Health care reform efforts discontinued by Congress
The Affordable Care Act remains the law of the land
TAX ALERT |
UPDATE (3/27/2017): On March 24, 2017, the House of Representatives was scheduled to vote on the American Health Care Act (AHCA) that would have modified the Affordable Care Act (ACA). However, Republications determined that there was not enough support to pass the bill so the vote was not held. Congress, in conjunction with President Trump, has decided to move on to other important national issues and discontinue health care reform efforts for now. Consequently, no changes have been made to the ACA and all of its provisions are still in effect. Employers and individuals must continue to comply with the ACA or face potential penalties.
ORIGINAL (3/9/2017): On March 6, 2017, the Republican party released an initial draft of the American Health Care Act (AHCA). The stated purpose of the AHCA is to repeal and replace the Affordable Care Act (ACA); however, the AHCA keeps many of the popular provisions of the ACA including:
- Prohibitions on lifetime and annual coverage limits, medical underwriting and discrimination based on race, creed, sex, etc.
- Coverage for adult children up to age 26 on their parents’ health plans
- Coverage for pre-existing conditions
- Guaranteed coverage renewals
Part 1 substantially reduces the Medicaid expansion provisions of the ACA plus makes significant changes to the individual insurance market. Part 2 is tax focused and eliminates many of the additional taxes created under the ACA. Here is a brief summary of the key provisions of each part.
Part 1 - Energy and Commerce Committee bill
Public health funding
The ACA provided the Secretary of Health and Human Services broad authority to spend money in the Prevention and Public Health Fund without Congressional oversight. The funding for this program stops effective Sept. 30, 2018. The proposal increases funding for community-based outpatient facilities that provide health services to medically underserved populations.
The ACA significantly expanded Medicaid; the AHCA rolls back that expansion in most situations. More fundamentally, the AHCA reforms federal Medicaid financing by creating a per capita model effective for the government’s fiscal year that starts Oct. 1, 2019. Under the AHCA, there will be new per-enrollee limits on federal payments to the states.
Individual and small group health insurance market
The AHCA makes substantial changes to the individual and small group health insurance market. First, the AHCA eliminates the cost sharing subsidy for silver plans purchased through a Health Insurance Exchange effective in 2020. Secondly, the AHCA establishes a temporary Patient and State Stability Fund (in effect from 2018 through 2026). The states can apply for funding for a variety of purposes including, for example, providing financial assistance to high-risk individuals, subsidizing reinsurance in the individual marketplace and promoting preventive services.
As discussed below, the AHCA repeals the individual mandate which requires Americans to purchase health insurance, meet an exemption, or pay a penalty. However, there is a new continuous coverage incentive that Republicans hope will limit adverse selection in the health care markets. Starting generally in 2019, if an individual applying for insurance went more than 63 days in the prior 12-month period without continuous health insurance coverage, the health coverage issuer will assess a flat 30 percent late-enrollment surcharge. The late-enrollment surcharge would apply for 12 months.
The AHCA alters the relative pricing structures in the individual and small group marketplace. Currently, the ACA permits insurance companies to charge an older adult up to three times the premium charged for a younger adult. The AHCA allows a 5-to-1 ratio beginning in 2018.
Under the ACA, health plans (other than catastrophic plans) were required to have a minimum actuarial value of 60 percent. The AHCA removes the 60 percent minimum standard effective in 2020.
Part 2 - Ways and Means Committee bill
This part of the AHCA does repeal substantial portions of the ACA. Some provisions impact employers whereas others affect individual taxpayers.
- Employer shared responsibility mandate (the play or pay penalty): The ACA required certain large employers with at least 50 employees to either provide health insurance to their employees or pay a penalty. The AHCA repeals this requirement retroactive to months beginning after Dec. 31, 2015.
- Compensation deduction cap: The ACA denied health insurance providers any deduction for compensation paid to an individual in excess of $500,000. This limitation will no longer apply for tax years beginning after Dec. 31, 2017.
- The 0.9 percent Medicare tax: The ACA added a Medicare surtax of 0.9 percent of a person’s wages or self-employment income in excess of certain thresholds. The AHCA repeals this additional 0.9 percent Medicare tax after Dec. 31, 2017.
- Tanning tax: Under the ACA there is a 10 percent sales tax on indoor tanning services. The AHCA repeals the tanning tax starting in 2018.
- Prescription drug fee: The ACA added an annual fee on companies that manufacture or import branded prescription drugs. The AHCA repeals the fee for years beginning after Dec. 31, 2017.
- Health insurance tax: The ACA imposed an annual fee on certain health insurers. The AHCA repeals the health insurance tax after Dec. 31, 2017.
- Small business tax credit: The AHCA repeals the ACA’s small business tax credit beginning in 2020. For 2018 and 2019, the small business tax credit generally is not available for qualified health plans that provide coverage for certain abortions. This does not preclude an employer from paying for a separate rider or plan that offers abortion coverage.
- Medical device excise tax: The ACA imposed a 2.3 percent excise tax on the sale of certain medical devices. Congress had already placed a moratorium on the collection of this tax for 2016 and 2017. The AHCA repeals the medical device tax effective Jan. 1, 2018.
- Retiree drug subsidy: As an incentive to employers to offer their retirees prescription drug coverage, Congress previously authorized a subsidy to employers that provided this coverage. In a reversal of course from the ACA, effective for tax years beginning after Dec. 31, 2017, employers who offer such coverage will be able to deduct the full cost of the benefits provided without reduction for the subsidy.
- Over-the-counter medications: Many employers offer their employees medical Flexible Spending Accounts (FSAs) under a cafeteria plan, Health Savings Accounts (HSAs), or Health Reimbursement Accounts. Under the ACA, these accounts are generally not permitted to reimburse employees for over-the-counter medications. The AHCA eliminates that restriction effective for plan years beginning in 2018.
- FSA contribution limits: The ACA placed a $2,500 cap (indexed to $2,600 for 2017) on the amount an employee can contribute to a health FSA. The Republican bill removes that cap and leaves the maximum funding amount to the discretion of the employer effective in 2018.
- Employer information reporting obligations: The ACA has a complex employer information reporting requirement (Forms 1095-C and 1095-B). Under the AHCA, a simplified version of this system will be necessary so that employers can report whether they are offering health care coverage to their employees.
- Cadillac tax: The ACA imposes a 40 percent tax on certain high-cost employer-sponsored health insurance benefits. The AHCA delays the effective date of the tax from Jan. 1, 2020, to taxable periods beginning on or after Jan. 1, 2025.
- Individual shared responsibility mandate: The current law requires most individuals to purchase health insurance or pay a penalty (determined monthly). The AHCA retroactively repeals this provision to months beginning after Dec. 31, 2015.
- Net investment tax: In order to fund the ACA, current law applies a rate of 3.8 percent to certain net investment income of individuals, estates and trusts with income above certain amounts. The AHCA repeals the net investment tax starting in 2018.
- Itemized deduction of medical expenses: Under current law, taxpayers who itemize deductions on their individual income tax returns can deduct medical costs that exceed 10 percent of their adjusted gross incomes. In 2016, for taxpayers who are 65 or older, the threshold is 7.5 percent. The Republican bill extends the 7.5 percent level for those 65 or older to 2017, and reduces the cap to 7.5 percent for all taxpayers in 2018.
- Premium tax credit modifications and repeal: The ACA allows individuals that meet certain income thresholds to purchase health insurance coverage through the Exchange (also known as the Health Insurance Marketplace) with premium tax credits. Premium tax credits are government subsidies toward the cost of the health insurance. The AHCA makes modifications to the premium tax credit system for 2018 and 2019 as explained below, and then repeals the tax credits effective Jan. 1, 2020.
Eligibility for the premium tax credit. In 2018 and 2019, the AHCA will permit individuals who purchase catastrophic-only or certain other qualified health plans not offered through an Exchange to receive premium tax credits. However, premium tax credits will not be available for plans that cover certain abortions. In addition, for 2018 and 2019, the determination of the amount of the premium tax credit will take into consideration the taxpayer’s household income plus the age of the individual and family members.
Recapturing excess premium tax credits. In certain situations, individuals who receive excess premium tax credits do not have to repay the excess. For 2018 and 2019, the AHCA requires any individual who was overpaid premium tax credits to repay the entire excess amount, regardless of income.
- Premium tax credit replacement: The Republicans propose to replace the ACA’s premium tax credits with an advancable, refundable tax credit for the purchase of certain insurance. This replacement program would be effective in 2020.
Eligibility for the tax credit. To be eligible for the tax credit, generally an individual must not have access to government health insurance programs (e.g., Medicare) or be offered health care coverage from any employer. Credits are available for major medical coverage offered in the individual health insurance market and for unsubsidized COBRA continuation coverage from an employer. Credits are not available for plans that cover certain abortions.
Amount of the tax credit. The proposed tax credit is adjusted for age as follows:
Age Credit Amount
Under age 30
Age 30 to 39
Age 40 to 49
Age 50 to 59
Age 60 and over
The credits are added together for family members; however, only the five oldest covered individuals are included. The credits for a family are capped at $14,000 annually, and apply on a monthly basis. For example, a married couple, both age 26, with one child can receive a $6,000 annual ($500 monthly) credit toward the purchase of family coverage. After 2020, the available credit amounts will adjust for inflation in $50 increments. If a taxpayer is entitled to a credit in excess of the cost of coverage, the taxpayer can request that the excess be deposited into his or her HSA.
Credit phase out. The credits are available in full to those making up to $75,000 per year ($150,000 for joint filers). The credit phases out by $100 for every $1,000 in income higher than those thresholds. For example, a single 28-year-old taxpayer making $80,000 per year would see his or her credit reduced from $2,000 to $1,500.
Credit delivery. In order to effectively deliver the credit at the same time the individual has the premium payment obligation, the AHCA authorizes the government to create a system—building upon already developed systems—to deliver the credit. This may mean that the Healthcare.gov website will be modified to facilitate the delivery of the credit.
- HSA modifications: The Republications want to expand use of HSAs by making certain changes starting in 2018.
Substantial increase in the HSA contribution limits. In 2017, the deductible HSA contribution limits (employer and employee combined) are $3,400 for self-only coverage and $6,750 for family coverage. Under the Republican bill, the HSA contribution limits will increase to match the out-of-pocket limits. Thus, for 2018, the contribution limits are expected to be at least $6,550 for self-only plans and $13,100 for family plans, the same dollar amounts as the maximum out-of-pocket costs.
HSA catch-up contributions. In addition to the basic HSA contributions referred to above, individuals age 55 or older (and not enrolled in Medicare) can make catch-up contributions. Currently, each eligible spouse can make an additional $1,000 catch-up contribution to his or her own HSA. The AHCA would allow both spouses to make their catch-up contributions to one HSA instead of to separate HSAs beginning in 2018.
Payment of certain medical expenses with HSA funds. Under current law, a taxpayer cannot use HSA funds to pay for medical expenses incurred before the creation of the HSA account. Under the AHCA, starting in 2018, taxpayers can use HSA funds to pay medical expenses incurred after a high deductible health plan begins if the taxpayer establishes an HSA within 60 days of that date.
Tax on HSA distributions. Individuals own their HSA (or Archer Medical Savings Account), thus they have the ability to withdraw funds for non-medical purposes. Such withdrawals are taxable and the ACA imposed a 20 percent penalty tax on the amount distributed. The AHCA reduces the penalty to 10 percent on HSAs and 15 percent on Archer MSAs effective in 2018.
The AHCA is the first step toward a new health care policy. Although it is not a complete repeal and replacement of the ACA, the AHCA goes a long way toward putting forth a revised vision of health care based on more choices for states and individuals.