This is the third in a series of Baker Tilly articles exploring the impact on ongoing U.S. healthcare reform.
On March 6, the Republican leadership in the U.S. House of Representatives released the American Health Care Act (AHCA) — proposed legislation to repeal and replace the Affordable Care Act (ACA). Drafts from both the House Ways and Means and the Energy and Commerce Committees include provisions modifying the existing ACA.
While eliminating the individual and employer mandates and most of ACA-related taxes, the AHCA retains the provision which allows:
- Children to remain on their parents’ insurance policies until age 26
- Prohibitions of coverage denial for individuals with pre-existing conditions
- Lifetime coverage caps. It also makes significant modifications to the premium tax credit system used to subsidize coverage for low-income Americans.
The following chart compares some of the AHCA provisions with current law.
Affordable Care Act
|American Health Care Act |
|Individual mandate||Individuals required to purchase insurance or pay a penalty||Penalty reduced to zero for months beginning after 12/31/15|
|Employer mandate||Applicable large employers required to provide certain level of insurance to certain percentage of employees||Penalty reduced to zero for months beginning after 12/31/15|
|Additional Medicare tax||0.9% surtax imposed on wages or self-employed income in excess of certain thresholds||Repeals beginning in 2018|
|Net investment income tax||Imposes a 3.8% surtax on net investment income of taxpayers with income in excess of certain thresholds.||Repeals beginning in 2018|
|Medical device tax||Imposes a 2.3% excise tax on sales of certain medical devices||Repeals beginning after 12/31/17|
|Health savings accounts (HSAs)||Basic contribution limit begins at $3,400 (self-only) or $6,750 (family). Disallows over-the-counter medications from HSA distributions. 20% tax rate on distributions not used for qualifying medical expenses||Basic contribution limit begins at $6,550 (self-only) or $13,100 (family) beginning in 2018. Includes over-the-counter medications in allowable distributions from HSAs. Also reduces the tax rate on non-qualified distributions. Spouses eligible for catch-up contributions to a single HSA beginning in 2018.|
|Flexible savings account||Employers or individuals limited to $2,500 annual contribution; indexed for cost-of-living adjustment||Repeals limitation on contributions|
|Premium tax credits||Households receive premium tax credits, based on income, to purchase qualified health coverage Repayment of excess premium credits to federal government limited based on income|
|Refundable tax credit for health insurance||Not applicable under ACA|
|Cadillac tax||40% excise tax imposed on high-cost employer-provided health coverage effective in 2020||Effective date of 40% excise tax on high-cost employer-provided health insurance delayed until 2025|
|Medical expense deduction||Medical expense deduction threshold is 10% of AGI||Medical expense deduction threshold drops to 7.5% of AGI|
|Offer of coverage reporting||Forms 1094/1095 reporting required of insurance providers, including exchanges and employers||Enacts, over time, simplified W-2 reporting by employers. Does not appear to offer immediate relief to reporting procedures|
For further information regarding this legislation, please see the House Ways and Means Committee section-by-section analysis of the bill.
By repealing the mandates for individuals to purchase, and employers to provide health insurance, the AHCA removes the requirement for citizens to have insurance. However, the AHCA does impose a 30 percent premium surcharge on individuals who purchase a policy only when necessary. Eliminating the various ACA taxes and fees, such as the net investment income tax, creates a funding issue for the new proposed refundable tax credits.
The estimated price tag of repealing ACA-related taxes as prescribed by the AHCA as currently drafted will be approximately $593.7 billion over the next decade, according to the Joint Committee on Taxation. However, this does not include the revenue loss scores which have not yet been released by the Congressional Budget Office. The unscored items include funds tied to repealing the individual and employer mandates to buy health coverage. In summary, the actual cost of the new AHCA provisions has also not yet been determined. Consequently, there is already bipartisan concern over these draft bills. While the House leadership has indicated quick passage, it is unclear whether there will be enough votes to move this legislation forward in Congress.
Baker Tilly observations – what this means to you
- The AHCA, as currently drafted, has multiple effective dates depending on the specific provision. The ACA-related taxes remain in effect through 2017, so net investment income and wages in excess of the thresholds remain subject to the respective surtaxes.
- Since both mandates are repealed as of 2015, it would appear the corresponding Forms 1094/1095 reporting would no longer be necessary. However, the language of the bill indicates this reporting would still be required in the short-term. Given the timing of this draft legislation, most forms should have already been provided to employees and the Internal Revenue Service (e-filed forms are due to the IRS by March 31, 2017). Since much of the information will be necessary for the premium tax credits, which aren’t phased out until 2020, it’s possible no reporting relief will occur until then.
- It appears the AHCA legislation is building upon certain ACA provisions while eliminating others. Certain ACA provisions do not seem to be addressed at all. For example, the draft bill is silent on the caps placed on annual and lifetime benefits pre-ACA. Presumably, since they are not specifically repealed, they will remain in effect. House committees are expected to begin reviewing the AHCA this week. Department of Health and Human Services Secretary Tom Price, along with the White House, have indicated the AHCA is the first step in repealing and replacing the ACA. Steps two and three will be regulatory (including removal of state barriers to purchasing insurance) and additional legislation, respectively.
The AHCA already has four GOP senators speaking out in opposition. The Act is also unlikely to garner any Democratic support in its current form making it difficult to pass the Senate via the reconciliation process (meaning a simple majority vote). While this may be the starting point for discussions, we don’t expect this to be enacted without meaningful changes.
Baker Tilly tax specialists will continue to keep you informed on significant healthcare reform proposals and enacted legislation.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.