Tax & Accounting Blog

House Takes the First Step Towards Repealing and Replacing the Affordable Care Act

Blog, Tax May 16, 2017

On May 4, the House of Representatives, by a vote of 217 to 213, passed the American Health Care Act (AHCA), an initial step towards repealing and replacing the Affordable Care Act (ACA). The AHCA would repeal many of the ACA’s provisions and replace others with a new system. The bill now faces the next hurdle as it heads to the Senate for consideration. It’s likely the bill will undergo significant change in the Senate.

Repealed Tax Provisions

Under the AHCA, virtually all of the tax provisions enacted under the ACA would be repealed, or effectively repealed. Following is a list of the key taxes, penalties, credits and fees that would be repealed.

Individual shared responsibility. The individual shared responsibility provisions (i.e., individual mandate) require individuals to have qualifying health insurance for each month of the year or be liable for a penalty. The individual mandate would effectively be eliminated by reducing the shared responsibility penalty to zero. The change would be effective retroactively for months beginning after 12/31/15.

Employer shared responsibility. The employer shared responsibility provisions (i.e., employer mandate) require employers to provide minimum essential coverage that is affordable and provides minimum value or be liable for a shared responsibility penalty. The employer mandate would effectively be eliminated by reducing to zero the penalties on employers that do not meet the requirements of the employer shared responsibility provisions. The change would be effective retroactively for months beginning after 12/31/15.

Premium tax credit (PTC). The PTC would be modified for 2018 and 2019 before being repealed effective 12/31/19.

Observation: The premium tax credit would be replaced with a new tax credit for health insurance coverage in 2020 (discussed below).

3.8% net investment income tax (NIIT). The 3.8% NIIT would be repealed for tax years beginning after 12/31/16.

0.9% additional Medicare tax. The 0.9% additional Medicare tax would be repealed for tax years beginning after 12/31/22.

Small employer health insurance credit. The small employer health insurance credit would be repealed for tax years beginning after 12/31/19.

“Cadillac” tax. The “Cadillac” tax on high cost employer-sponsored health plans, while not repealed, would be delayed until tax periods beginning on or after 1/1/26.

Medical device excise tax. The 2.3% excise tax on medical devices would be repealed for sales after 12/31/16.

Annual fee on health insurance providers. The annual fee on health insurance providers would be repealed for calendar years beginning after 12/31/16.

Tanning tax. The 10% tanning tax would be repealed effective 6/30/17.

New Tax Provisions

The AHCA adds several new health care related tax provisions and alters many of the existing provisions that were enacted under the ACA. Following are the highlights of these changes.

New health insurance coverage credit. The bill would modify the ACA’s premium tax credit for 2018 and 2019, and create a new refundable tax credit for health insurance coverage beginning 1/1/2020. The new credit would be age-based and range from $2,000 for individuals under 30, up to $4,000 for individuals age 60 and over, with an aggregate family annual limit of $14,000.

Observation: The existing premium tax credit calculates the credit amount based on family income, local cost of insurance premiums, and age. The replacement health insurance coverage credit would be based solely on an individual’s age, and phases out for taxpayers with modified adjusted gross income in excess of $75,000 for single filers ($150,000 for joint filers). Individuals would no longer be required to purchase insurance through a state marketplace to be eligible for the credit.

Removal of cap on health flexible spending account (health FSA) contributions. The ACA imposed an annual limit on employee pre-tax contributions to health FSAs. For 2017, the lRS has set the annual limit at $2,600. The AHCA proposes to revert to the pre-ACA rule by eliminating the annual dollar limit on pre-tax health FSA contributions, effective for tax years beginning after 12/31/16.

Observation: Because cafeteria plan changes would be required to incorporate a repeal of the health FSA contribution limit, employers would only be allowed to increase the limit on a prospective basis.

Health saving account (HSA) reforms and enhancements. The AHCA provides a number of favorable provisions impacting HSAs.

  • Increase HSA contribution limits. The bill would increase the maximum HSA contribution limits to equal the sum of the amount of the HSA deductible and out-of-pocket limitation. For 2017, these limits are $3,400 for self-only coverage and $6,750 for family coverage. Under the AHCA, they would be at least $6,650 for self-only and $13,300 for family coverage beginning in 2018.
  • Catch-up contributions by both spouses to the same HSA. Under the AHCA, both spouses, if eligible, could make catch-up contributions to the same HSA, effective in 2018. Under current rules, each spouse must make a catch-up contribution to their own HSA. For 2017, the catch-up contribution limit is $1,000 for individuals who are age 55 or older.
  • Pre-HSA medical expenses. The AHCA provides a special rule that would allow certain medical expenses incurred prior to the establishment of an HSA to be considered qualifying medical expenses if the HSA is established within 60 days of the date that coverage began under the high deductible health plan (HDHP), effective for coverage beginning in 2018.

    Observation: This provision would allow individuals who recently enrolled in an HDHP the flexibility to establish an HSA after incurring qualifying medical expenses.

Lower floor for medical expense deduction. The percent-of-AGI floor for medical expense deductions would be lowered to 5.8% for tax years beginning after 12/31/16. The ACA raised the longstanding 7.5% floor to 10% (with the higher floor phased in over time for certain older taxpayers).

Over-the-counter medications as qualified medical expense. Under the AHCA, over-the-counter medications would be considered qualified medical expenses, regardless of whether the drug is prescribed, for purposes of HSAs, Archer MSAs, health FSAs, and health reimbursement arrangements (HRAs), effective for expenses incurred after 12/31/16.

Additional tax on HSA and Archer MSA distributions. The additional tax on HSAs and Archer MSAs for distributions not used for qualified medical expenses would be reduced from 20% to 10% and 15%, respectively; effective for distributions made after 12/31/16.

Information Reporting Requirements

Group health plan coverage eligibility. The AHCA would add a provision requiring employers to report group health plan coverage eligibility information on an employee’s Form W-2 beginning in 2020.

ACA reporting requirements retained. The ACA information reporting requirements for health providers under Section 6055, and applicable large employers under Section 6056 would be retained. This information would be needed during the transition period when the PTC is still in place, at least through 2019.

Observation: Repeal of the reporting requirements likely falls outside of the scope of allowable changes in the budget reconciliation process. However, the Secretary of the Treasury could stop enforcement at some point if the reporting rules become redundant and are replaced by new reporting requirements.

Market reforms

The majority of the ACA health insurance market reforms would remain in place under the AHCA. The following reforms would remain intact:

  • Dependent coverage to age 26
  • Waiting periods
  • Guaranteed availability and renewal
  • Annual and lifetime limits prohibited on essential health benefits (the definition of essential health benefits would be subject to potential state waivers)
  • Prohibition on denial of coverage for pre-existing conditions (new provisions would allow for increased premiums without continuous coverage and potential state waivers)
  • Preventive services coverage with no cost sharing

What’s Next?

The amended bill will likely be scored by the CBO in the coming weeks, which may well inform the Senate’s deliberation. Senator Susan Collins (R-Maine) told reporters, “I think we should take as long as necessary to do the job right, and we certainly need the CBO analysis on the impact of cost and coverage… before we can produce our own bill.” Republicans hold a narrow 52-seat majority in the Senate, so they can only afford to lose a few votes to keep the bill moving forward.

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