Legislation proposed by the Republicans to repeal and replace the Affordable Care Act, called the American Health Care Act (“AHCA”), repeals most of the taxes that were imposed by the Affordable Care Act on employers, their health plans and employees, such as the employer mandate and 0.9% Medicare surtax. The AHCA would not repeal the Affordable Care Act’s insurance coverage mandates, including the elimination of lifetime and annual dollar limits on essential health benefits or requirements to cover dependent children up to age 26. Below is a summary of the key provisions that would affect employers and their health plans.
1. Effect on Affordable Care Act Taxes Relating to Employers and Their Health Plans (other than Account-Based Plans (discussed below)) and Employees:
- The Employer Mandate: The AHCA would repeal the requirement for large employers to provide health insurance to full-time employees or pay a tax penalty. The repeal would be effective retroactively for months beginning after 2015, so that no penalty would be imposed for any failure to offer minimum essential coverage in 2016 or later years.
- Excise Tax on High-Cost Health Plans (the “Cadillac Tax”): The AHCA would not repeal the Affordable Care Act’s 40% excise tax on any “excess benefit” provided under an employer-sponsored plan. Instead, the AHCA would delay the effective date of the tax from 2020 to 2025.
- Medicare Part D Prescription Drug Deduction: The AHCA would reinstate the deduction eliminated by the Affordable Care Act for tax-free subsidies received by employers for providing prescription drug coverage to Medicare-eligible retirees that is actuarially equivalent to Medicare Part D coverage. Accordingly, for taxable years beginning after 2017, employers are permitted to deduct the full cost of providing these prescription drug benefits, even if the employer receives a federal subsidy for providing the benefits.
- Additional Medicare Tax on High-Income Taxpayers: The AHCA would repeal the 0.9% hospital insurance (Medicare) tax on wages in excess of $250,000 (for joint filers) or $200,000. Accordingly, employers would no longer be required to withhold the additional Medicare tax for employees who earn at least $200,000 for tax years after 2017.
- Small Business Tax Credit: The AHCA would repeal the Affordable Care Act’s small business tax credit beginning in 2020; provided that the tax credit would be unavailable starting in 2018 for any small employer sponsoring a health plan that includes coverage for abortion services other than in cases necessary to save the life of the mother or with respect to a pregnancy that is the result of an act of rape or incest.
- Deduction Cap on Compensation Paid by Health Insurers: The Affordable Care Act generally prevented health insurance companies from deducting more than $500,000 for compensation paid to employees, directors, and certain independent contractors in any calendar year. The AHCA would repeal this deduction cap for taxable years beginning after 2017.
2. Effect on Health Savings Accounts, Flexible Spending Arrangements, and other Account-Based Plans
- Tax-free Reimbursement of OTC drugs: The Affordable Care Act disallowed tax-free reimbursement of over-the-counter medicines unless the medicine was either insulin or prescribed by a physician. For tax years after 2017, the AHCA would allow Health Savings Accounts (“HSAs”), Archer MSAs, and health flexible spending arrangements (“health FSAs”) to cover the costs of over-the-counter medicines on a tax-free basis.
- The AHCA would make the following additional changes for HSAs for taxable years after 2017:
- Decrease in Penalty Tax: Distributions from HSAs and Archer MSAs before death, disability, or the age of Medicare eligibility that are not used for qualified medical expenses are included in gross income and subject to a 20% additional tax. The AHCA would decrease the additional tax to 10% for HSAs (and 15% for Archer MSAs), which is the penalty percentage that applied before the Affordable Care Act changed it in 2011.
- Increase in Annual HSA Contribution Limits: The annual limits for amounts individuals may contribute to HSAs currently are unrelated to (and lower than) the maximum amount the statute permits an individual to pay out-of-pocket under a high deductible health plan (“HDHP”) (i.e., are unrelated to the statutory out-of-pocket maximums for HDHPs). The AHCA would increase the amount that individuals may contribute to an HSA to the statutory out-of-pocket maximums for HDHPs. Thus, the annual HSA contribution limits for individuals with self-only HDHP coverage would be at least $6,550 (instead of $3,400), and the limit for individuals with family HDHP coverage would be at least $13,100 (instead of $6,750).
- Catch-Up Contributions By Spouses Permitted to Same HSA: Under current law, the annual HSA contribution limit is increased by $1,000 for individuals who have attained age 55 by the end of the taxable year. But, in order for a married couple with spouses that are both at least age 55 to make two HSA catch-up contributions, a separate HSA must be established in the name of each spouse. The AHCA would allow both spouses to make catch-up contributions to the same HSA.
- Reimbursement Permitted for Medical Expenses Incurred Prior to Establishment of HSA: Qualified medical expenses generally must be incurred after the HSA is established to be reimbursable on a tax-free basis. The AHCA would allow tax-free reimbursement of qualified medical expenses incurred since the effective date of the individual’s HDHP coverage if the individual establishes an HSA within 60 days after the effective date of the HDHP coverage.
- Directing Deposit of Refundable Tax Credit to HSAs: The AHCA would allow individuals who do not have seriously delinquent tax debt to direct the Secretary of Treasury to deposit to the individual’s HSA the excess of any advanceable tax credit for health insurance over the cost of the individual’s health insurance. The contribution by the Secretary would be treated as a rollover contribution to the HSA and, therefore, are not subject to the annual HSA contribution limits. HSA account-holders may generally accept only one rollover every 12 months. The AHCA provides that the Secretary’s deposit would not count as a rollover for purposes of the one-year limitation.
- The AHCA would also eliminate the current $2,500 (indexed) limit on annual salary reduction contributions by an employee to a health FSA under a cafeteria plan for taxable years beginning after 2017.
3. Effect on Reporting Requirements
The AHCA does not propose repealing any of the reporting requirements imposed on employers by the Affordable Care Act, although the reporting requirements may be simplified as a consequence of repealing the employer mandate.
The AHCA would generally provide an individual a refundable tax credit to purchase an individual health insurance policy or unsubsidized COBRA coverage. The new credit would be age-based and would be reduced for individuals with modified adjusted gross incomes exceeding $75,000 ($150,000 for individuals filing a joint return). An individual would not be eligible for the credit if the individual does has access to a government health insurance program or an offer of employer-sponsored group health coverage.
To assist the IRS in enforcing the eligibility requirements for the tax credit, employers would be required to continue to report to the federal government the months for which an individual is offered employer-sponsored coverage. The AHCA contemplates that this reporting might be done on a Form W-2 instead of the current Form 1095-B or 1095-C, but it does not explicitly repeal the Form 1095 reporting requirement.
In addition, an individual must demonstrate that there was not a period of at least 63 continuous days during which the individual did not have creditable health coverage to avoid paying a higher premium for an individual health insurance policy. The AHCA contemplates that an individual would be able to use an employer-provided Form 1095-C or 1095-B to demonstrate continuous coverage.