American Health Care Act (AHCA) Passes the House of Representatives
By Michael D'Addio, Principal, Tax & Business Services
The House of Representatives passed by a narrow margin the American Health Care Act (AHCA). The successful vote was the result of several amendments which brought the more conservative Republican House Members (the Freedom Caucus) on board. Our Tax Bulletin dated March 22, 2017 was our last update describing the provisions of the bill as amended, which was subsequently pulled from consideration without a vote.
The current bill, which now goes on to the Senate for consideration, contains many significant changes while retaining many provisions from the original draft. Some of the major items are summarized below, including the tax provisions.
ACA Provisions Retained
- Dependents can stay on their parents’ health plan until age 26.
- Federal and state exchanges listing individual and small business health insurance plans will continue under the AHCA.
State Elections to Opt Out of Certain ACA Rules
- Essential Health Benefits. While health insurance plans under the Affordable Care Act had to provide for a bundle of benefits called “essential health benefits,” under the AHCA states will be able to opt out of this provision. It must use a process where it requests a waiver to opt out. The result of this action is that insurers in the state can market policies which do not offer all of the “essential health benefits,” which include outpatient care; emergency room trips; in-hospital care; pregnancy, maternity and newborn care; mental health and substance abuse disorder services; prescription drugs; rehabilitative services; lab tests; preventive services; and pediatric services. This is intended to reduce the cost of policies for those who select a policy which does not include all of such benefits. For example, a male would not need to purchase a policy including pregnancy and maternity coverage. The portion of this provision relating to Medicaid was already in the prior bill. The amendments extended this rule to policies sold in the individual market.
- Premium Rating (pre-existing conditions). A state can opt out of the requirement that premiums be the same for all people of the same age. This will permit insurers to charge different rates for those with pre-existing conditions. While the law requires that the insurer must provide access to coverage, there is no limit on the premium which can be charged for such coverage. A new $8 billion fund will be established to help lower premiums for individuals affected by this rule.
- Age Rating. The ACHA permits a 5:1 different in rates charged for older persons versus younger persons. However, a state can opt-out of this provision and can adopt different ratios effective in 2018.
Medicaid (A number of changes are made to the Medicaid program)
- The AHCA would end Medicaid expansion in 2020. Prior to Obamacare, entitlement to Medicaid was restricted to specific groups of low-income Americans. The Affordable Care Act expanded the program to anyone who earned less than 133% of federal poverty level. Thirty one states, including some with Republican governors, participated in the Medicaid expansion program. The AHCA will not end the expansion immediately. States will be able to enroll people into the Medicaid program until 2020. Additionally, those states that have not participated will be able to opt in to the Medicaid expansion program and enroll residents over the same time period. The program will be frozen in 2020, and states will not be able to sign up new enrollees. It is expected that the Medicaid rolls will decline as enrollees earn higher incomes or otherwise leave the program.
- A new section of the Social Security Act would be created to give States the option of instituting a work requirement in Medicaid for nondisabled, nonelderly, non-pregnant adults as a condition of receiving coverage under Medicaid. The act defines activities as those deemed work activities for this purpose. The work requirement cannot be imposed on: pregnant women; children under age 19; an individual who is the only parent or caretaker of a child under age of 6 or a child with a disability; or an individual under age of 20 who is married or the head of the household who maintains satisfactory attendance at school or who participates in education directly related to employment. A state imposing statement imposing the work requirement can get a 5% administrative Federal Medical Assistance Percentage bump.
- In 2020, Medicaid will shift to a “per capital cap” system where states will receive a lump sum for each enrollee (instead of the current unlimited commitment of the federal government).
- States can elect to receive “flexible” block grants for a period of 10 years rather than providing care through the per capital allotment. This election carries certain reporting obligations by the state.
- Eligibility Redetermination will be required each six months.
ACA Tax Provisions
Individual Mandate. The shared responsibility payment on individuals who do not maintain health insurance coverage is repealed immediately. The AHCA also provides for penalty relief available for those who would be subject to the penalty in 2016 – effectively making the repeal retroactive to December 31, 2015. If passed, this may produce refund claims for those who included the shared responsibility payment in their 2016 tax liabilities.
New Penalty Provision for Individuals. While the individual mandate is repealed, the AHCA contains a provision which penalizes someone who does not maintain “continuous coverage.” If there is a lapse of coverage longer than 63 days, then the individual purchasing health coverage on the individual market can be charged a 30% premium surcharge for a full year before returning to the standard rate. Under this rule, this “penalty” is paid to the insurer and not to the government.
A continuous coverage provision has been a part of several Republican replacement plans. One version suggested a surcharge of 150% of the standard premium for 18 months.
Since the surcharge is the same for healthy and sick, this provision may have the unintended consequence of delaying the purchase of health insurance until one is sick (when the surcharge would be worth it). This can drive up insurance costs in general.
New Tax Credit Structure. The AHCA retains the idea of subsidizing health insurance costs through the use of tax credits but significantly changes the formula used to determine the eligible credit.
The ACA premium tax credits were linked to: 1) purchasing health insurance on a state or federal exchange; 2) not having been offered affordable coverage by an employer; and 3) having certain levels of Household Income. Those earning less than 200% federal poverty level received the highest credits while those earning more than 400% of federal poverty level were phased out to zero.
For 2018 and 2019, the ACA tax credits are retained but modified:
- There will be an increase to the credit amounts for young adults with income greater than 150% of Federal Poverty Level and a decrease amounts for adults 50 years old or older at same income level.
- The excess of the advanced subsidies received from an exchange over the actual tax premium credit computed on the insured’s income tax return will be fully due to the government. There will be no caps on the amounts due.
- Tax credits cannot be used for plans that cover abortion.
- Premium tax credits can be used for the purchase of catastrophic health insurance.
- Premium tax credits are extended to plans purchased outside of a federal or state operated exchange. However, the insurers will not offer advance subsidies for plans purchased outside of the exchange.
For 2010, the AHCA bases tax credits mostly on age with a phase-out for income. For 2010, credits are established for certain age ranges for taxpayers who earn up to $75,000 a year ($150,000 for married joint filers):
- $2,000 for those under 30.
- $2,500 for those between 30-39.
- $3,000 for those between 40-49.
- $3,500 for those between 50-69.
- $4,000 for those 60 or older.
Families can combine the credits with a maximum credit of $14,000 for a single family.
The listed credits are reduced at a rate of 10 cents for each $1 of income above the income thresholds.
The ACA cost-sharing subsidies (intended to lower out-of-pocket costs for those earning between 100% and 250% of federal poverty level) are eliminated under the AHCA beginning in 2020. The AHCA established a Patient and State Stability Fund funded with $100 billion over nine years which can be used for a number of purposes, including offsetting the loss of this benefit. States are required to match this fund.
Employer Mandate. Employers will no longer be required to offer affordable coverage to employees. The employer shared responsibility payment will be repealed immediately with a relief provision for 2016. This effectively eliminates the penalty for Applicable Large Employers retroactively to 2016.
Since there is no Individual Mandate or Employer Mandate, the reporting regime established under the ACA should be eliminated.
- The 3.8% Net Investment Income Tax is repealed for tax year beginning 2017.
- The 0.9% additional Medicare Surcharge Tax is repealed effective January 1, 2023.
- The Cadillac Tax is retained, but delayed in effect until 2026. It was scheduled to go into effect in 2020, but the new bill suspends any collection for the years 2020 to 2025. Most likely this tax was retained for budgeting purposes so that revenue beginning in 2026 can be counted.
- The annual limit on deducting a salary in excess of $1 million paid to employees of publicly traded corporations is repealed effective 2017.
- The provision under the ACA which increased the penalty on Health Savings Account distributions used for other than qualified medical expenses from 10% to 20% is repealed effective January 1, 2017. This reduces the penalty back to 10%.
- The 20% penalty under the ACA on Archer Medical Savings Account distributions not used for qualified medical expenses is reduced to 15% effective January 1, 2017.
- The provision excluding the cost of over-the-counter drugs as qualified medical expenses for a Health Savings Account, Archer Medical Savings Account, Health Flexible Spending Arrangement, and Health Reimbursement Arrangement is repealed effective January 1, 2017.
- The AHCA removes the $500,000 cap on the amount of executive salaries which an insurer can deduct as a business expense. Under the AHCA, the full amount of payments can be deducted effective 2017.
- Health Savings Account rules for 2018 will be substantially changed.
– Limits will be increased from $3,400 in 2017 to $6,550 in 2018 for individuals and from $6,750 in 2017 to $13,100 in 2018 for families. The limits stated in the law for 2018 are minimum amounts since they could be adjusted for inflation.
– The accounts can be used to purchase over-the-counter drugs without a prescription.
– Spouses will be able to make catch-up contributions to the same Health Savings Account.
– The additional tax on using funds for non-medical purposes is reduced to 10% (discussed above).
– A new rule would provide that if an HSA is established within 60 days of the date that a medical expense is incurred, the plan will be deemed to have been in place for determining if it is a qualified medical expense.
- The floor for deducting medical expenses is reduced from 10% to 5.8% of Adjusted Gross Income, retroactive to 2017. This is lower than the old 7.5% AGI and is intended to provide additional relief to those with “high” medical costs. In part, this offsets the harm of high deductibles. However, since the medical deduction may be eliminated under the Trump tax plan, this change may be meaningless.
- The Medical Device Excise Tax is repealed as of 2017.
- The annual fee on health insurers is repealed as of 2017.
- The 10% tanning tax is repealed effective January 1, 2017.
- The deduction for employers who receive Part D retiree drug subsidy payments to provide creditable prescription drug manufacturers is reinstated as of January 1, 2017.
- The Small Business Tax Credits will end in 2020.
Several versions of the Republican plan capped the tax exclusion for employer-sponsored health coverage, making health plan costs subject to income tax for the employee.
Structure, Reporting Lines, and Appropriate Authorities to Execute Financial Reporting
- Periodically evaluate the organization’s structure and make necessary changes based on changes in the business.
- Define areas of authority and responsibilities of management.
- Define a structure for assigning ownership of data, including who is authorized to make and/or modify transactions.
Individual Accountability for Their Internal Control Responsibilities
- Ensure management, employees and others are made familiar with policies and procedures set by the company.
- Empower employees to correct problems and implement improvements in their assigned areas.
- Rewards, such as merit pay and other incentives, can foster an appropriate ethical tone.