Could clinical trial compensation taxation be getting in the way of cutting-edge medications being brought to market? Those on the front lines of clinical research say, ‘yes’ and it is happening more often than anyone is willing to admit.
Fighting for Life or Putting Food on the table
Trial Coordinator Nurse: “Mr. Davenport, good to see you again. How is the new medication treating you? Are you noticing less symptoms from your diabetes?”
Mr. Davenport (Patient): “The medications are the least of my worries. I’ve been here 4 times in the last month and the extra $200 has disqualified me from getting my food stamps this month.
This is an excerpt from a true story reported to a clinician recently from a patient participating in a diabetes clinical trial. She reports this patient suffering “serious hardship” during the time he was in the trial because his $50 stipend per visit ($200 taxable income increase) was barely enough to cover transportation to and from the trial and also led to the loss of food stamps which he relied on heavily.
On Paper the Concept Seems Perfect
It’s been widely published that only 5% of eligible patients participate in clinical trials. These low participation rates can be attributed to various obstacles, including financial burdens related to participation, encompassing expenses like transportation, dependent care, meals, housing, and others.
Clinical trial sponsors are increasingly putting in place programs to enhance the patient experience and remove inconvenience, accounting for both the time and effort volunteers face. While once debated, the ethics of clinical trial compensation were largely negated in 2018, when the Food and Drug Administration (FDA) confirmed that paying research study participants is a common and acceptable practice. Today payments are often combined with reimbursements for out-of-pocket expenses – leading towards total cost neutralization for participants.
While this may seem like a sound strategy, medical researchers in the field are reporting participants are missing and/or delaying key appointments, while some are flat out dropping out of clinical trials due to compensation throwing them into a financial crisis, as described above.
Double Trouble: Taxation Turmoil
Research coordinators have also shared with us that patients have voluntarily elected to wait to receive part of their stipend until the following year, or have rescheduled visits to avoid earning a visit stipend so that they will not go over the reporting limit and affect their SSDI and food stamp eligibility.
They also have seen patients wait so long to cash their compensation checks that the bank will no longer honor the check and a new one has to be issued. Not surprisingly, patients are very concerned about going over the $2,000 in liquid assets maximum set for Medicaid recipients.
In addition, when it is time to file taxes, patients can be put under additional financial stress if they are used to filing very simple taxes at the end of the year but experience confusion with the Form 1099-MISC. Patients report that it is a hassle to have to add this into their taxes, and then if the payment is taxed, they are not getting the entire compensation amount that was promised.
Tax Impact of COVID-19 Era Clinical Trials
Looking back, Greenphire’s analysis of over 450 clinical trials and 180,000 participants across more than 80 sponsors demonstrated that just 10% of participants received over $600 in reportable payments in 2021. It is critical to note that a portion of these participants were instrumental in helping prove the safety and efficacy of the COVID-19 vaccine.
Additionally, most clinical trial participants who received over $600 – if not all – paid taxes in that calendar year on payments they received for volunteering in a clinical trial. For the majority of patients paid in 2021, the total reportable compensation earned was $230 on average, illustrating the minimal tax revenue generated by the U.S. government. Nonetheless, there is still a burden of tracking payments for the total trial population which creates a dramatic administrative burden on sites and participants alike.
Sites Recognize the Need for Stipend Taxation Reform
Greenphire has been monitoring industry sentiment regarding tax for many years; in 2022, we polled sites, sponsors and CROs as to whether taxation of stipends was warranted, and surprising results emerged. 75% of sites overwhelmingly agreed that tax shouldn’t be levied against stipends or that the threshold should be raised to over $1,000. The primary reason? Study participants are volunteering their time, and as such, their stipends should not be taxed. Similarly, 63% of sponsors and CROs agreed with this sentiment, however 25% said “I don’t know,” pointing towards the need to bring attention to this important issue. Stay tuned for results from our 2024 Market Trends survey later this summer, including updated insights on trial taxation.
How Did We Get Here? Current Clinical Trial Taxation Compensation
In February 2009, the IRS categorized “a payment or series of payments made to individuals for participating in medical research studies” as ‘Other Income,’ akin to prizes won on game shows or through sweepstakes, on the 1099-MISC tax form.
This classification had numerous implications, including:
- Those who receive $600 or more in payments (excluding reimbursements) are required to report these payments as ordinary income on their tax return and may owe Federal taxes on it.
- A trial sponsor must automatically withhold 24 percent of payments to a participant who does not provide a validated Taxpayer Identification Number (TIN).
- Additionally, payments made to participants may affect their eligibility for Supplemental Security Income (SSI) and Medicaid benefits.
The total amount of payments received over the course of a year can vary, depending on the type of study, the number of visits, and what is deemed reasonable payment.
The Fine Print: The Details on Tax Regulation
For those of you unfamiliar with the US tax code, which many of you reading may be, I’d like to share with you some of the regulation driving the administrative burden associated with participant payments and taxation.
Regulations:
Treasury regulations 1.6041-1 through 1.6041-6 describe a variety of information return requirements subject to the $600 reporting requirement. Treas. Reg. 1.6041-1 generally requires payments of $600 or more by businesses of Fixed, Determinable, Annual, or Periodic (FDAP) income.
Resource: https://www.law.cornell.edu/cfr/text/26/1.6041-1
Treas. Reg. 1.6041-3 lists out exceptions to the information reporting requirement.
These exceptions are generally made because:
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- The payment needs to be reported on a different 1099 (like interest income reportable on a Form 1099-INT),
- The payee is 501(c) tax exempt so the income wouldn’t be taxable.
- The payment is not includible in gross income (like scholarship income), or
- The payee is a Corporation.
Resource: https://www.law.cornell.edu/cfr/text/26/1.6041-3
Currently – clinical trial stipends are taxed as either “Other Income” (not subject to self-employment taxes, Form 1099-MISC/Box 3) or as non-employee compensation (NEC) (subject to self-employment taxes, Form 1099-NEC/Box 1). It depends on whether the payee is acting in the course of a trade or business as to whether it is NEC income versus MISC income and there is an IRS Private Letter Ruling (PLR 9106004) from 1990 about a man who was participating in clinical trials for his asthma – and the conclusion was that the taxpayer earned Other Income.
Consistent with this ruling, our participant payments are reported on Form 1099-MISC, Box 3- Other Income, unless a participant otherwise self identifies as participating in trials as a trade or business.
What Tax Thought Leaders Say Should be Done
I frequently liaise with clients as well as tax subject matter experts on matters relating to clinical trials, and the topic of participant taxation of stipends is certainly a hot button issue as of late.
Tax leaders familiar with the challenges of running clinical trials suggest that creating incentives for individuals, including tax incentives, for clinical trial payments that do not represent NEC would have many benefits, including increasing diversity in clinical trial studies and improving the results of the related outcomes.
They also recommend increasing to the $2,000 threshold set in the Ensuring Access to Clinical Trials Act of 2015 as a good place to start. This would mean that any taxpayer receiving $2,000 or less per year for clinical trial payments could exclude those amounts from income. The good news is that this recommendation could be closer to a reality than you may expect.
Call to Action: Take a Stand Against Clinical Trial Participant Taxation
Clinical trials hold the key to future medical development. Each of us has a responsibility to identify ways to attract and retain more potential people to participate in research to fully ensure that everyone has equal access to novel treatments and cures and that they are in turn safe and effective for all populations.
Greenphire has identified that not only do a fraction of eligible patients enroll in clinical trials, but that we are potentially alienating the very populations we’re looking to attract by classifying clinical trial payments above $600 as reportable income.
In May 2024, the Clinical Trial Modernization Act (H.R. 8412) was introduced to make it easier for people with oncology and life-threatening diseases to participate in clinical trials, including those who are underrepresented. Most notably, the bill ensures that financial support from clinical trial sponsors provided to patients is not subject to taxation and doesn’t count against income limitations for government safety net programs. As we illustrated above, Greenphire data has been used to quantify the proportion of clinical trial patients impacted as well as validate the difference in revenue collected by the government at various tax thresholds, thereby informing the threshold incorporated in the bill.
We encourage you to get involved:
- Track H.R. 84121 and Call or Write Congress with your support
- Learn more about the Bill; Read the American Cancer Society Cancer Action Network Fact Sheet
- Contact Greenphire to speak with a tax specialist or to get access to our 2023 payment data representing the limited revenue taxing patients contributes to the government: Taxmanagement@greenphire.com
