By Erika M. Medina, USI Northeast Vice President, Employee Retirement Income Security Act (ERISA) Counsel
On March 6, 2017, the House Republicans introduced the American Health Care Act composed of two bills aimed at repealing and replacing provisions of the Affordable Care Act, colloquially called “Obamacare.” The American Health Care Act (the “Bills”) targets the tax, individual and employer mandate provisions of the Affordable Care Act, but maintains the extended dependent coverage provisions and prohibition on pre-existing exclusions. In addition, the Bills introduce provisions to modernize Medicaid; redesign tax credits for the purchase of insurance; redesign low-income health care; and broaden the use and limits of consumer health accounts, such as health Flexible Spending Accounts (“FSA”) and Health Savings Accounts (“HSA”).
The Bills will be reviewed by the Ways and Means, and Energy and Commerce Committees. If approved, the Bills will be introduced to the House Budget Committee, sent to the House Rules Committee, and finally introduced to the House.
The following summarizes some of the main provisions of the Bills applicable to employers and individuals.
Under the Affordable Care Act (“ACA”), an Applicable Large Employer (“ALE”) is required to offer minimum essential coverage (“MEC”) to 95% of its full-time employee (“FTE”) population or pay a penalty (the “A” Penalty) – the employer mandate. In addition, if an ALE offers MEC, but the offer does not also meet the minimum value and affordability requirements and an employee goes to the Exchange, the employer would be assessed a penalty (the “B” Penalty). Under the proposed Bills, the employer penalties (both A and B) would be reduced to $0 effective after December 31, 2015 and applicable on a calendar-year basis.
Currently, ALEs are required to file a Form 1094-C with the Internal Revenue Service and issue Form 1095-C to its FTEs and individuals enrolled in the plan. The Bills propose a “simplified” reporting of health coverage offer within the Form W-2. The current requirement to complete Forms 1094-C and 1095-C cannot be repealed by the Bills, but would no longer be enforceable once the “simplified” reporting is introduced, effectively making the 1094/1095 reporting superfluous.
The ACA also introduced the High Cost on Health care Tax or the “Cadillac Tax” applicable to employer offered health coverage that exceeds an individual or family annual limit. If the employer offered health coverage exceeds the permissible annual limit, the employer would be assessed a 40% tax on the excess coverage cost. The assessment of the Cadillac Tax was delayed until after December 31, 2019. The Bills would further delay the Cadillac Tax until after December 31, 2024.
MEDICARE PART D SUBSIDY
Employers that offer retiree prescription drug coverage and receive a Medicare Part D subsidy for the coverage must limit a business expense deduction to the cost of the prescription drug less the federal subsidy. The Bills would repeal the ACA tax limit requirement and reinstate the ability of employers to claim the total cost of prescription drug coverage without reducing the cost by the federal subsidy. This would be effective after December 31, 2017.
SMALL BUSINESS TAX CREDIT
Under the ACA, small employers with 1) fewer than 25 full-time equivalent employees; 2) whose employees earn less than $50,000 annually; and 3) that pay a uniform percentage of at least 50% of the premium of employee-only coverage are eligible for a Small Business Tax Credit. Under the proposed Bills, small employers will not be eligible to receive the credit if the qualified health plan covers elective abortions beginning January 1, 2018. Furthermore, the credit itself is repealed effective 2020.
INDIVIDUAL MANDATE AND PREMIUM TAX CREDITS
Under the ACA, individuals must be covered by health insurance for the calendar year or pay a penalty – the individual mandate. The Bills would reduce the penalty to $0 beginning after December 31, 2015. However, the Bills would also introduce a “continuous health coverage incentive” that requires an individual to maintain continuous coverage for a 12-month look back period. If the individual lapsed in coverage for a period of 63 days or more, then a 30% premium surcharge would be assessed for a prospective 12-month period.
Currently, if an individual meets certain requirements, the individual will be eligible for a premium tax credit to reduce the cost of Exchange coverage. Beginning January 1, 2018, the premium tax credit would be limited to purchase catastrophic health plans and qualified health plans, not offered through the Exchange. The premium tax credit cannot be used to purchase elective abortion coverage and will be adjusted based on household income and the age of the individual and family members.
Furthermore, beginning tax year 2018 and concluding tax year 2019, individuals will be required to repay any excess premium tax credit amount, regardless of income. The situation may arise when an individual is eligible for the premium subsidy, but due to an increase in salary, the subsidy is reduced causing an overpayment. The premium tax credit will be completely repealed effective January 1, 2020.
INDIVIDUAL TAX RETURNS
The ACA imposed an additional Medicare Tax of .9% on employee wages or self-employment income over $200,000 ($250,000 for joint filers). The Bills would repeal this additional tax effective January 1, 2018.
Under current law, individuals who itemize medical expenses can only deduct medical expenses over 10% of their Adjusted Gross Income. Beginning January 1, 2018, the percentage would be reduced to 7.5% for all taxpayers. Furthermore, for taxpayers and spouses age 65 or older, the 7.5% limit would be applicable beginning January 1, 2017.
Finally, the Bills introduce an advance refundable tax credit that may be used to purchase health insurance through the State or unsubsidized COBRA. To be eligible for the credit, an individual must 1) be a non-incarcerated U.S. citizen, national, or qualified alien; 2) cannot have access to government health insurance or an offer of coverage from an employer; and 3) earns $75,000 or less ($150,000 or less for a joint filer). The credit is adjusted by age as follows:
- Under 30 – $2,000
- 30-39 – $2,500
- 40-49 – $3,000
- 50-59 – $3,500
- Over 60 – $4,000
The credit is aggregated for families and capped at $14,000.
Under the ACA, health FSAs and HSAs have annual limits and cannot be used to purchase over-the-counter medication. Under the Bills, health flexible spending accounts would not have an annual limit and the annual limit for health savings accounts would be increased to the annual maximum out of pocket limit for high deductible health plans (“HDHP”) (currently $6,550 for self and $13,100 for family). In addition, the following provisions would be implemented for health savings accounts:
- Catch-up contributions would be permissible for both spouses;
- Non-medical distributions would be subject to a 10% penalty (rather than the current 20% penalty); and
- An HSA is deemed established the day the individual enrolls in the HDHP so long as the account is opened within 60 days of enrollment.
These provisions would be effective after December 31, 2017.
The Bills would also repeal the following ACA-era taxes, effective after December 31, 2017:
- Medical Device Tax – 2.3% excise tax on the sale of medical devices;
- Tanning tax – 10% tax on indoor tanning;
- Net Investment Tax – 3.8% tax on net investments of individuals, estates and trusts above the statutory threshold;
- Health Insurer Tax – tax on an entity engaged in the business of providing health insurance;
- Prescription Medication Tax – annual fee imposed on each covered entity engaged in the business of manufacturing or importing branded prescription drugs;
- Remuneration from Certain Insurers – deduction for executives capped at $500,000 per officer, director, or employee.
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