Income Tax Reporting by Matching Entity – Student Loan Repayment Assistance
Nebraska is one of 17 states with a loan repayment or loan forgiveness program intended to provide for the increased availability of health services in underserved or health care professional shortage areas (as determined by the state), which is not included in the health care professional’s gross income for purposes of federal income tax. This health professional incentive was enacted as section 10908 of the Patient Protection and Affordable Care Act, and became effective for calendar year 2009 and thereafter.
Marlene Janssen of the Nebraska Rural Health Advisory Commission reports that this legislation was enacted thanks in large part to the efforts of Senator Ben Nelson, who was convinced that state programs of this nature should enjoy the same income tax treatment as provided to beneficiaries of the National Health Service Corps Loan Repayment Program and state education loan repayment programs eligible for funds under the Public Health Service Act.
The Nebraska Office of Rural Health has been in contact with health professionals who have benefitted from the Nebraska Loan Repayment Program to advise them of the exclusion from gross income of amounts forgiven as a result of their participation in the program. These professionals may include physicians, nurse practitioners, physician assistants (practicing in the specialties of family practice, internal medicine, general pediatrics, obstetrics/gynecology, general surgery, and psychiatry). Dentists, oral surgeons, clinical psychologists, Licensed Mental Health Practitioners, pharmacists, occupational therapists and physical therapists have also been eligible to participate in the program.
The Nebraska Loan Repayment Program is set up as a matching fund to assist local hospitals and other entities serving an identified health professional shortage area to recruit and retain needed health professionals. Both the community organization and the health professional submit applications to participate for as many as three years. The local organization must agree to provide an equal match to the state dollars ($20,000 per year for physicians and $10,000 per year for nurse practitioners and physician assistants). The total benefit to a physician can be $120,000, tax-free. The health professional must commit to three years in the shortage area and to serve Medicaid beneficiaries.
The recruited health professionals may be better advised of the tax exclusion of benefits from the Nebraska Loan Repayment Program than the community organizations who have been providing the matching funds. Indeed, the IRS did not include reference to section 10908 in IRS Publication 970, concerning Tax Benefits for Education until 2012.
Hospitals and other community participants in the Nebraska Loan Repayment Program may have reported income to the health care professional pursuant to instructions in their recruitment agreements executed prior to 2009, and before the effect of section 10908 was widely known. Regardless of instructions in those recruitment agreements, the hospital or other community entity responsible for paying the matching funds to the Nebraska Office of Rural Health on or after January 1, 2008 is not required to issue a Form 1099 to the recruited health professional, nor to include such payments in income reported on W-2 for those physicians who are employed by the matching entity.