of established tenets or teachings 
of such sect or division as described in such sec-
tion. 
‘‘(B) EXEMPTION.—An application for the 
exemption described in subparagraph (A) shall 
be filed with the Secretary at such time and in 
such form and manner as the Secretary may 
prescribe. The Secretary may treat an applica-
tion for exemption under section 1402(g)(1) as 
an application for exemption under this section, 
or may otherwise coordinate applications under 
such sections, as the Secretary determines ap-
propriate. Any such exemption granted by the 
Secretary shall be effective for such period as 
the Secretary determines appropriate. 
‘‘(d) ACCEPTABLE COVERAGE REQUIREMENT.— 
‘‘(1) IN GENERAL.—The requirements of this 
subsection are met with respect to any individual for 
any period if such individual (and each qualifying 
child of such individual) is covered by acceptable 
coverage at all times during such period. 
‘‘(2) ACCEPTABLE
COVERAGE.—For purposes 
of this section, the term ‘acceptable coverage’ means 
any of the following: 
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‘‘(A) QUALIFIED HEALTH BENEFITS PLAN 
COVERAGE.—Coverage under a qualified health 
benefits plan (as defined in section 100(c) of 
the Affordable Health Care for America Act). 
‘‘(B) GRANDFATHERED
HEALTH
INSUR-
ANCE
COVERAGE; COVERAGE
UNDER
GRAND-
FATHERED
EMPLOYMENT-BASED
HEALTH 
PLAN.—Coverage under a grandfathered health 
insurance coverage (as defined in subsection (a) 
of section 202 of the Affordable Health Care 
for America Act) or under a current employ-
ment-based health plan (within the meaning of 
subsection (b) of such section). 
‘‘(C) MEDICARE.—Coverage under part A 
of title XVIII of the Social Security Act. 
‘‘(D) MEDICAID.—Coverage for medical as-
sistance under title XIX of the Social Security 
Act. 
‘‘(E) MEMBERS OF THE ARMED FORCES 
AND
DEPENDENTS
(INCLUDING
TRICARE).— 
Coverage under chapter 55 of title 10, United 
States Code, including similar coverage fur-
nished under section 1781 of title 38 of such 
Code. 
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‘‘(F) VA.—Coverage under the veteran’s 
health care program under chapter 17 of title 
38, United States Code. 
‘‘(G) MEMBERS
OF
INDIAN
TRIBES.— 
Health care services made available through the 
Indian Health Service, a tribal organization (as 
defined in section 4 of the Indian Health Care 
Improvement Act), or an urban Indian organi-
zation (as defined in such section) to members 
of an Indian tribe (as defined in such section). 
‘‘(H) 
OTHER
COVERAGE.—Such 
other 
health benefits coverage as the Secretary, in co-
ordination with the Health Choices Commis-
sioner, recognizes for purposes of this sub-
section. 
‘‘(e) OTHER DEFINITIONS AND SPECIAL RULES.— 
‘‘(1) QUALIFYING CHILD.—For purposes of this 
section, the term ‘qualifying child’ has the meaning 
given such term by section 152(c). With respect to 
any period during which health coverage for a child 
must be provided by an individual pursuant to a 
child support order, such child shall be treated as a 
qualifying child of such individual (and not as a 
qualifying child of any other individual). 
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‘‘(2) BASIC PLAN.—For purposes of this sec-
tion, the term ‘basic plan’ has the meaning given 
such term under section 100(c) of the Affordable 
Health Care for America Act. 
‘‘(3) HEALTH
INSURANCE
EXCHANGE.—For 
purposes of this section, the term ‘Health Insurance 
Exchange’ has the meaning given such term under 
section 100(c) of the Affordable Health Care for 
America Act, including any State-based health insur-
ance exchange approved for operation under section 
308 of such Act. 
‘‘(4) FAMILY COVERAGE.—For purposes of this 
section, the term ‘family coverage’ means any cov-
erage other than self-only coverage. 
‘‘(5) MODIFIED
ADJUSTED
GROSS
INCOME.— 
For purposes of this section, the term ‘modified ad-
justed gross income’ means adjusted gross income 
increased by— 
‘‘(A) any amount excluded from gross in-
come under section 911, and 
‘‘(B) any amount of interest received or 
accrued by the taxpayer during the taxable year 
which is exempt from tax. 
‘‘(6) NOT TREATED AS TAX IMPOSED BY THIS 
CHAPTER
FOR
CERTAIN
PURPOSES.—The tax im-
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posed under this section shall not be treated as tax 
imposed by this chapter for purposes of determining 
the amount of any credit under this chapter or for 
purposes of section 55. 
‘‘(f) REGULATIONS.—The Secretary shall prescribe 
such regulations or other guidance as may be necessary 
or appropriate to carry out the purposes of this section, 
including regulations or other guidance (developed in co-
ordination with the Health Choices Commissioner) which 
provide— 
‘‘(1) exemption from the tax imposed under 
subsection (a) in cases of de minimis lapses of ac-
ceptable coverage, and 
‘‘(2) a waiver of the application of subsection 
(a) in cases of hardship, including a process for ap-
plying for such a waiver.’’. 
(b) INFORMATION REPORTING.— 
(1) IN GENERAL.—Subpart B of part III of 
subchapter A of chapter 61 of such Code is amended 
by inserting after section 6050W the following new 
section: 
‘‘SEC. 6050X. RETURNS RELATING TO HEALTH INSURANCE 
COVERAGE. 
‘‘(a) REQUIREMENT OF REPORTING.—Every person 
who provides acceptable coverage (as defined in section 
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59B(d)) to any individual during any calendar year shall, 
at such time as the Secretary may prescribe, make the 
return described in subsection (b) with respect to such in-
dividual. 
‘‘(b) FORM AND MANNER OF RETURNS.—A return 
is described in this subsection if such return— 
‘‘(1) is in such form as the Secretary may pre-
scribe, and 
‘‘(2) contains— 
‘‘(A) the name, address, and TIN of the 
primary insured and the name of each other in-
dividual obtaining coverage under the policy, 
‘‘(B) the period for which each such indi-
vidual was provided with the coverage referred 
to in subsection (a), and 
‘‘(C) such other information as the Sec-
retary may require. 
‘‘(c) STATEMENTS TO BE FURNISHED TO INDIVID-
UALS WITH RESPECT TO WHOM INFORMATION IS RE-
QUIRED.—Every person required to make a return under 
subsection (a) shall furnish to each primary insured whose 
name is required to be set forth in such return a written 
statement showing— 
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‘‘(1) the name and address of the person re-
quired to make such return and the phone number 
of the information contact for such person, and 
‘‘(2) the information required to be shown on 
the return with respect to such individual. 
The written statement required under the preceding sen-
tence shall be furnished on or before January 31 of the 
year following the calendar year for which the return 
under subsection (a) is required to be made. 
‘‘(d) COVERAGE
PROVIDED
BY
GOVERNMENTAL 
UNITS.—In the case of coverage provided by any govern-
mental unit or any agency or instrumentality thereof, the 
officer or employee who enters into the agreement to pro-
vide such coverage (or the person appropriately designated 
for purposes of this section) shall make the returns and 
statements required by this section.’’. 
(2) PENALTY FOR FAILURE TO FILE.— 
(A) RETURN.—Subparagraph (B) of sec-
tion 6724(d)(1) of such Code is amended by 
striking ‘‘or’’ at the end of clause (xxii), by 
striking ‘‘and’’ at the end of clause (xxiii) and 
inserting ‘‘or’’, and by adding at the end the 
following new clause: 
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‘‘(xxiv) section 6050X (relating to re-
turns relating to health insurance cov-
erage), and’’. 
(B) STATEMENT.—Paragraph (2) of sec-
tion 6724(d) of such Code is amended by strik-
ing ‘‘or’’ at the end of subparagraph (EE), by 
striking the period at the end of subparagraph 
(FF) and inserting ‘‘, or’’, and by inserting 
after subparagraph (FF) the following new sub-
paragraph: 
‘‘(GG) section 6050X (relating to returns 
relating to health insurance coverage).’’. 
(c) RETURN REQUIREMENT.—Subsection (a) of sec-
tion 6012 of such Code is amended by inserting after 
paragraph (9) the following new paragraph: 
‘‘(10) Every individual to whom section 59B(a) 
applies and who fails to meet the requirements of 
section 59B(d) with respect to such individual or 
any qualifying child (as defined in section 152(c)) of 
such individual.’’. 
(d) CLERICAL AMENDMENTS.— 
(1) The table of parts for subchapter A of chap-
ter 1 of the Internal Revenue Code of 1986 is 
amended by adding at the end the following new 
item: 
‘‘PART VIII. HEALTH CARE RELATED TAXES.’’. 
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(2) The table of sections for subpart B of part 
III of subchapter A of chapter 61 is amended by 
adding at the end the following new item: 
‘‘Sec. 6050X. Returns relating to health insurance coverage.’’. 
(e) SECTION 15 NOT TO APPLY.—The amendment 
made by subsection (a) shall not be treated as a change 
in a rate of tax for purposes of section 15 of the Internal 
Revenue Code of 1986. 
(f) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by 
this section shall apply to taxable years beginning 
after December 31, 2012. 
(2) RETURNS.—The amendments made by sub-
section (b) shall apply to calendar years beginning 
after December 31, 2012. 
Subpart B—Employer Responsibility 
SEC. 511. ELECTION TO SATISFY HEALTH COVERAGE PAR-
TICIPATION REQUIREMENTS. 
(a) IN GENERAL.—Chapter 43 of the Internal Rev-
enue Code of 1986 is amended by adding at the end the 
following new section: 
‘‘SEC. 4980H. ELECTION WITH RESPECT TO HEALTH COV-
ERAGE PARTICIPATION REQUIREMENTS. 
‘‘(a) ELECTION OF EMPLOYER RESPONSIBILITY TO 
PROVIDE HEALTH COVERAGE.— 
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‘‘(1) IN GENERAL.—Subsection (b) shall apply 
to any employer with respect to whom an election 
under paragraph (2) is in effect. 
‘‘(2) TIME AND MANNER.—An employer may 
make an election under this paragraph at such time 
and in such form and manner as the Secretary may 
prescribe. 
‘‘(3) AFFILIATED GROUPS.—In the case of any 
employer which is part of a group of employers who 
are treated as a single employer under subsection 
(b), (c), (m), or (o) of section 414, the election 
under paragraph (2) shall be made by such person 
as the Secretary may provide. Any such election, 
once made, shall apply to all members of such 
group. 
‘‘(4) SEPARATE
ELECTIONS.—Under regula-
tions prescribed by the Secretary, separate elections 
may be made under paragraph (2) with respect to— 
‘‘(A) separate lines of business, and 
‘‘(B) full-time employees and employees 
who are not full-time employees. 
‘‘(5) TERMINATION OF ELECTION IN CASES OF 
SUBSTANTIAL
NONCOMPLIANCE.—The 
Secretary 
may terminate the election of any employer under 
paragraph (2) if the Secretary (in coordination with 
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the Health Choices Commissioner) determines that 
such employer is in substantial noncompliance with 
the health coverage participation requirements. 
‘‘(b) EXCISE TAX WITH RESPECT TO FAILURE TO 
MEET HEALTH COVERAGE PARTICIPATION REQUIRE-
MENTS.— 
‘‘(1) IN GENERAL.—In the case of any employer 
who fails (during any period with respect to which 
the election under subsection (a) is in effect) to sat-
isfy the health coverage participation requirements 
with respect to any employee to whom such election 
applies, there is hereby imposed on each such failure 
with respect to each such employee a tax of $100 for 
each day in the period beginning on the date such 
failure first occurs and ending on the date such fail-
ure is corrected. 
‘‘(2) LIMITATIONS ON AMOUNT OF TAX.— 
‘‘(A) TAX NOT TO APPLY WHERE FAILURE 
NOT
DISCOVERED
EXERCISING
REASONABLE 
DILIGENCE.—No tax shall be imposed by para-
graph (1) on any failure during any period for 
which it is established to the satisfaction of the 
Secretary that the employer neither knew, nor 
exercising reasonable diligence would have 
known, that such failure existed. 
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‘‘(B) TAX
NOT
TO
APPLY
TO
FAILURES 
CORRECTED WITHIN 30 DAYS.—No tax shall be 
imposed by paragraph (1) on any failure if— 
‘‘(i) such failure was due to reason-
able cause and not to willful neglect, and 
‘‘(ii) such failure is corrected during 
the 30-day period beginning on the 1st 
date that the employer knew, or exercising 
reasonable diligence would have known, 
that such failure existed. 
‘‘(C) OVERALL LIMITATION FOR UNINTEN-
TIONAL
FAILURES.—In the case of failures 
which are due to reasonable cause and not to 
willful neglect, the tax imposed by subsection 
(a) for failures during the taxable year of the 
employer shall not exceed the amount equal to 
the lesser of— 
‘‘(i) 10 percent of the aggregate 
amount paid or incurred by the employer 
(or predecessor employer) during the pre-
ceding taxable year for employment-based 
health plans, or 
‘‘(ii) $500,000. 
‘‘(D) COORDINATION
WITH
OTHER
EN-
FORCEMENT
PROVISIONS.—The tax imposed 
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under paragraph (1) with respect to any failure 
shall be reduced (but not below zero) by the 
amount of any civil penalty collected under sec-
tion 502(c)(11) of the Employee Retirement In-
come Security Act of 1974 or section 2793(g) 
of the Public Health Service Act with respect to 
such failure. 
‘‘(c) HEALTH COVERAGE PARTICIPATION REQUIRE-
MENTS.—For purposes of this section, the term ‘health 
coverage participation requirements’ means the require-
ments of part I of subtitle B of title IV of the (as in effect 
on the date of the enactment of this section).’’. 
(b) CLERICAL AMENDMENT.—The table of sections 
for chapter 43 of such Code is amended by adding at the 
end the following new item: 
‘‘Sec. 4980H. Election with respect to health coverage participation require-
ments.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to periods beginning after Decem-
ber 31, 2012. 
SEC. 
512. 
HEALTH 
CARE 
CONTRIBUTIONS 
OF 
NON-
ELECTING EMPLOYERS. 
(a) IN GENERAL.—Section 3111 of the Internal Rev-
enue Code of 1986 is amended by redesignating subsection 
(c) as subsection (d) and by inserting after subsection (b) 
the following new subsection: 
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‘‘(c) EMPLOYERS
ELECTING
NOT
TO
PROVIDE 
HEALTH BENEFITS.— 
‘‘(1) IN GENERAL.—In addition to other taxes, 
there is hereby imposed on every nonelecting em-
ployer an excise tax, with respect to having individ-
uals in his employ, equal to 8 percent of the wages 
(as defined in section 3121(a)) paid by him with re-
spect to employment (as defined in section 3121(b)). 
‘‘(2) SPECIAL
RULES
FOR
SMALL
EMPLOY-
ERS.— 
‘‘(A) IN GENERAL.—In the case of any em-
ployer who is small employer for any calendar 
year, paragraph (1) shall be applied by sub-
stituting the applicable percentage determined 
in accordance with the following table for ‘8 
percent’: 
‘‘If the annual payroll of such employer for 
the preceding calendar year: 
The applicable 
percentage is: 
Does not exceed $500,000 .....................................
0 percent 
Exceeds $500,000, but does not exceed $585,000 
2 percent 
Exceeds $585,000, but does not exceed $670,000 
4 percent 
Exceeds $670,000, but does not exceed $750,000 
6 percent 
‘‘(B) SMALL EMPLOYER.—For purposes of 
this paragraph, the term ‘small employer’ 
means any employer for any calendar year if 
the annual payroll of such employer for the pre-
ceding calendar year does not exceed $750,000. 
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‘‘(C) ANNUAL PAYROLL.—For purposes of 
this paragraph, the term ‘annual payroll’ 
means, with respect to any employer for any 
calendar year, the aggregate wages (as defined 
in section 3121(a)) paid by him with respect to 
employment (as defined in section 3121(b)) 
during such calendar year. 
‘‘(3) NONELECTING EMPLOYER.—For purposes 
of paragraph (1), the term ‘nonelecting employer’ 
means any employer for any period with respect to 
which such employer does not have an election under 
section 4980H(a) in effect. 
‘‘(4) SPECIAL
RULE
FOR
SEPARATE
ELEC-
TIONS.—In the case of an employer who makes a 
separate election described in section 4980H(a)(4) 
for any period, paragraph (1) shall be applied for 
such period by taking into account only the wages 
paid to employees who are not subject to such elec-
tion. 
‘‘(5) AGGREGATION; PREDECESSORS.—For pur-
poses of this subsection— 
‘‘(A) all persons treated as a single em-
ployer under subsection (b), (c), (m), or (o) of 
section 414 shall be treated as 1 employer, and 
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‘‘(B) any reference to any person shall be 
treated as including a reference to any prede-
cessor of such person.’’. 
(b) DEFINITIONS.—Section 3121 of such Code is 
amended by adding at the end the following new sub-
section: 
‘‘(aa) SPECIAL RULES
FOR TAX
ON EMPLOYERS 
ELECTING NOT TO PROVIDE HEALTH BENEFITS.—For 
purposes of section 3111(c)— 
‘‘(1) Paragraphs (1), (5), and (19) of sub-
section (b) shall not apply. 
‘‘(2) Paragraph (7) of subsection (b) shall apply 
by treating all services as not covered by the retire-
ment systems referred to in subparagraphs (C) and 
(F) thereof. 
‘‘(3) Subsection (e) shall not apply and the 
term ‘State’ shall include the District of Columbia.’’. 
(c) CONFORMING AMENDMENT.—Subsection (d) of 
section 3111 of such Code, as redesignated by this section, 
is amended by striking ‘‘this section’’ and inserting ‘‘sub-
sections (a) and (b)’’. 
(d) APPLICATION TO RAILROADS.— 
(1) IN GENERAL.—Section 3221 of such Code 
is amended by redesignating subsection (c) as sub-
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section (d) and by inserting after subsection (b) the 
following new subsection: 
‘‘(c) EMPLOYERS
ELECTING
NOT
TO
PROVIDE 
HEALTH BENEFITS.— 
‘‘(1) IN GENERAL.—In addition to other taxes, 
there is hereby imposed on every nonelecting em-
ployer an excise tax, with respect to having individ-
uals in his employ, equal to 8 percent of the com-
pensation paid during any calendar year by such em-
ployer for services rendered to such employer. 
‘‘(2) EXCEPTION
FOR
SMALL
EMPLOYERS.— 
Rules similar to the rules of section 3111(c)(2) shall 
apply for purposes of this subsection. 
‘‘(3) NONELECTING EMPLOYER.—For purposes 
of paragraph (1), the term ‘nonelecting employer’ 
means any employer for any period with respect to 
which such employer does not have an election under 
section 4980H(a) in effect. 
‘‘(4) SPECIAL
RULE
FOR
SEPARATE
ELEC-
TIONS.—In the case of an employer who makes a 
separate election described in section 4980H(a)(4) 
for any period, subsection (a) shall be applied for 
such period by taking into account only the com-
pensation paid to employees who are not subject to 
such election.’’. 
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(2) DEFINITIONS.—Subsection (e) of section 
3231 of such Code is amended by adding at the end 
the following new paragraph: 
‘‘(13) SPECIAL RULES FOR TAX ON EMPLOYERS 
ELECTING NOT TO PROVIDE HEALTH BENEFITS.— 
For purposes of section 3221(c)— 
‘‘(A) Paragraph (1) shall be applied with-
out regard to the third sentence thereof. 
‘‘(B) Paragraph (2) shall not apply.’’. 
(3) CONFORMING AMENDMENT.—Subsection (d) 
of section 3221 of such Code, as redesignated by 
this section, is amended by striking ‘‘subsections (a) 
and (b), see section 3231(e)(2)’’ and inserting ‘‘this 
section, see paragraphs (2) and (13)(B) of section 
3231(e)’’. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to periods beginning after Decem-
ber 31, 2012. 
PART 2—CREDIT FOR SMALL BUSINESS 
EMPLOYEE HEALTH COVERAGE EXPENSES 
SEC. 
521. 
CREDIT 
FOR 
SMALL 
BUSINESS 
EMPLOYEE 
HEALTH COVERAGE EXPENSES. 
(a) IN GENERAL.—Subpart D of part IV of sub-
chapter A of chapter 1 of the Internal Revenue Code of 
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1986 (relating to business-related credits) is amended by 
adding at the end the following new section: 
‘‘SEC. 45R. SMALL BUSINESS EMPLOYEE HEALTH COV-
ERAGE CREDIT. 
‘‘(a) IN GENERAL.—For purposes of section 38, in 
the case of a qualified small employer, the small business 
employee health coverage credit determined under this sec-
tion for the taxable year is an amount equal to the applica-
ble percentage of the qualified employee health coverage 
expenses of such employer for such taxable year. 
‘‘(b) APPLICABLE PERCENTAGE.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the applicable percentage is 50 percent. 
‘‘(2) PHASEOUT
BASED
ON
AVERAGE
COM-
PENSATION OF EMPLOYEES.—In the case of an em-
ployer whose average annual employee compensation 
for the taxable year exceeds $20,000, the percentage 
specified in paragraph (1) shall be reduced by a 
number of percentage points which bears the same 
ratio to 50 as such excess bears to $20,000. 
‘‘(c) LIMITATIONS.— 
‘‘(1) PHASEOUT BASED ON EMPLOYER SIZE.— 
In the case of an employer who employs more than 
10 qualified employees during the taxable year, the 
credit determined under subsection (a) shall be re-
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duced by an amount which bears the same ratio to 
the amount of such credit (determined without re-
gard to this paragraph and after the application of 
the other provisions of this section) as— 
‘‘(A) the excess of— 
‘‘(i) the number of qualified employees 
employed by the employer during the tax-
able year, over 
‘‘(ii) 10, bears to 
‘‘(B) 15. 
‘‘(2) CREDIT NOT ALLOWED WITH RESPECT TO 
CERTAIN HIGHLY COMPENSATED EMPLOYEES.—No 
credit shall be determined under subsection (a) with 
respect to qualified employee health coverage ex-
penses paid or incurred with respect to any employee 
for any taxable year if the aggregate compensation 
paid by the employer to such employee during such 
taxable year exceeds $80,000. 
‘‘(3) CREDIT ALLOWED FOR ONLY 2 TAXABLE 
YEARS.—No credit shall be determined under sub-
section (a) with respect to any employer for any tax-
able year unless the employer elects to have this sec-
tion apply for such taxable year. An employer may 
elect the application of this section with respect to 
not more than 2 taxable years. 
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‘‘(d) QUALIFIED EMPLOYEE HEALTH COVERAGE EX-
PENSES.—For purposes of this section— 
‘‘(1) IN
GENERAL.—The term ‘qualified em-
ployee health coverage expenses’ means, with respect 
to any employer for any taxable year, the aggregate 
amount paid or incurred by such employer during 
such taxable year for coverage of any qualified em-
ployee of the employer (including any family cov-
erage which covers such employee) under qualified 
health coverage. 
‘‘(2) QUALIFIED
HEALTH
COVERAGE.—The 
term ‘qualified health coverage’ means acceptable 
coverage (as defined in section 59B(d)) which— 
‘‘(A) is provided pursuant to an election 
under section 4980H(a), and 
‘‘(B) satisfies the requirements referred to 
in section 4980H(c). 
‘‘(e) OTHER DEFINITIONS.—For purposes of this 
section— 
‘‘(1) QUALIFIED SMALL EMPLOYER.—For pur-
poses of this section, the term ‘qualified small em-
ployer’ means any employer for any taxable year 
if— 
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‘‘(A) the number of qualified employees 
employed by such employer during the taxable 
year does not exceed 25, and 
‘‘(B) the average annual employee com-
pensation of such employer for such taxable 
year does not exceed the sum of the dollar 
amounts in effect under subsection (b)(2). 
‘‘(2) QUALIFIED EMPLOYEE.—The term ‘quali-
fied employee’ means any employee of an employer 
for any taxable year of the employer if such em-
ployee received at least $5,000 of compensation from 
such employer for services performed in the trade or 
business of such employer during such taxable year. 
‘‘(3) AVERAGE ANNUAL EMPLOYEE COMPENSA-
TION.—The term ‘average annual employee com-
pensation’ means, with respect to any employer for 
any taxable year, the average amount of compensa-
tion paid by such employer to qualified employees of 
such employer during such taxable year. 
‘‘(4) COMPENSATION.—The term ‘compensa-
tion’ has the meaning given such term in section 
408(p)(6)(A). 
‘‘(5) FAMILY
COVERAGE.—The term ‘family 
coverage’ means any coverage other than self-only 
coverage. 
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‘‘(f) SPECIAL RULES.—For purposes of this sec-
tion— 
‘‘(1) SPECIAL RULE FOR PARTNERSHIPS AND 
SELF-EMPLOYED.—In the case of a partnership (or 
a trade or business carried on by an individual) 
which has one or more qualified employees (deter-
mined without regard to this paragraph) with re-
spect to whom the election under section 4980H(a) 
applies, each partner (or, in the case of a trade or 
business carried on by an individual, such indi-
vidual) shall be treated as an employee. 
‘‘(2) AGGREGATION RULE.—All persons treated 
as a single employer under subsection (b), (c), (m), 
or (o) of section 414 shall be treated as 1 employer. 
‘‘(3) PREDECESSORS.—Any reference in this 
section to an employer shall include a reference to 
any predecessor of such employer. 
‘‘(4) DENIAL OF DOUBLE BENEFIT.—Any de-
duction otherwise allowable with respect to amounts 
paid or incurred for health insurance coverage to 
which subsection (a) applies shall be reduced by the 
amount of the credit determined under this section. 
‘‘(5) INFLATION ADJUSTMENT.—In the case of 
any taxable year beginning after 2013, each of the 
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dollar amounts in subsections (b)(2), (c)(2), and 
(e)(2) shall be increased by an amount equal to— 
‘‘(A) such dollar amount, multiplied by 
‘‘(B) the cost of living adjustment deter-
mined under section 1(f)(3) for the calendar 
year in which the taxable year begins deter-
mined by substituting ‘calendar year 2012’ for 
‘calendar year 1992’ in subparagraph (B) 
thereof. 
If any increase determined under this paragraph is 
not a multiple of $50, such increase shall be rounded 
to the next lowest multiple of $50.’’. 
(b) CREDIT TO BE PART OF GENERAL BUSINESS 
CREDIT.—Subsection (b) of section 38 of such Code (re-
lating to general business credit) is amended by striking 
‘‘plus’’ at the end of paragraph (34), by striking the period 
at the end of paragraph (35) and inserting ‘‘, plus’’, and 
by adding at the end the following new paragraph: 
‘‘(36) in the case of a qualified small employer 
(as defined in section 45R(e)), the small business 
employee health coverage credit determined under 
section 45R(a).’’. 
(c) CLERICAL AMENDMENT.—The table of sections 
for subpart D of part IV of subchapter A of chapter 1 
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of such Code is amended by inserting after the item relat-
ing to section 45Q the following new item: 
‘‘Sec. 45R. Small business employee health coverage credit.’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2012. 
PART 3—LIMITATIONS ON HEALTH CARE 
RELATED EXPENDITURES 
SEC. 531. DISTRIBUTIONS FOR MEDICINE QUALIFIED ONLY 
IF FOR PRESCRIBED DRUG OR INSULIN. 
(a) HSAS.—Subparagraph (A) of section 223(d)(2) 
of the Internal Revenue Code of 1986 is amended by add-
ing at the end the following: ‘‘Such term shall include an 
amount paid for medicine or a drug only if such medicine 
or drug is a prescribed drug or is insulin.’’. 
(b) ARCHER MSAS.—Subparagraph (A) of section 
220(d)(2) of such Code is amended by adding at the end 
the following: ‘‘Such term shall include an amount paid 
for medicine or a drug only if such medicine or drug is 
a prescribed drug or is insulin.’’. 
(c) HEALTH FLEXIBLE SPENDING ARRANGEMENTS 
AND HEALTH REIMBURSEMENT ARRANGEMENTS.—Sec-
tion 106 of such Code is amended by adding at the end 
the following new subsection: 
‘‘(f) REIMBURSEMENTS FOR MEDICINE RESTRICTED 
TO PRESCRIBED DRUGS AND INSULIN.—For purposes of 
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this section and section 105, reimbursement for expenses 
incurred for a medicine or a drug shall be treated as a 
reimbursement for medical expenses only if such medicine 
or drug is a prescribed drug or is insulin.’’. 
(d) EFFECTIVE DATES.—The amendment made by 
this section shall apply to expenses incurred after Decem-
ber 31, 2010. 
SEC. 532. LIMITATION ON HEALTH FLEXIBLE SPENDING AR-
RANGEMENTS UNDER CAFETERIA PLANS. 
(a) IN GENERAL.—Section 125 of the Internal Rev-
enue Code of 1986 is amended— 
(1) by redesignating subsections (i) and (j) as 
subsections (j) and (k), respectively; and 
(2) by inserting after subsection (h) the fol-
lowing new subsection: 
‘‘(i) LIMITATION ON HEALTH FLEXIBLE SPENDING 
ARRANGEMENTS.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, if a benefit is provided under a cafeteria plan 
through employer contributions to a health flexible 
spending arrangement, such benefit shall not be 
treated as a qualified benefit unless the cafeteria 
plan provides that an employee may not elect for 
any taxable year to have salary reduction contribu-
tions in excess of $2,500 made to such arrangement. 
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‘‘(2) INFLATION ADJUSTMENT.—In the case of 
any taxable year beginning after 2013, the dollar 
amount in paragraph (1) shall be increased by an 
amount equal to— 
‘‘(A) such dollar amount, multiplied by 
‘‘(B) the cost of living adjustment deter-
mined under section 1(f)(3) for the calendar 
year in which the taxable year begins deter-
mined by substituting ‘calendar year 2012’ for 
‘calendar year 1992’ in subparagraph (B) 
thereof. 
If any increase determined under this paragraph is 
not a multiple of $50, such increase shall be rounded 
to the next lowest multiple of $50.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2012. 
SEC. 533. INCREASE IN PENALTY FOR NONQUALIFIED DIS-
TRIBUTIONS FROM HEALTH SAVINGS AC-
COUNTS. 
(a) IN GENERAL.—Subparagraph (A) of section 
223(f)(4) of the Internal Revenue Code of 1986 is amend-
ed by striking ‘‘10 percent’’ and inserting ‘‘20 percent’’. 
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(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2010. 
SEC. 534. DENIAL OF DEDUCTION FOR FEDERAL SUBSIDIES 
FOR PRESCRIPTION DRUG PLANS WHICH 
HAVE BEEN EXCLUDED FROM GROSS IN-
COME. 
(a) IN GENERAL.—Section 139A of the Internal Rev-
enue Code of 1986 is amended by striking the second sen-
tence. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning after 
December 31, 2012. 
PART 4—OTHER PROVISIONS TO CARRY OUT 
HEALTH INSURANCE REFORM 
SEC. 541. DISCLOSURES TO CARRY OUT HEALTH INSUR-
ANCE EXCHANGE SUBSIDIES. 
(a) IN GENERAL.—Subsection (l) of section 6103 of 
the Internal Revenue Code of 1986 is amended by adding 
at the end the following new paragraph: 
‘‘(21) DISCLOSURE OF RETURN INFORMATION 
TO CARRY OUT HEALTH INSURANCE EXCHANGE SUB-
SIDIES.— 
‘‘(A) IN GENERAL.—The Secretary, upon 
written request from the Health Choices Com-
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missioner or the head of a State-based health 
insurance exchange approved for operation 
under section 308 of the Affordable Health 
Care for America Act, shall disclose to officers 
and employees of the Health Choices Adminis-
tration or such State-based health insurance ex-
change, as the case may be, return information 
of any taxpayer whose income is relevant in de-
termining any affordability credit described in 
subtitle C of title III of the Affordable Health 
Care for America Act. Such return information 
shall be limited to— 
‘‘(i) taxpayer identity information 
with respect to such taxpayer, 
‘‘(ii) the filing status of such tax-
payer, 
‘‘(iii) the modified adjusted gross in-
come of such taxpayer (as defined in sec-
tion 59B(e)(5)), 
‘‘(iv) the number of dependents of the 
taxpayer, 
‘‘(v) such other information as is pre-
scribed by the Secretary by regulation as 
might indicate whether the taxpayer is eli-
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gible for such affordability credits (and the 
amount thereof), and 
‘‘(vi) the taxable year with respect to 
which the preceding information relates or, 
if applicable, the fact that such informa-
tion is not available. 
‘‘(B) RESTRICTION ON USE OF DISCLOSED 
INFORMATION.—Return information disclosed 
under subparagraph (A) may be used by offi-
cers and employees of the Health Choices Ad-
ministration or such State-based health insur-
ance exchange, as the case may be, only for the 
purposes of, and to the extent necessary in, es-
tablishing and verifying the appropriate amount 
of any affordability credit described in subtitle 
C of title III of the Affordable Health Care for 
America Act and providing for the repayment of 
any such credit which was in excess of such ap-
propriate amount.’’. 
(b) PROCEDURES AND RECORDKEEPING RELATED 
TO DISCLOSURES.—Paragraph (4) of section 6103(p) of 
such Code is amended— 
(1) by inserting ‘‘, or any entity described in 
subsection (l)(21),’’ after ‘‘or (20)’’ in the matter 
preceding subparagraph (A); 
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(2) by inserting ‘‘or any entity described in sub-
section (l)(21),’’ after ‘‘or (o)(1)(A),’’ in subpara-
graph (F)(ii); and 
(3) by inserting ‘‘or any entity described in sub-
section (l)(21),’’ after ‘‘or (20),’’ both places it ap-
pears in the matter after subparagraph (F). 
(c) UNAUTHORIZED DISCLOSURE OR INSPECTION.— 
Paragraph (2) of section 7213(a) of such Code is amended 
by striking ‘‘or (20)’’ and inserting ‘‘(20), or (21)’’. 
SEC. 
542. 
OFFERING 
OF 
EXCHANGE-PARTICIPATING 
HEALTH BENEFITS PLANS THROUGH CAFE-
TERIA PLANS. 
(a) IN GENERAL.—Subsection (f) of section 125 of 
the Internal Revenue Code of 1986 is amended by adding 
at the end the following new paragraph: 
‘‘(3) 
CERTAIN
EXCHANGE-PARTICIPATING 
HEALTH BENEFITS PLANS NOT QUALIFIED.— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
benefit’ shall not include any exchange-partici-
pating health benefits plan (as defined in sec-
tion 101(c) of the Affordable Health Care for 
America Act). 
‘‘(B) EXCEPTION
FOR
EXCHANGE-ELIGI-
BLE EMPLOYERS.—Subparagraph (A) shall not 
apply with respect to any employee if such em-
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ployee’s employer is an exchange-eligible em-
ployer (as defined in section 302 of the Afford-
able Health Care for America Act).’’. 
(b) CONFORMING AMENDMENTS.—Subsection (f) of 
section 125 of such Code is amended— 
(1) by striking ‘‘For purposes of this section, 
the term’’ and inserting ‘‘For purposes of this sec-
tion— 
‘‘(1) IN GENERAL.—The term’’; and 
(2) by striking ‘‘Such term shall not include’’ 
and inserting the following: 
‘‘(2) LONG-TERM CARE INSURANCE NOT QUALI-
FIED.—The term ‘qualified benefit’ shall not in-
clude’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2012. 
SEC. 543. EXCLUSION FROM GROSS INCOME OF PAYMENTS 
MADE UNDER REINSURANCE PROGRAM FOR 
RETIREES. 
(a) IN GENERAL.—Section 139A of the Internal Rev-
enue Code of 1986 is amended— 
(1) by striking ‘‘Gross income’’ and inserting 
the following: 
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‘‘(a) FEDERAL SUBSIDIES FOR PRESCRIPTION DRUG 
PLANS.—Gross income’’; and 
(2) by adding at the end the following new sub-
section: 
‘‘(b) FEDERAL REINSURANCE PROGRAM FOR RETIR-
EES.—A rule similar to the rule of subsection (a) shall 
apply with respect to payments made under section 111 
of the Affordable Health Care for America Act.’’. 
(b) CONFORMING AMENDMENT.—The heading of sec-
tion 139A of such Code (and the item relating to such 
section in the table of sections for part III of subchapter 
B of chapter 1 of such Code) is amended by inserting 
‘‘AND RETIREE HEALTH PLANS’’ after ‘‘PRESCRIP-
TION DRUG PLANS’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years ending after the 
date of the enactment of this Act. 
SEC. 544. CLASS PROGRAM TREATED IN SAME MANNER AS 
LONG-TERM CARE INSURANCE. 
(a) IN GENERAL.—Subsection (f) of section 7702B 
of the Internal Revenue Code of 1986 is amended— 
(1) by striking ‘‘State long-term care plan’’ in 
paragraph (1)(A) and inserting ‘‘government long- 
term care plan’’; 
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(2) by redesignating paragraph (2) as para-
graph (3); and 
(3) by inserting after paragraph (2) the fol-
lowing new paragraph: 
‘‘(2) GOVERNMENT LONG-TERM CARE PLAN.— 
For purposes of this subsection, the term ‘govern-
ment long-term care plan’ means— 
‘‘(A) the CLASS program established 
under title XXXII of the Public Health Service 
Act, and 
‘‘(B) any State long-term care plan.’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Paragraph (3) of section 7702B(f) of such 
Code, as redesignated by subsection (a), is amended 
by striking ‘‘paragraph (1)’’ and inserting ‘‘this sub-
section’’. 
(2) Subsection (f) of section 7702(B) of such 
Code is amended by striking ‘‘STATE-MAINTAINED’’ 
in the heading thereof and inserting ‘‘GOVERN-
MENT’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years ending after De-
cember 31, 2010. 
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SEC. 545. EXCLUSION FROM GROSS INCOME FOR MEDICAL 
CARE PROVIDED FOR INDIANS. 
(a) IN GENERAL.—Part III of subchapter B of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to 
items specifically excluded from gross income) is amended 
by inserting after section 139C the following new section: 
‘‘SEC. 139D. MEDICAL CARE PROVIDED FOR INDIANS. 
‘‘(a) IN GENERAL.—Gross income does not include— 
‘‘(1) health services or benefits provided or pur-
chased by the Indian Health Service, either directly 
or indirectly, through a grant to or a contract or 
compact with an Indian tribe or tribal organization 
or through programs of third parties funded by the 
Indian Health Service, 
‘‘(2) medical care provided by an Indian tribe 
or tribal organization to a member of an Indian 
tribe (including for this purpose, to the member’s 
spouse or dependents) through any one of the fol-
lowing: provided or purchased medical care services; 
accident or health insurance (or an arrangement 
having the effect of accident or health insurance); or 
amounts paid, directly or indirectly, to reimburse the 
member for expenses incurred for medical care, 
‘‘(3) the value of accident or health plan cov-
erage provided by an Indian tribe or tribal organiza-
tion for medical care to a member of an Indian tribe 
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(including for this purpose, coverage that extends to 
such member’s spouse or dependents) under an acci-
dent or health plan (or through an arrangement hav-
ing the effect of accident or health insurance), and 
‘‘(4) any other medical care provided by an In-
dian tribe that supplements, replaces, or substitutes 
for the programs and services provided by the Fed-
eral Government to Indian tribes or Indians. 
‘‘(b) DEFINITIONS.—For purposes of this section— 
‘‘(1) IN
GENERAL.—The terms ‘accident or 
health insurance’ and ‘accident or health plan’ have 
the same meaning as when used in sections 104 and 
106. 
‘‘(2) MEDICAL CARE.—The term ‘medical care’ 
has the meaning given such term in section 213. 
‘‘(3) DEPENDENT.—The term ‘dependent’ has 
the meaning given such term in section 152, deter-
mined without regard to subsections (b)(1), (b)(2), 
and (d)(1)(B). 
‘‘(4) INDIAN TRIBE.—The term ‘Indian tribe’ 
means any Indian tribe, band, nation, pueblo, or 
other organized group or community, including any 
Alaska Native village, or regional or village corpora-
tion, as defined in, or established pursuant to, the 
Alaska Native Claims Settlement Act (43 U.S.C. 
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1601 et seq.), which is recognized as eligible for the 
special programs and services provided by the 
United States to Indians because of their status as 
Indians. 
‘‘(5) TRIBAL ORGANIZATION.—The term ‘tribal 
organization’ has the meaning given such term in 
section 4(l) of the Indian Self-Determination and 
Education Assistance Act (25 U.S.C. 450b(l)).’’. 
(b) CLERICAL AMENDMENT.—The table of sections 
for such part III is amended by inserting after the item 
relating to section 139C the following new item: 
‘‘Sec. 139D. Medical care provided for Indians.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to health benefits and coverage 
provided after the date of enactment of this Act. 
(d) NO INFERENCE.—Nothing in the amendments 
made by this section shall be construed to create an infer-
ence with respect to the exclusion from gross income of— 
(1) benefits provided by Indian tribes that are 
not within the scope of this section; and 
(2) health benefits or coverage provided by In-
dian tribes prior to the effective date of this section. 
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Subtitle B—Other Revenue 
Provisions 
PART 1—GENERAL PROVISIONS 
SEC. 551. SURCHARGE ON HIGH INCOME INDIVIDUALS. 
(a) IN GENERAL.—Part VIII of subchapter A of 
chapter 1 of the Internal Revenue Code of 1986, as added 
by this title, is amended by adding at the end the following 
new subpart: 
‘‘Subpart B—Surcharge on High Income Individuals 
‘‘Sec. 59C. Surcharge on high income individuals. 
‘‘SEC. 59C. SURCHARGE ON HIGH INCOME INDIVIDUALS. 
‘‘(a) GENERAL RULE.—In the case of a taxpayer 
other than a corporation, there is hereby imposed (in addi-
tion to any other tax imposed by this subtitle) a tax equal 
to 5.4 percent of so much of the modified adjusted gross 
income of the taxpayer as exceeds $1,000,000. 
‘‘(b) TAXPAYERS NOT MAKING A JOINT RETURN.— 
In the case of any taxpayer other than a taxpayer making 
a joint return under section 6013 or a surviving spouse 
(as defined in section 2(a)), subsection (a) shall be applied 
by substituting ‘$500,000’ for ‘$1,000,000’. 
‘‘(c) MODIFIED ADJUSTED GROSS INCOME.—For 
purposes of this section, the term ‘modified adjusted gross 
income’ means adjusted gross income reduced by any de-
duction (not taken into account in determining adjusted 
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gross income) allowed for investment interest (as defined 
in section 163(d)). In the case of an estate or trust, ad-
justed gross income shall be determined as provided in sec-
tion 67(e). 
‘‘(d) SPECIAL RULES.— 
‘‘(1) NONRESIDENT ALIEN.—In the case of a 
nonresident alien individual, only amounts taken 
into account in connection with the tax imposed 
under section 871(b) shall be taken into account 
under this section. 
‘‘(2) 
CITIZENS
AND
RESIDENTS
LIVING 
ABROAD.—The dollar amount in effect under sub-
section (a) (after the application of subsection (b)) 
shall be decreased by the excess of— 
‘‘(A) the amounts excluded from the tax-
payer’s gross income under section 911, over 
‘‘(B) the amounts of any deductions or ex-
clusions disallowed under section 911(d)(6) 
with respect to the amounts described in sub-
paragraph (A). 
‘‘(3) CHARITABLE
TRUSTS.—Subsection (a) 
shall not apply to a trust all the unexpired interests 
in which are devoted to one or more of the purposes 
described in section 170(c)(2)(B). 
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‘‘(4) NOT TREATED AS TAX IMPOSED BY THIS 
CHAPTER
FOR
CERTAIN
PURPOSES.—The tax im-
posed under this section shall not be treated as tax 
imposed by this chapter for purposes of determining 
the amount of any credit under this chapter or for 
purposes of section 55.’’. 
(b) CLERICAL AMENDMENT.—The table of subparts 
for part VIII of subchapter A of chapter 1 of such Code, 
as added by this title, is amended by inserting after the 
item relating to subpart A the following new item: 
‘‘SUBPART B. SURCHARGE ON HIGH INCOME INDIVIDUALS.’’. 
(c) SECTION 15 NOT TO APPLY.—The amendment 
made by subsection (a) shall not be treated as a change 
in a rate of tax for purposes of section 15 of the Internal 
Revenue Code of 1986. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2010. 
SEC. 552. EXCISE TAX ON MEDICAL DEVICES. 
(a) IN GENERAL.—Chapter 31 of the Internal Rev-
enue Code of 1986 is amended by adding at the end the 
following new subchapter: 
‘‘Subchapter D—Medical Devices 
‘‘Sec. 4061. Medical devices. 
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‘‘SEC. 4061. MEDICAL DEVICES. 
‘‘(a) IN GENERAL.—There is hereby imposed on the 
first taxable sale of any medical device a tax equal to 2.5 
percent of the price for which so sold. 
‘‘(b) FIRST TAXABLE SALE.—For purposes of this 
section— 
‘‘(1) IN
GENERAL.—The term ‘first taxable 
sale’ means the first sale, for a purpose other than 
for resale, after production, manufacture, or impor-
tation. 
‘‘(2) EXCEPTION FOR SALES AT RETAIL ESTAB-
LISHMENTS.—Such term shall not include the sale 
of any medical device if— 
‘‘(A) such sale is made at a retail estab-
lishment on terms which are available to the 
general public, and 
‘‘(B) such medical device is of a type (and 
purchased in a quantity) which is purchased by 
the general public. 
‘‘(3) EXCEPTION
FOR
EXPORTS, ETC.—Rules 
similar to the rules of sections 4221 (other than 
paragraphs (3), (4), (5), and (6) of subsection (a) 
thereof) and 4222 shall apply for purposes of this 
section. To the extent provided by the Secretary, 
section 4222 may be extended to, and made applica-
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ble with respect to, the exemption provided by para-
graph (2). 
‘‘(4) SALES TO PATIENTS NOT TREATED AS RE-
SALES.—If a medical device is sold for use in con-
nection with providing any health care service to an 
individual, such sale shall not be treated as being for 
the purpose of resale (even if such device is sold to 
such individual). 
‘‘(c) OTHER DEFINITIONS AND SPECIAL RULES.— 
For purposes of this section— 
‘‘(1) MEDICAL DEVICE.—The term ‘medical de-
vice’ means any device (as defined in section 201(h) 
of the Federal Food, Drug, and Cosmetic Act) in-
tended for humans. 
‘‘(2) LEASE TREATED AS SALE.—Rules similar 
to the rules of section 4217 shall apply. 
‘‘(3) USE TREATED AS SALE.— 
‘‘(A) IN GENERAL.—If any person uses a 
medical device before the first taxable sale of 
such device, then such person shall be liable for 
tax under such subsection in the same manner 
as if such use were the first taxable sale of such 
device. 
‘‘(B) EXCEPTIONS.—The preceding sen-
tence shall not apply to— 
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‘‘(i) use of a medical device as mate-
rial in the manufacture or production of, 
or as a component part of, another medical 
device to be manufactured or produced by 
such person, or 
‘‘(ii) use of a medical device after a 
sale described in subsection (b)(2). 
‘‘(4) DETERMINATION OF PRICE.— 
‘‘(A) IN GENERAL.—Rules similar to the 
rules of subsections (a), (c), and (d) of section 
4216 shall apply for purposes of this section. 
‘‘(B) CONSTRUCTIVE SALE PRICE.—If— 
‘‘(i) a medical device is sold (otherwise 
than through an arm’s length transaction) 
at less than the fair market price, or 
‘‘(ii) a person is liable for tax for a 
use described in paragraph (3), 
the tax under this section shall be computed on 
the price for which such or similar devices are 
sold in the ordinary course of trade as deter-
mined by the Secretary. 
‘‘(5) RESALES
PURSUANT
TO
CERTAIN
CON-
TRACT ARRANGEMENTS.— 
‘‘(A) IN GENERAL.—In the case of a speci-
fied contract sale of a medical device, the seller 
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referred to in subparagraph (B)(i) shall be enti-
tled to recover from the producer, manufac-
turer, or importer referred to in subparagraph 
(B)(ii) the amount of the tax paid by such sell-
er under this section with respect to such sale. 
‘‘(B) SPECIFIED
CONTRACT
SALE.—For 
purposes of this paragraph, the term ‘specified 
contract sale’ means, with respect to any med-
ical device, the first taxable sale of such device 
if— 
‘‘(i) the seller is not the producer, 
manufacturer, or importer of such device, 
and 
‘‘(ii) the price at which such device is 
so sold is determined in accordance with a 
contract between the producer, manufac-
turer, or importer of such device and the 
person to whom such device is so sold. 
‘‘(C) SPECIAL RULES RELATED TO CRED-
ITS AND REFUNDS.—In the case of any credit 
or refund under section 6416 of the tax im-
posed under this section on a specified contract 
sale of a medical device— 
‘‘(i) such credit or refund shall be al-
lowed or made only if the seller has filed 
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with the Secretary the written consent of 
the producer, manufacturer, or importer 
referred to in subparagraph (B)(ii) to the 
allowance of such credit or the making of 
such refund, and 
‘‘(ii) the amount of tax taken into ac-
count under subparagraph (A) shall be re-
duced by the amount of such credit or re-
fund.’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Paragraph (2) of section 6416(b) of such 
Code is amended— 
(A) by inserting ‘‘or 4061’’ after ‘‘under 
section 4051’’; and 
(B) by adding at the end the following: ‘‘In 
the case of the tax imposed by section 4061, 
subparagraphs (B), (C), (D), and (E) shall not 
apply.’’. 
(2) The table of subchapters for chapter 31 of 
such Code is amended by adding at the end the fol-
lowing new item: 
‘‘SUBCHAPTER D. MEDICAL DEVICES.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to sales (and leases and uses treat-
ed as sales) after December 31, 2012. 
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SEC. 553. EXPANSION OF INFORMATION REPORTING RE-
QUIREMENTS. 
(a) IN GENERAL.—Section 6041 of the Internal Rev-
enue Code of 1986 is amended by adding at the end the 
following new subsections: 
‘‘(h) APPLICATION
TO CORPORATIONS.—Notwith-
standing any regulation prescribed by the Secretary before 
the date of the enactment of this subsection, for purposes 
of this section the term ‘person’ includes any corporation 
that is not an organization exempt from tax under section 
501(a). 
‘‘(i) REGULATIONS.—The Secretary may prescribe 
such regulations and other guidance as may be appro-
priate or necessary to carry out the purposes of this sec-
tion, including rules to prevent duplicative reporting of 
transactions.’’. 
(b) PAYMENTS FOR PROPERTY AND OTHER GROSS 
PROCEEDS.—Subsection (a) of section 6041 of the Inter-
nal Revenue Code of 1986 is amended— 
(1) by inserting ‘‘amounts in consideration for 
property,’’ after ‘‘wages,’’; 
(2) by inserting ‘‘gross proceeds,’’ after ‘‘emolu-
ments, or other’’; and 
(3) by inserting ‘‘gross proceeds,’’ after ‘‘setting 
forth the amount of such’’. 
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(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to payments made after December 
31, 2011. 
SEC. 554. REPEAL OF WORLDWIDE ALLOCATION OF INTER-
EST. 
(a) IN GENERAL.—Section 864 of the Internal Rev-
enue Code of 1986 is amended by striking subsection (f) 
and by redesignating subsection (g) as subsection (f). 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2010. 
SEC. 555. EXCLUSION OF UNPROCESSED FUELS FROM THE 
CELLULOSIC BIOFUEL PRODUCER CREDIT. 
(a) IN GENERAL.—Subparagraph (E) of section 
40(b)(6) of the Internal Revenue Code of 1986 is amended 
by adding at the end the following new clause: 
‘‘(iii) EXCLUSION
OF
UNPROCESSED 
FUELS.—The term ‘cellulosic biofuel’ shall 
not include any fuel if— 
‘‘(I) more than 4 percent of such 
fuel (determined by weight) is any 
combination of water and sediment, or 
‘‘(II) the ash content of such fuel 
is more than 1 percent (determined by 
weight).’’. 
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(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to fuels sold or used after the date 
of the enactment of this Act. 
PART 2—PREVENTION OF TAX AVOIDANCE 
SEC. 561. LIMITATION ON TREATY BENEFITS FOR CERTAIN 
DEDUCTIBLE PAYMENTS. 
(a) IN GENERAL.—Section 894 of the Internal Rev-
enue Code of 1986 (relating to income affected by treaty) 
is amended by adding at the end the following new sub-
section: 
‘‘(d) LIMITATION ON TREATY BENEFITS FOR CER-
TAIN DEDUCTIBLE PAYMENTS.— 
‘‘(1) IN GENERAL.—In the case of any deduct-
ible related-party payment, any withholding tax im-
posed under chapter 3 (and any tax imposed under 
subpart A or B of this part) with respect to such 
payment may not be reduced under any treaty of the 
United States unless any such withholding tax would 
be reduced under a treaty of the United States if 
such payment were made directly to the foreign par-
ent corporation. 
‘‘(2) 
DEDUCTIBLE
RELATED-PARTY
PAY-
MENT.—For purposes of this subsection, the term 
‘deductible related-party payment’ means any pay-
ment made, directly or indirectly, by any person to 
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any other person if the payment is allowable as a de-
duction under this chapter and both persons are 
members of the same foreign controlled group of en-
tities. 
‘‘(3) FOREIGN CONTROLLED GROUP OF ENTI-
TIES.—For purposes of this subsection— 
‘‘(A) IN
GENERAL.—The term ‘foreign 
controlled group of entities’ means a controlled 
group of entities the common parent of which 
is a foreign corporation. 
‘‘(B) CONTROLLED GROUP OF ENTITIES.— 
The term ‘controlled group of entities’ means a 
controlled group of corporations as defined in 
section 1563(a)(1), except that— 
‘‘(i) ‘more than 50 percent’ shall be 
substituted for ‘at least 80 percent’ each 
place it appears therein, and 
‘‘(ii) the determination shall be made 
without regard to subsections (a)(4) and 
(b)(2) of section 1563. 
A partnership or any other entity (other than a 
corporation) shall be treated as a member of a 
controlled group of entities if such entity is con-
trolled 
(within 
the 
meaning 
of 
section 
954(d)(3)) by members of such group (includ-
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ing any entity treated as a member of such 
group by reason of this sentence). 
‘‘(4) FOREIGN
PARENT
CORPORATION.—For 
purposes of this subsection, the term ‘foreign parent 
corporation’ means, with respect to any deductible 
related-party payment, the common parent of the 
foreign controlled group of entities referred to in 
paragraph (3)(A). 
‘‘(5) REGULATIONS.—The Secretary may pre-
scribe such regulations or other guidance as are nec-
essary or appropriate to carry out the purposes of 
this subsection, including regulations or other guid-
ance which provide for— 
‘‘(A) the treatment of two or more persons 
as members of a foreign controlled group of en-
tities if such persons would be the common par-
ent of such group if treated as one corporation, 
and 
‘‘(B) the treatment of any member of a 
foreign controlled group of entities as the com-
mon parent of such group if such treatment is 
appropriate taking into account the economic 
relationships among such entities.’’. 
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(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to payments made after the date 
of the enactment of this Act. 
SEC. 562. CODIFICATION OF ECONOMIC SUBSTANCE DOC-
TRINE; PENALTIES. 
(a) IN GENERAL.—Section 7701 of the Internal Rev-
enue Code of 1986 is amended by redesignating subsection 
(o) as subsection (p) and by inserting after subsection (n) 
the following new subsection: 
‘‘(o) CLARIFICATION
OF
ECONOMIC
SUBSTANCE 
DOCTRINE.— 
‘‘(1) APPLICATION OF DOCTRINE.—In the case 
of any transaction to which the economic substance 
doctrine is relevant, such transaction shall be treated 
as having economic substance only if— 
‘‘(A) the transaction changes in a mean-
ingful way (apart from Federal income tax ef-
fects) the taxpayer’s economic position, and 
‘‘(B) the taxpayer has a substantial pur-
pose (apart from Federal income tax effects) 
for entering into such transaction. 
‘‘(2) SPECIAL RULE WHERE TAXPAYER RELIES 
ON PROFIT POTENTIAL.— 
‘‘(A) IN
GENERAL.—The potential for 
profit of a transaction shall be taken into ac-
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count in determining whether the requirements 
of subparagraphs (A) and (B) of paragraph (1) 
are met with respect to the transaction only if 
the present value of the reasonably expected 
pre-tax profit from the transaction is substan-
tial in relation to the present value of the ex-
pected net tax benefits that would be allowed if 
the transaction were respected. 
‘‘(B) TREATMENT OF FEES AND FOREIGN 
TAXES.—Fees and other transaction expenses 
and foreign taxes shall be taken into account as 
expenses in determining pre-tax profit under 
subparagraph (A). 
‘‘(3) STATE AND LOCAL TAX BENEFITS.—For 
purposes of paragraph (1), any State or local income 
tax effect which is related to a Federal income tax 
effect shall be treated in the same manner as a Fed-
eral income tax effect. 
‘‘(4) FINANCIAL ACCOUNTING BENEFITS.—For 
purposes of paragraph (1)(B), achieving a financial 
accounting benefit shall not be taken into account as 
a purpose for entering into a transaction if the ori-
gin of such financial accounting benefit is a reduc-
tion of Federal income tax. 
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‘‘(5) DEFINITIONS AND SPECIAL RULES.—For 
purposes of this subsection— 
‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.— 
The term ‘economic substance doctrine’ means 
the common law doctrine under which tax bene-
fits under subtitle A with respect to a trans-
action are not allowable if the transaction does 
not have economic substance or lacks a business 
purpose. 
‘‘(B) EXCEPTION FOR PERSONAL TRANS-
ACTIONS OF INDIVIDUALS.—In the case of an 
individual, paragraph (1) shall apply only to 
transactions entered into in connection with a 
trade or business or an activity engaged in for 
the production of income. 
‘‘(C) OTHER
COMMON
LAW
DOCTRINES 
NOT
AFFECTED.—Except as specifically pro-
vided in this subsection, the provisions of this 
subsection shall not be construed as altering or 
supplanting any other rule of law, and the re-
quirements of this subsection shall be construed 
as being in addition to any such other rule of 
law. 
‘‘(D) DETERMINATION OF APPLICATION OF 
DOCTRINE NOT AFFECTED.—The determination 
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of whether the economic substance doctrine is 
relevant to a transaction (or series of trans-
actions) shall be made in the same manner as 
if this subsection had never been enacted. 
‘‘(6) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section.’’. 
(b) PENALTY FOR UNDERPAYMENTS ATTRIBUTABLE 
TO TRANSACTIONS LACKING ECONOMIC SUBSTANCE.— 
(1) IN
GENERAL.—Subsection (b) of section 
6662 of such Code is amended by inserting after 
paragraph (5) the following new paragraph: 
‘‘(6) Any disallowance of claimed tax benefits 
by reason of a transaction lacking economic sub-
stance (within the meaning of section 7701(o)) or 
failing to meet the requirements of any similar rule 
of law.’’. 
(2) INCREASED PENALTY FOR NONDISCLOSED 
TRANSACTIONS.—Section 6662 of such Code is 
amended by adding at the end the following new 
subsection: 
‘‘(i) INCREASE IN PENALTY IN CASE OF NONDIS-
CLOSED NONECONOMIC SUBSTANCE TRANSACTIONS.— 
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‘‘(1) IN GENERAL.—In the case of any portion 
of an underpayment which is attributable to one or 
more nondisclosed noneconomic substance trans-
actions, subsection (a) shall be applied with respect 
to such portion by substituting ‘40 percent’ for ‘20 
percent’. 
‘‘(2) 
NONDISCLOSED
NONECONOMIC
SUB-
STANCE TRANSACTIONS.—For purposes of this sub-
section, the term ‘nondisclosed noneconomic sub-
stance transaction’ means any portion of a trans-
action described in subsection (b)(6) with respect to 
which the relevant facts affecting the tax treatment 
are not adequately disclosed in the return nor in a 
statement attached to the return. 
‘‘(3) 
SPECIAL
RULE
FOR
AMENDED
RE-
TURNS.—Except as provided in regulations, in no 
event shall any amendment or supplement to a re-
turn of tax be taken into account for purposes of 
this subsection if the amendment or supplement is 
filed after the earlier of the date the taxpayer is first 
contacted by the Secretary regarding the examina-
tion of the return or such other date as is specified 
by the Secretary.’’. 
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(3) CONFORMING AMENDMENT.—Subparagraph 
(B) of section 6662A(e)(2) of such Code is amend-
ed— 
(A) by striking ‘‘section 6662(h)’’ and in-
serting ‘‘subsections (h) or (i) of section 6662’’; 
and 
(B) 
by 
striking 
‘‘GROSS
VALUATION 
MISSTATEMENT PENALTY’’ in the heading and 
inserting 
‘‘CERTAIN
INCREASED
UNDER-
PAYMENT PENALTIES’’. 
(c) REASONABLE CAUSE EXCEPTION NOT APPLICA-
BLE TO NONECONOMIC SUBSTANCE TRANSACTIONS AND 
TAX SHELTERS.— 
(1) REASONABLE CAUSE EXCEPTION FOR UN-
DERPAYMENTS.—Subsection (c) of section 6664 of 
such Code is amended— 
(A) by redesignating paragraphs (2) and 
(3) as paragraphs (3) and (4), respectively; 
(B) by striking ‘‘paragraph (2)’’ in para-
graph (4)(A), as so redesignated, and inserting 
‘‘paragraph (3)’’; and 
(C) by inserting after paragraph (1) the 
following new paragraph: 
‘‘(2) EXCEPTION.—Paragraph (1) shall not 
apply to any portion of an underpayment which is 
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attributable to one or more tax shelters (as defined 
in section 6662(d)(2)(C)) or transactions described 
in section 6662(b)(6).’’. 
(2) REASONABLE CAUSE EXCEPTION FOR RE-
PORTABLE
TRANSACTION
UNDERSTATEMENTS.— 
Subsection (d) of section 6664 of such Code is 
amended— 
(A) by redesignating paragraphs (2) and 
(3) as paragraphs (3) and (4), respectively; 
(B) by striking ‘‘paragraph (2)(C)’’ in 
paragraph (4), as so redesignated, and inserting 
‘‘paragraph (3)(C)’’; and 
(C) by inserting after paragraph (1) the 
following new paragraph: 
‘‘(2) EXCEPTION.—Paragraph (1) shall not 
apply to any portion of a reportable transaction un-
derstatement which is attributable to one or more 
tax shelters (as defined in section 6662(d)(2)(C)) or 
transactions described in section 6662(b)(6).’’. 
(d) APPLICATION
OF PENALTY
FOR ERRONEOUS 
CLAIM FOR REFUND OR CREDIT TO NONECONOMIC SUB-
STANCE TRANSACTIONS.—Section 6676 of such Code is 
amended by redesignating subsection (c) as subsection (d) 
and inserting after subsection (b) the following new sub-
section: 
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‘‘(c) NONECONOMIC
SUBSTANCE
TRANSACTIONS 
TREATED AS LACKING REASONABLE BASIS.—For pur-
poses of this section, any excessive amount which is attrib-
utable to any transaction described in section 6662(b)(6) 
shall not be treated as having a reasonable basis.’’. 
(e) EFFECTIVE DATE.— 
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by 
this section shall apply to transactions entered into 
after the date of the enactment of this Act. 
(2) UNDERPAYMENTS.—The amendments made 
by subsections (b) and (c)(1) shall apply to under-
payments attributable to transactions entered into 
after the date of the enactment of this Act. 
(3) 
UNDERSTATEMENTS.—The 
amendments 
made by subsection (c)(2) shall apply to understate-
ments attributable to transactions entered into after 
the date of the enactment of this Act. 
(4) REFUNDS AND CREDITS.—The amendment 
made by subsection (d) shall apply to refunds and 
credits attributable to transactions entered into after 
the date of the enactment of this Act. 
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SEC. 563. CERTAIN LARGE OR PUBLICLY TRADED PERSONS 
MADE SUBJECT TO A MORE LIKELY THAN 
NOT STANDARD FOR AVOIDING PENALTIES 
ON UNDERPAYMENTS. 
(a) IN GENERAL.—Subsection (c) of section 6664 of 
the Internal Revenue Code of 1986, as amended by section 
562, is amended— 
(1) by redesignating paragraphs (3) and (4) as 
paragraphs (4) and (5), respectively; 
(2) by striking ‘‘paragraph (3)’’ in paragraph 
(4)(A), as so redesignated, and inserting ‘‘paragraph 
(4)’’; and 
(3) by inserting after paragraph (2) the fol-
lowing new paragraph: 
‘‘(3) SPECIAL RULE FOR CERTAIN LARGE OR 
PUBLICLY TRADED PERSONS.— 
‘‘(A) IN
GENERAL.—In the case of any 
specified person, paragraph (1) shall apply to 
the portion of an underpayment which is attrib-
utable to any item only if such person has a 
reasonable belief that the tax treatment of such 
item by such person is more likely than not the 
proper tax treatment of such item. 
‘‘(B) SPECIFIED
PERSON.—For purposes 
of this paragraph, the term ‘specified person’ 
means— 
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‘‘(i) any person required to file peri-
odic or other reports under section 13 of 
the Securities Exchange Act of 1934, and 
‘‘(ii) any corporation with gross re-
ceipts in excess of $100,000,000 for the 
taxable year involved. 
All persons treated as a single employer under 
section 52(a) shall be treated as one person for 
purposes of clause (ii).’’. 
(b) NONAPPLICATION OF SUBSTANTIAL AUTHORITY 
AND REASONABLE BASIS STANDARDS
FOR REDUCING 
UNDERSTATEMENTS.—Paragraph (2) of section 6662(d) 
of such Code is amended by adding at the end the fol-
lowing new subparagraph: 
‘‘(D) REDUCTION NOT TO APPLY TO CER-
TAIN LARGE OR PUBLICLY TRADED PERSONS.— 
Subparagraph (B) shall not apply to any speci-
fied 
person 
(as 
defined 
in 
section 
6664(c)(3)(B)).’’. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall apply to underpayments attributable to trans-
actions entered into after the date of the enactment 
of this Act. 
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(2) NONAPPLICATION
OF
UNDERSTATEMENT 
REDUCTION.—The amendment made by subsection 
(b) shall apply to understatements attributable to 
transactions entered into after the date of the enact-
ment of this Act. 
PART 3—PARITY IN HEALTH BENEFITS 
SEC. 571. CERTAIN HEALTH RELATED BENEFITS APPLICA-
BLE TO SPOUSES AND DEPENDENTS EX-
TENDED TO ELIGIBLE BENEFICIARIES. 
(a) APPLICATION OF ACCIDENT AND HEALTH PLANS 
TO ELIGIBLE BENEFICIARIES.— 
(1) EXCLUSION
OF
CONTRIBUTIONS.—Section 
106 of the Internal Revenue Code of 1986 (relating 
to contributions by employer to accident and health 
plans), as amended by section 531, is amended by 
adding at the end the following new subsection: 
‘‘(g) COVERAGE PROVIDED FOR ELIGIBLE BENE-
FICIARIES OF EMPLOYEES.— 
‘‘(1) IN GENERAL.—Subsection (a) shall apply 
with respect to any eligible beneficiary of the em-
ployee. 
‘‘(2) ELIGIBLE BENEFICIARY.—For purposes of 
this subsection, the term ‘eligible beneficiary’ means 
any individual who is eligible to receive benefits or 
coverage under an accident or health plan.’’. 
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(2) EXCLUSION OF AMOUNTS EXPENDED FOR 
MEDICAL
CARE.—The first sentence of section 
105(b) of such Code (relating to amounts expended 
for medical care) is amended— 
(A) by striking ‘‘and his dependents’’ and 
inserting ‘‘his dependents’’; and 
(B) by inserting before the period the fol-
lowing: ‘‘and any eligible beneficiary (within the 
meaning of section 106(g)) with respect to the 
taxpayer’’. 
(3) PAYROLL TAXES.— 
(A) Section 3121(a)(2) of such Code is 
amended— 
(i) by striking ‘‘or any of his depend-
ents’’ in the matter preceding subpara-
graph (A) and inserting ‘‘, any of his de-
pendents, or any eligible beneficiary (with-
in the meaning of section 106(g)) with re-
spect to the employee’’; 
(ii) by striking ‘‘or any of his depend-
ents,’’ in subparagraph (A) and inserting 
‘‘, any of his dependents, or any eligible 
beneficiary (within the meaning of section 
106(g)) with respect to the employee,’’; 
and 
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(iii) by striking ‘‘and their depend-
ents’’ both places it appears and inserting 
‘‘and such employees’ dependents and eligi-
ble beneficiaries (within the meaning of 
section 106(g))’’. 
(B) Section 3231(e)(1) of such Code is 
amended— 
(i) by striking ‘‘or any of his depend-
ents’’ and inserting ‘‘, any of his depend-
ents, or any eligible beneficiary (within the 
meaning of section 106(g)) with respect to 
the employee,’’; and 
(ii) by striking ‘‘and their depend-
ents’’ both places it appears and inserting 
‘‘and such employees’ dependents and eligi-
ble beneficiaries (within the meaning of 
section 106(g))’’. 
(C) Section 3306(b)(2) of such Code is 
amended— 
(i) by striking ‘‘or any of his depend-
ents’’ in the matter preceding subpara-
graph (A) and inserting ‘‘, any of his de-
pendents, or any eligible beneficiary (with-
in the meaning of section 106(g)) with re-
spect to the employee,’’; 
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(ii) by striking ‘‘or any of his depend-
ents’’ in subparagraph (A) and inserting ‘‘, 
any of his dependents, or any eligible bene-
ficiary (within the meaning of section 
106(g)) with respect to the employee’’; and 
(iii) by striking ‘‘and their depend-
ents’’ both places it appears and inserting 
‘‘and such employees’ dependents and eligi-
ble beneficiaries (within the meaning of 
section 106(g))’’. 
(D) Section 3401(a) of such Code is 
amended by striking ‘‘or’’ at the end of para-
graph (22), by striking the period at the end of 
paragraph (23) and inserting ‘‘; or’’, and by in-
serting after paragraph (23) the following new 
paragraph: 
‘‘(24) for any payment made to or for the ben-
efit of an employee or any eligible beneficiary (within 
the meaning of section 106(g)) if at the time of such 
payment it is reasonable to believe that the employee 
will be able to exclude such payment from income 
under section 106 or under section 105 by reference 
in section 105(b) to section 106(g).’’. 
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(b) EXPANSION OF DEPENDENCY FOR PURPOSES OF 
DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF- 
EMPLOYED INDIVIDUALS.— 
(1) IN
GENERAL.—Paragraph (1) of section 
162(l) of the Internal Revenue Code of 1986 (relat-
ing to special rules for health insurance costs of self- 
employed individuals) is amended to read as follows: 
‘‘(1) ALLOWANCE OF DEDUCTION.—In the case 
of a taxpayer who is an employee within the mean-
ing of section 401(c)(1), there shall be allowed as a 
deduction under this section an amount equal to the 
amount paid during the taxable year for insurance 
which constitutes medical care for— 
‘‘(A) the taxpayer, 
‘‘(B) the taxpayer’s spouse, 
‘‘(C) the taxpayer’s dependents, 
‘‘(D) any individual who— 
‘‘(i) satisfies the age requirements of 
section 152(c)(3)(A), 
‘‘(ii) bears a relationship to the tax-
payer described in section 152(d)(2)(H), 
and 
‘‘(iii) meets the requirements of sec-
tion 152(d)(1)(C), and 
‘‘(E) one individual who— 
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‘‘(i) does not satisfy the age require-
ments of section 152(c)(3)(A), 
‘‘(ii) bears a relationship to the tax-
payer described in section 152(d)(2)(H), 
‘‘(iii) meets the requirements of sec-
tion 152(d)(1)(D), and 
‘‘(iv) is not the spouse of the taxpayer 
and does not bear any relationship to the 
taxpayer described in subparagraphs (A) 
through (G) of section 152(d)(2).’’. 
(2) CONFORMING AMENDMENT.—Subparagraph 
(B) of section 162(l)(2) of such Code is amended by 
inserting ‘‘, any dependent, or individual described 
in subparagraph (D) or (E) of paragraph (1) with 
respect to’’ after ‘‘spouse’’. 
(c) EXTENSION
TO ELIGIBLE BENEFICIARIES
OF 
SICK AND ACCIDENT BENEFITS PROVIDED TO MEMBERS 
OF A VOLUNTARY EMPLOYEES’ BENEFICIARY ASSOCIA-
TION AND THEIR DEPENDENTS.—Section 501(c)(9) of 
the Internal Revenue Code of 1986 (relating to list of ex-
empt organizations) is amended by adding at the end the 
following new sentence: ‘‘For purposes of providing for the 
payment of sick and accident benefits to members of such 
an association and their dependents, the term ‘dependents’ 
shall include any individual who is an eligible beneficiary 
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(within the meaning of section 106(g)), as determined 
under the terms of a medical benefit, health insurance, 
or other program under which members and their depend-
ents are entitled to sick and accident benefits.’’. 
(d) FLEXIBLE
SPENDING
ARRANGEMENTS
AND 
HEALTH REIMBURSEMENT ARRANGEMENTS.—The Sec-
retary of Treasury shall issue guidance of general applica-
bility providing that medical expenses that otherwise qual-
ify— 
(1) for reimbursement from a flexible spending 
arrangement under regulations in effect on the date 
of the enactment of this Act may be reimbursed 
from an employee’s flexible spending arrangement, 
notwithstanding the fact that such expenses are at-
tributable to any individual who is not the employ-
ee’s spouse or dependent (within the meaning of sec-
tion 105(b) of the Internal Revenue Code of 1986) 
but is an eligible beneficiary (within the meaning of 
section 106(g) of such Code) under the flexible 
spending arrangement with respect to the employee; 
and 
(2) for reimbursement from a health reimburse-
ment arrangement under regulations in effect on the 
date of the enactment of this Act may be reimbursed 
from an employee’s health reimbursement arrange-
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ment, notwithstanding the fact that such expenses 
are attributable to an individual who is not a spouse 
or dependent (within the meaning of section 105(b) 
of such Code) but is an eligible beneficiary (within 
the meaning of section 106(g) of such Code) under 
the health reimbursement arrangement with respect 
to the employee. 
(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2009. 
DIVISION B—MEDICARE AND 
MEDICAID IMPROVEMENTS 
SEC. 1001. TABLE OF CONTENTS OF DIVISION. 
The table of contents of this division is as follows: 
Sec. 1001. Table of contents of division. 
TITLE I—IMPROVING HEALTH CARE VALUE 
Subtitle A—Provisions Related to Medicare Part A 
PART 1—MARKET BASKET UPDATES 
Sec. 1101. Skilled nursing facility payment update. 
Sec. 1102. Inpatient rehabilitation facility payment update. 
Sec. 1103. Incorporating productivity improvements into market basket updates 
that do not already incorporate such improvements. 
PART 2—OTHER MEDICARE PART A PROVISIONS 
Sec. 1111. Payments to skilled nursing facilities. 
Sec. 1112. Medicare DSH report and payment adjustments in response to cov-
erage expansion. 
Sec. 1113. Extension of hospice regulation moratorium. 
Sec. 1114. Permitting physician assistants to order post-hospital extended care 
services and to provide for recognition of attending physician 
assistants as attending physicians to serve hospice patients. 
Subtitle B—Provisions Related to Part B 
PART 1—PHYSICIANS’ SERVICES 
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Sec. 1121. Resource-based feedback program for physicians in Medicare. 
Sec. 1122. Misvalued codes under the physician fee schedule. 
Sec. 1123. Payments for efficient areas. 
Sec. 1124. Modifications to the Physician Quality Reporting Initiative (PQRI). 
Sec. 1125. Adjustment to Medicare payment localities. 
PART 2—MARKET BASKET UPDATES 
Sec. 1131. Incorporating productivity improvements into market basket updates 
that do not already incorporate such improvements. 
PART 3—OTHER PROVISIONS 
Sec. 1141. Rental and purchase of power-driven wheelchairs. 
Sec. 1141A. Election to take ownership, or to decline ownership, of a certain 
item of complex durable medical equipment after the 13-month 
capped rental period ends. 
Sec. 1142. Extension of payment rule for brachytherapy. 
Sec. 1143. Home infusion therapy report to Congress. 
Sec. 1144. Require ambulatory surgical centers (ASCs) to submit cost data and 
other data. 
Sec. 1145. Treatment of certain cancer hospitals. 
Sec. 1146. Payment for imaging services. 
Sec. 1147. Durable medical equipment program improvements. 
Sec. 1148. MedPAC study and report on bone mass measurement. 
Sec. 1149. Timely access to post-mastectomy items. 
Sec. 1149A. Payment for biosimilar biological products. 
Sec. 1149B. Study and report on DME competitive bidding process. 
Subtitle C—Provisions Related to Medicare Parts A and B 
Sec. 1151. Reducing potentially preventable hospital readmissions. 
Sec. 1152. Post acute care services payment reform plan and bundling pilot 
program. 
Sec. 1153. Home health payment update for 2010. 
Sec. 1154. Payment adjustments for home health care. 
Sec. 1155. Incorporating productivity improvements into market basket update 
for home health services. 
Sec. 1155A. MedPAC study on variation in home health margins. 
Sec. 1155B. Permitting home health agencies to assign the most appropriate 
skilled service to make the initial assessment visit under a 
Medicare home health plan of care for rehabilitation cases. 
Sec. 1156. Limitation on Medicare exceptions to the prohibition on certain phy-
sician referrals made to hospitals. 
Sec. 1157. Institute of Medicine study of geographic adjustment factors under 
Medicare. 
Sec. 1158. Revision of medicare payment systems to address geographic inequi-
ties. 
Sec. 1159. Institute of Medicine study of geographic variation in health care 
spending and promoting high-value health care. 
Sec. 1160. Implementation, and Congressional review, of proposal to revise 
Medicare payments to promote high value health care. 
Subtitle D—Medicare Advantage Reforms 
PART 1—PAYMENT AND ADMINISTRATION 
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(B) by adding at the end the following new 
subclause: 
‘‘(II) The productivity adjustment described in this 
subclause, with respect to an increase or change for a fis-
cal year or year or cost reporting period, or other annual 
period, is a productivity offset in the form of a reduction 
in such increase or change equal to the percentage change 
in the 10-year moving average of annual economy-wide 
private nonfarm business multi-factor productivity (as re-
cently published in final form before the promulgation or 
publication of such increase for the year or period in-
volved). Except as otherwise provided, any reference to the 
increase described in this clause shall be a reference to 
the percentage increase described in subclause (I) minus 
the percentage change under this subclause.’’; 
(2) in the first sentence of clause (viii)(I), by 
inserting ‘‘(but not below zero)’’ after ‘‘shall be re-
duced’’; and 
(3) in the first sentence of clause (ix)(I)— 
(A) by inserting ‘‘(determined without re-
gard to clause (iii)(II))’’ after ‘‘clause (i)’’ the 
second time it appears; and 
(B) by inserting ‘‘(but not below zero)’’ 
after ‘‘reduced’’. 
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‘‘(cc) TREATMENT OF SUB-
SEQUENT RESUPPLY WITHIN PE-
RIOD
OF
REASONABLE
USEFUL 
LIFETIME OF GROUP 3 SUPPORT 
SURFACE IN CASE OF NEED.—If 
an individual rejects transfer of 
title to a Group 3 Support Sur-
face under this subclause and the 
individual requires such Support 
Surface at any subsequent time 
during the period of the reason-
able useful lifetime of such equip-
ment (as defined by the Sec-
retary) beginning with the first 
month for which payment is 
made for the rental of such 
equipment under clause (i), the 
supplier shall supply the equip-
ment without charge to the indi-
vidual or the program under this 
title during the remainder of 
such period, other than payment 
for maintenance and servicing 
during such period which would 
otherwise have been paid if the 
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