In 2005 Congress passed the Tax Increase Prevention and Reconciliation Act (P.L. 209-222), amending the Internal Revenue Code to require a 3% withholding from payments made by governmental agencies. Payments made for providing health care services that are based on recipient income (e.g. Medicaid) are exempt. However, payments under programs where eligibility is based on age (e.g. Medicare) are not exempt.

This 3% withholding was expected to apply to Medicare payments beginning January 1, 2011, but as part of 2009’s stimulus bill, Congress extended the effective date to January 2, 2012.  That means physicians, hospitals and other providers could receive only 97% of what they are owed from Medicare, starting in 2012. That 3% hit would come on top of any across-the-board cuts required by the Medicare physician payment formula.

The IRS would apply the withholding to physicians’ tax obligations for the year. The remainder would be refunded after doctors file their tax returns the following spring, but in the meantime, the federal government would hold that money, interest-free.

The IRS has issued proposed regulations to address this withholding, suggesting that it not apply to payments less than $10,000. However, the government payer can choose to aggregate payments causing them to exceed the threshold. The proposed regulations also recommend that this withholding not apply to payments made under binding contracts that are in effect on the later of December 31, 2010 or six months after publication of their final rules. The proposed rules do not address the issue of contract renewals.

At this point, no final regulations have been issued by the IRS; however, they are likely to appear in the coming months as the December 31, 2011 deadline draws near. NCMS will keep you informed of these rules as they become available and public comment is sought.