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Obamacare Repeal Moves to House Floor; Ultimate Passage Uncertain
(Parker Tax Publishing March 2017)
On March 16, The House Budget Committee approved The American Health Care Act (AHCA) 19-17, clearing the way for a vote by the full House later this week. The bill would repeal the Affordable Care Act's (ACA) individual and employer mandates retroactive to January 1, 2016, and replace the means-tested premium tax credit with age-based health insurance credits. Beginning in 2018, it would also repeal most of the taxes used to fund the ACA, including the 3.8 percent net investment income tax and the 0.9 percent additional Medicare tax. American Health Care Act.
I. General Overview
Major Provisions of the American Health Care Act
The following are the key provisions of the American Health Care Act:
(1) Eliminates individual and employer mandates but requires insurers to apply a 30 percent surcharge on premiums for people who enroll in insurance in the nongroup or small-group markets if they have been uninsured for more than 63 days within the past year.
(2) Repeals the following ACA taxes, effective January 1, 2018: the 3.8 percent net investment income tax, the 0.9 percent additional Medicare tax, the medical device tax, and the tanning tax. Delays implementation of the "Cadillac tax" on high cost employer-sponsored health coverage from 2020 to 2025.
(3) Replaces the ACA's means-tested premium tax credits with age-based tax credits.
(4) Maintains the ACA's insurance regulations requiring "guaranteed issue" (i.e., insurers cannot decline to provide coverage based on preexisting conditions and other health factors) and allows children to stay on their parent's healthcare plans until age 26.
(5) Maintains the ACA's 10 essential benefit categories (e.g., maternity and newborn care, prescription drug coverage, etc.) (i.e., covered benefits), but, beginning in 2020, eliminates the requirement that insurers cover at least 60 percent of the cost of covered benefits.
(6) Relaxes the current-law requirement that prevents insurers from charging older people premiums that are more than three times larger than the premiums charged to younger people. Unless a state sets a different limit, the AHCA would allow insurers to charge older customers five times more than younger ones, beginning in 2018.
(7) Nearly doubles health savings account (HSA) contribution limits and removes the limit on flexible spending accounts (FSA) contributions (i.e., employers would have full discretion to set the contribution limits for health FSA plans).
(8) Freezes the ACA's federally subsidized Medicaid expansion beginning in 2020 and caps the growth in per-enrollee payments starting the same year.
(9) Appropriates $100 billion over ten years for grants to states through the Patient and State Stability Fund, which could be used to create or expand high-risk pools and other measures to help stabilize insurance markets.
Threading the Needle in the House and Senate
Because Republicans in Congress do not anticipate receiving any support for ACA repeal from Democrats, they decided to craft legislation that can be moved through the Senate using a budget process known as "reconciliation." Bills moved using reconciliation can circumvent a filibuster because debate can be brought to a close with just 51 votes rather than the usual 60 (Republicans hold 52 seats in the Senate).
But under the "Byrd Rule", such bills cannot contain extraneous provisions that don't directly affect the federal budget. This effectively places off limits some aspects of the ACA, such as insurance market reforms (e.g., provisions forbidding insurers from placing lifetime limits on amounts that can be claimed under a health insurance policy).
Observation: There are at least two provisions in the AHCA that could be challenged under the Byrd rule: (1) the requirement that insurers apply a 30 percent surcharge on premiums for people who enroll in insurance after having gone uninsured, and (2) the change allowing insurers to charge older individuals five times as much as younger ones (up from three times under present law). If Senate parliamentarian Elizabeth MacDonough determines the provisions do not qualify for inclusion in a reconciliation bill, she could rule them out of order (subject to override by a majority of members).
In addition to the procedural challenges in the Senate, the AHCA has been under attack from both moderate and fiscally conservative Republicans in both chambers. Members from states that expanded Medicaid under the ACA have voiced concerns about constituents losing coverage under AHCA, with several going on record as being opposed to the legislation in its present form. Meanwhile, members of the House Freedom Caucus (estimated to have 37 members) and other fiscal conservatives have been deriding the AHCA as "Obamacare 2.0" and demanding a clean repeal bill as a starting point for healthcare reform.
If Democrats voted unanimously against repeal, Republicans could afford only 21 defections in the House and just two in the Senate. Notably, all three Freedom Caucus members on the House Budget Committee voted against the AHCA in last Thursday's committee vote.
CBO and JCT Estimates
According to estimates by the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT), the AHCA will reduce federal deficits by $337 billion over the 2017-2026 period, but at the expense of 24 million Americans losing their health insurance over the same period (14 million in 2018). Not surprisingly, the accuracy of the CBO coverage estimates has been the subject of vigorous debate.
Despite being partly based on the hotly contested coverage estimates, the CBO/JCT deficit reduction estimates have generated less controversy. The largest savings would come from reductions in outlays for Medicaid and from the reduction in tax credits for nongroup health insurance. The largest costs would come from repealing many of the changes the ACA made to the Internal Revenue Code, including the 0.9 percent increase in the Hospital Insurance payroll tax rate for high-income taxpayers (i.e., the additional Medicare tax), the 3.8 percent surtax on such taxpayers' net investment income, and the annual fees imposed on health insurers. See discussion of these changes, along with their anticipated effective dates, below.
II. AHCA Tax Provisions
The following is a summary of the tax-related changes in the AHCA:
Repeal of Individual Mandate
Under current law, most individuals are required to purchase health insurance or pay a penalty. The AHCA would reduce the penalty to zero for failure to maintain minimum essential coverage; effectively repealing the individual mandate. The effective date would apply for months beginning after December 31, 2015, providing retroactive relief to those impacted by the penalty in 2016.
Repeal of Employer Mandate
Under current law, certain employers are required to provide health insurance or pay a penalty. The AHCA would reduce the penalty to zero for failure to provide minimum essential coverage; effectively repealing the employer mandate. The effective date would apply for months beginning after December 31, 2015, providing retroactive relief to those impacted by the penalty in 2016.
Repeal of Net Investment Income Tax
The ACA imposed a net investment tax, applying 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.
Repeal of Medicare Tax Increase
The ACA imposed a Medicare Hospital Insurance (HI) surtax based on income at a rate equal to 0.9 percent of an employee's wages or a self-employed individual's self-employment income. The AHCA repeals the additional 0.9 percent Medicare tax beginning in 2018.
Repeal of Increase in Income Threshold for Medical Expense Deduction
Taxpayers who itemize their deductions may deduct qualifying medical expenses. The medical-expense deduction may be claimed only for expenses that exceed a certain percentage of the taxpayer's adjustment gross income (AGI). ACA increased the AGI percentage threshold from 7.5 percent to 10 percent if the taxpayer or spouse was aged 65 or older. The AHCA restores the pre-ACA AGI percentage threshold to 7.5-percent for all taxpayers beginning in 2018 and extends the special rule for those aged 65 or older through this year.
Delay in Implementation of "Cadillac Tax"
The ACA imposed a 40 percent excise tax on high cost employer-sponsored health coverage, also known as Cadillac plans. Under current law, the tax will go into effect in 2020. The AHCA changes the effective date of the tax. It will not apply for any taxable period beginning after December 31, 2019, and before January 1, 2025. Thus, the tax will apply only for taxable periods beginning after December 31, 2024.
Repeal of Medical Device Tax
The ACA created a new 2.3 percent excise tax on the sale of certain medical devices. The AHCA repeals the medical device tax beginning after December 31, 2017.
Repeal of Tanning Tax
The ACA imposed a 10 percent sales tax on indoor tanning services. The AHCA repeals the tanning tax starting in 2018.
Modifications to and Eventual Elimination of Premium Tax Credit
Under current law, qualified health plans must meet certain requirements for households to be eligible for the premium tax credit. The AHCA amends those requirements to make available premium tax credits for the purchase of "catastrophic-only" qualified health plans and certain qualified plans not offered through an Exchange. Additionally, The AHCA prohibits premium tax credits from being used to purchase plans that offer elective abortion coverage. Lastly, The AHCA revises the schedule under which an individual's or family's share of premiums is determined by adjusting for household income and the age of the individual or family members.
The AHCA repeals ACA's premium tax credit beginning in 2020.
Refundable Age-Based Tax Credit for Health Insurance
The AHCA creates an advanceable, refundable tax credit for the purchase of state-approved, major medical health insurance and unsubsidized COBRA coverage. To be eligible, generally, an individual must not have access to government health insurance programs or an offer from any employer; and be a citizen, national or qualified alien of the United States, and not incarcerated. The credits are adjusted by age:
(1) Under age 30: $2,000
(2) Between 30 and 39: $2,500
(3) Between 40 and 49: $3,000
(4) Between 50 and 59: $3,500
(5) 60 and over: $4,000
The credits are additive for a family and capped at $14,000. The credits grow over time and are available in full to those making $75,000 per year ($150,000 joint filers). The credit phases out by $100 for every $1,000 in income higher than those thresholds. The Secretary of the Treasury is empowered to create a system - building upon already developed systems - to deliver the credit. Eligibility determinations will continue to be conducted by the federal government, while insurers and licensed agents and brokers will be able to do more of the consumer-facing actions currently performed in 39 states by healthcare.gov. The program also calls for simplified reporting of an offer of coverage on the W-2 by employers. Reconciliation rules limit the ability of Congress to repeal the current reporting, but, when the current reporting becomes redundant and replaced by the reporting mechanism called for in the bill, then the Secretary of the Treasury can stop enforcing reporting that is not needed for taxable purposes.
Repeal of Limitations on Contributions to Flexible Savings Accounts
The ACA limits the amount an employer or individual may contribute to a health flexible spending account (FSA) to $2,500, indexed for cost-of-living adjustments. The AHCA repeals the limitation on health FSA contributions for taxable years beginning after December 31, 2017.
Increase in Maximum Contribution Limit to Health Savings Account
The AHCA increases the basic limit on aggregate Health Savings Account contributions for a year to equal the maximum on the sum of the annual deductible and out-of-pocket expenses permitted under a high deductible health plan. Thus, the basic limit will be at least $6,550 in the case of self-only coverage and $13,100 in the case of family coverage beginning in 2018.
The AHCA would effectively allow both spouses to make catch-up contributions to one HSA beginning in 2018.
Repeal of Increase of Tax on Health Savings Accounts Distributions
Distributions from an HSA or Archer MSA that are used for qualified medical expenses are excludible from gross income. Distributions that are not used for qualified medical expenses are includible in income and are generally subject to an additional tax. ACA increased the percentage of the tax on distributions that are not used for qualified medical expenses to 20 percent. The AHCA lowers the rate to pre-ACA percentages. This change is effective for distributions after December 31, 2017.
Recapture Excess Advance Payments of Premium Tax Credits
The amount a household is required to pay towards their premiums is based on income. If a household's income increases during the tax year, excess premium tax credits may result. Under current law, for households with incomes less than 400 percent of the federal poverty level there are certain limits on the amount the household is required to repay the federal government for the excess premium tax credits. For tax years 2018 and 2019, the AHCA requires any individual who was overpaid in premium tax credits to repay the entire excess amount, regardless of income.
Small Business Tax Credit
The AHCA repeals ACA's small business tax credit beginning in 2020. Between 2018 and 2020, under the proposal, the small business tax credit generally is not available with respect to a qualified health plan that provides coverage relating to elective abortions.
Repeal of the Tax on Over-the-Counter Medications
Under current law, taxpayers may use several different types of tax-advantaged health savings accounts to help pay or be reimbursed for qualified medical expenses. The ACA excluded over-the-counter medications from the definition of qualified medical expenses. The AHCA effectively repeals the ACA tax on over-the-counter medications. The effective date begins tax year 2018.
Repeal of Elimination of Deduction for Expenses Allocable to Medicare Part D Subsidy
Prior to ACA, as an incentive for employers to offer retiree drug coverage, employers who offered sufficient prescription drug coverage to their employees qualified for the Retiree Drug Subsidy to help cover actual spending for prescription drug costs. The ACA eliminated the ability for employers to take a tax deduction on the value of this subsidy. The AHCA repeals this ACA change and re-instates the business-expense deduction for retiree prescription drug costs without reduction by the amount of any federal subsidy. The AHCA applies to taxable years beginning after December 31, 2017.
Special Rule for Certain Medical Expenses Incurred Before Establishment of HSA
The AHCA sets forth certain circumstances under which HSA withdrawals can be used to pay qualified medical expenses incurred before the HSA was established. Starting in 2018, if an HSA is established during the 60-day period beginning on the date that an individual's coverage under a high deductible health plan begins, then the HSA is treated as having been established on the date coverage under the high deductible health plan begins for purposes of determining if an expense incurred is a qualified medical expense.
Remuneration from Certain Insurers
Generally, employers may deduct the remuneration paid to employees as "ordinary and necessary" business expenses. The ACA added a limitation for certain health insurance providers that exceeds $500,000 paid to an officer, director, or employee. The AHCA repeals the limit on the deduction of a covered health insurance provider for compensation attributable to services performed by an applicable individual starting in 2018.
Repeal and Replace of Certain Consumer Taxes
The ACA imposed an annual fee on certain brand pharmaceutical manufacturers. The AHCA repeals the tax on brand pharmaceutical manufacturers such that it would not apply for years beginning after December 31, 2017.
Repeal of Annual Fee on Certain Health Insurers
The ACA imposed an annual fee on certain health insurers. The proposal repeals the health insurance tax beginning after December 31, 2017.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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