The two committees of the U.S. House of Representatives with jurisdiction over health care (the Ways and Means Committee and the Energy and Commerce Committee) each released proposed legislation, which, if passed by the U.S. House of Representatives and U.S. Senate and signed into law by the President, would overturn the Patient Protection and Affordable Care Act (“ACA”). Called the “American Health Care Act,” (“AHCA”) the legislation repeals and replaces several provisions of ACA, while keeping others.
Today, the U.S. House Ways and Means Committee (after 18 hours of debate) and the U.S. House Energy and Commerce Committee (after 27 hours of debate) approved their portions of the legislation. Both bills will now go to the U.S. House Budget Committee where they will be merged into one bill to be voted on by the full U.S. House of Representatives. If the House approves the bill, it moves to the U.S. Senate and then to the President for signature. There can be changes to the bill as it goes through the legislative process.
Many provisions of the legislation have an impact on an employer’s offer of health coverage to employees and an employee’s requirement to have health coverage.
- Individual Mandate. Under ACA, most individuals must have minimum essential health coverage or pay a tax penalty. The AHCA reduces the tax penalty for failing to have coverage to $0.00 as of January 1, 2016. The penalty reduction in practice repeals the individual mandate with a retroactive effective date.
- Employer Mandate. ACA requires applicable large employers to offer employees affordable health coverage providing minimum value or pay a tax penalty. The AHCA reduces the tax penalty for failing to offer coverage to $0.00 as of January 1, 2016. The penalty reduction in practice repeals the employer mandate with a retroactive effective date.
- Health Flexible Spending Account Limits. ACA limited contributions to a health flexible spending account plan (FSA) to $2,500 (indexed for inflation- $2,600 in 2017). The AHCA repeals the limit on contributions to a health FSA for tax years starting after December 31, 2017.
- Tax on OTC Medications. ACA excluded over-the-counter medications from the definition of “qualified medical expenses.” Starting in 2018, OTC medications will no longer be taxed. If over-the-counter medications are qualified medical expenses, they may no longer require a prescription for reimbursement from a health FSA.
- Cadillac Tax. While not yet effective, ACA imposed an excise tax on high-cost employer-sponsored health coverage. The so-called “Cadillac Tax” was scheduled to be implemented January 1, 2020. The AHCA does not repeal the Cadillac Tax, but it pushes the effective date to tax periods starting after December 31, 2024.
- Health Savings Account Contribution Limits. The AHCA would increase the limit on HSA contributions to the sum of the annual deductible plus the amount of out-of-pocket expenses allowed under a high deductible health plan ($6,550 for self-only coverage and $13,100 for family coverage starting in 2018). The AHCA would also allow spouses to make catch-up contributions to one HSA starting in 2018.
- Health Savings Account Distributions. Health Savings Account distributions that are used for qualified medical expenses are not taxable, while HSA distributions that are not used for qualified medical expenses are included in income and subject to a penalty tax. The AHCA lowers the penalty tax on non-medical expense distributions.
- Medicare Tax. The ACA created a Medicare Hospital Insurance tax based on income at a rate of .9% of an employee’s wages. The AHCA repeals the additional tax starting in 2018.
- Tax Credit for Health Insurance. The AHCA creates a new, refundable age-based tax credit to help individuals purchase state-approved medical insurance coverage and unsubsidized COBRA coverage. An individual eligible for the credit must not have an offer of coverage from an employer or be eligible for a government health insurance program. Credits are adjusted by age and capped by family status. The federal government will determine eligibility for the credit. An employer must, at the request of an employee, provide a statement identifying if the individual is eligible for employer-provided health coverage.
- Reporting of Health Coverage on W-2. The AHCA anticipates a simplified reporting of offers of coverage on Form W-2. Congress cannot repeal the W-2 reporting rules, so the AHCA anticipates Treasury no longer enforcing the reporting requirement when it is not needed for tax purposes.
- Continuous Heath Insurance Coverage Incentive. Beginning with the 2019 benefit year, insurers will implement a 12-month look-back period to determine if an applicant had more than 63 days without continuous health insurance coverage. If an applicant had a lapse in coverage for more than 63 days, issuers will impose a 30% late-enrollment surcharge. The surcharge will last 12 months.
- Small Business Tax Credit. The AHCA repeals the Small Business Tax Credit starting in 2020. Between 2018 and 2020, the Small Business Tax Credit will not be available to a qualified health plan that provides coverage for elective abortions.
- Medicare Part D Incentive. Before the ACA, some employers who offered prescription drug coverage to retirees were eligible to receive a tax subsidy. The AHCA re-implements the business-expense tax-deduction for retiree prescription drug costs without requiring the reduction of a subsidy amount received.
- Income Threshold for Medical Expense Deductions. The AHCA re-implements the adjusted gross income threshold for deducting qualifying medical expenses to 7.5% beginning in 2018.
Other items of interest, perhaps not directly impacting most employers:
- Tanning Tax. The 10% sales tax on indoor tanning services is repealed.
- Payment from Insurers. The ACA prohibited certain health insurance providers from deduct compensation over $500,000 paid to an officer, director or employee. The AHCA repeals the limit starting in 2018.
- Health Insurer Tax. The annual insurance tax imposed on health insurance is repealed after December 31, 2017.
- Prescription Medication Tax. The annual fee on certain brand pharmaceutical manufacturers is repealed after December 31, 2017.
- Federal Payments to States. The AHCA imposes a freeze on funding to certain programs that provide abortions.
- Medicaid Changes. The AHCA repeals certain Medicaid expansion implemented by the ACA and reforms federal Medicaid financing.
- Patient and State Stability Fund. A new fund is created for states to use to help individuals who do not have access to employer health coverage.
Employers need to pay close attention to the future development of the AHCA. The U.S. House of Representatives will vote on the legislation after it passes the Budget Committee. If approved, it will move to the U.S. Senate, where changes can be made. If the AHCA is passed with the repeal of the employer mandate, it is likely that employers’ 1094/1095 reporting requirements will change. Employers may have new reporting requirements to reflect the continuous health coverage incentive. All employers should continue to follow health care reform developments to determine the impact of any new rules.
