2017 year-end tax letter | Healthcare update

Authored by Eric Pochas, Michelle Hobbs and Stephen Sutten

Administration chisels away at the ACA

On Oct. 12, the president signed a pair of executive orders designed to reshape the trajectory of our nation’s health insurance markets. These orders were the latest in a string of actions taken by the administration in an attempt to chisel away at the Affordable Care Act (ACA).

First, in support for his campaign commitment to increase healthcare choice and competition, the president directed various government agencies to explore ways to expand rules for association health plans (AHPs). The intent here is to implement conditions that would make it favorable for more employers to band together and even cross state lines to purchase healthcare plans.

Second, the president announced he would end payments to insurers for subsidizing low-income market participants. Until effectively closing it, this door had remained open by a 2016 lawsuit filed and won by the House of Representatives. As part of that lawsuit, a federal judge ruled the Obama administration had been improperly funding the ACA subsidy program. The decision was subsequently appealed but not acted upon before the signing of this second order.

What these orders mean to large employers

Large employers are left largely unaffected by these actions. Employers of more than 50 employees remain bound by the ACA’s mandates as they pertain to offers of coverage, coverage requirements and the ACA’s annual reporting obligations.

What these orders mean to small employers

For small employers, many of whom continue to struggle with offering insurance despite having access to mechanisms such as the ACA’s Small Business Health Options Program (SHOP) marketplace, these orders may give way to more favorable coverage conditions. Potential changes to the Employer Retirement Income Security Act (ERISA) and related regulations could allow more employers to band together to offer healthcare coverage to their employees, building large insurance pools of small employers, which may mean that new trade or professional AHPs will form for the sole purpose of offering group insurance.

The order also may dial back restrictions on health reimbursement arrangements (HRAs). It directs the agencies to consider allowing employers to direct funds into an HRA that can be used by employees to pay premiums for health plans purchased on the individual market. These tax-favored “standalone HRAs” were eliminated when the employer shared responsibility mandate took hold. Only recently were they modestly reintroduced for use by small businesses with fewer than 50 full-time employees.

What these orders mean to individuals and insurers

The impact of these orders upon individuals will not be known until the regulations and guidance are written around them, a process which is expected to take up to a year to complete. Speculation is wide and varied with respect to the implications of eliminating the cost-sharing reductions, which total about $7 billion this year. Some insurers had anticipated this action and adjusted accordingly. All are levying rate hikes in different ways. The market in general is expected to churn with uncertainty heading into the open enrollment period. Rather than absorb the mandated payments, some may use the elimination of them as grounds to back out of their federal contracts to sell health plans for 2018.

Individuals purchasing marketplace coverage remain eligible for premium assistance tax credits, which are awarded based on household income and size factors. Those not already eligible for these tax credits may feel the order’s biggest cost impact.

Also remaining in play is the ACA’s individual mandate. In fact, for the upcoming 2018 filing season, the IRS announced it will not accept electronically filed tax returns where an individual taxpayer does not address the health coverage requirements of the ACA.

Lastly, the order calls for changes to the availability of short-term, limited-duration insurance plans, or STLDIs. The Obama administration prohibited STLDIs that last longer than three months and barred individuals from renewing them. The executive order reverts the availability of these plans back to the pre-2016 rule of less than a year (364 days).

Chiseling away

In addition to ending subsidies and setting a course toward new types and paths to coverage, the Trump administration is taking other measures to chisel away at the ACA. It slashed funding for advertising and Health Insurance Marketplace enrollment support. It also reduced the length of the marketplace’s annual enrollment period. In early October, the administration introduced new policies that will allow virtually any employer to claim a religious or moral objection to the ACA's birth control coverage mandate.

Time will tell just how significant a role these executive orders will play for small and big businesses as well as individuals. Until then, the ACA remains the law that drives how, when and where most people are able to go to include themselves among the ranks of the insured.

ACA reminders

After several attempts to pass some kind of reform, the Senate has tabled ACA repeal and replace to 2018 or 2019 (the House passed the American Health Care Act in June) in an effort to win over additional senators. Our ongoing healthcare series of articles details each iteration of attempted reform. Below is a brief reminder of the ACA requirements.

Individual mandate

2017 is the fourth year individuals are required to carry minimum essential coverage (MEC) or face a penalty (individual shared responsibility penalty). Individual taxpayers must have coverage for themselves and their tax family members throughout the year. This year, the penalty for not maintaining coverage is 2.5 percent of annual household income (capped at the national average premium for a bronze health plan sold in the marketplace) or $695 per adult ($347.50 per child under 18) up to a maximum of $2,085. If a penalty is due, Form 8965, “Health Coverage Exemptions,” is used to calculate the amount to be reported on line 61 of Form 1040, “U.S. Individual Income Tax Return.”

Statutory exemptions from maintaining coverage include individuals with income below the minimum threshold for filing an individual tax return, members of federally recognized Indian tribes, members of a religious sect recognized as conscientiously opposed to accepting insurance benefits and non-U.S. citizens, U.S. nationals or aliens not lawfully present in the country. Taxpayers meeting one of these exemptions must include Form 8965 as part of Form 1040. Other exemptions can be found at irs.gov.

Employer mandate

Applicable large employers (ALE) with more than 50 full-time or full-time equivalent (FTE) employees must continue to offer affordable minimum essential coverage to at least 95 percent of their employees in order to avoid paying the employer-shared responsibility payment. An FTE is an employee working more than 30 hours per week and can include common law employees that may currently be treated as independent contractors. Related entities may also impact whether an employer is considered an ALE. The penalty for 2017 is $2,260 per employee (less the first 30 FTEs) and is calculated on a per-month basis.

Employers do not include the employer mandate penalty with the annual tax return. Instead, the IRS calculates the amount, using information from the employer and employee tax returns. The IRS informs the employer using Notice 972CG of any potential penalty calculation. The employer will have an opportunity to respond before any assessment or notice and demand for payment is made. An employer will not be contacted by the IRS until after the employees’ individual income tax returns are due for that year that show claims for the premium tax credit.

Employers with fewer than 25 FTEs may be eligible for the small business healthcare tax credit. Other criteria include an average wage of less than $52,000 per year and payment of at least half of employee health insurance premiums. Coverage must also be purchased through the small business health options program known as the SHOP marketplace.

Qualified small employer health reimbursement arrangements

On Dec. 13, 2016, Congress enacted the 21st Century Cures Act, which permits eligible employers to provide a qualified small employer health reimbursement arrangement (QSEHRA). QSEHRAs are not a group health plan and, therefore, are not subject to the requirements that apply to group health plans. Eligible employers cannot be an ALE nor can they offer a group health plan to their employees. In a controlled group or affiliated service group treated as a single employer, each employer in the group must provide a QSEHRA to all employees, and each employer’s QSEHRA must be provided on the same terms.

A QSEHRA is an arrangement that meets the following criteria:

  1. the arrangement is funded solely by an eligible employer, and no salary reduction contributions may be made under the arrangement;
  2. the arrangement generally is provided on the same terms to all eligible employees of the employer;
  3. the arrangement provides, after the employee provides proof of coverage, for the payment or reimbursement of medical expenses incurred by the employee or the employee’s family members;
    1. if medical care was provided during one or more months when the individual for whom the expenses were incurred did not have MEC, the amount of the reimbursements paid from the QSEHRA are included in the gross income of the eligible employee
    2. medical expenses include premiums for other health coverage, such as individual insurance policies
    3. the employee must first provide proof that the individual for whom the expense will be reimbursed has MEC for the month during which the expense was incurred before a QSEHRA can reimburse an expense for any plan year
  4. the amount of the payments and reimbursements for 2017 do not exceed $4,950 for employee-only arrangements or $10,050 for arrangements that provide for payments and reimbursements of expenses of family members. For 2018, the maximum permitted benefit for self-only coverage will be $5,050 and for family coverage $10,250.

QSEHRAs can be used in lieu of employers that previously paid health insurance premiums on behalf of their employees instead of offering a health insurance plan. While a QSEHRA continues to be treated as a group health plan under the Public Health Service Act, for all other purposes is not and, therefore, is not subject to the group health plan requirements that apply under the Internal Revenue Code and ERISA. Such payment arrangements which do not meet the ACA standards of coverage subject employers to a $100 per day per employee penalty.

Written notice to eligible employees must be provided at least 90 days before the beginning of a year for which the QSEHRA is provided. The written notice must include:

  1. a statement of the amount that would be the eligible employee’s permitted benefit;
  2. a statement that the eligible employee should provide the benefit amount to any health insurance exchange where an employee applies for advance payments of the premium tax credit; and
  3. a statement that if the eligible employee is not covered under minimum essential coverage for any month, the employee may be liable for an individual shared responsibility payment for that month and reimbursements under the arrangement may then be includible in gross income.

For years beginning after Dec. 31, 2016, a penalty is imposed on eligible employers that fail to timely furnish eligible employees with the required written QSEHRA notice. This penalty equals $50 per employee, up to a maximum of $2,500 per calendar year per eligible employee for failure to provide the written notice. An eligible employer that offers a QSEHRA during 2017 or 2018 must furnish the initial written notice to its eligible employees by the later of Feb. 19, 2018, or 90 days before the first day of the plan year of the QSEHRA.

On Oct. 31, 2017, the Internal Revenue Service issued Notice 2017-67 which includes 79 questions and answers addressing technical requirements and administrative issues regarding the sponsorship of these plans. Included in this guidance are rules for determining eligible employer and employee status, the statutory limit for reimbursement in a given year, the MEC requirement as well as the requirement that the employee provide proof of MEC in order to seek tax-free reimbursement. There is also guidance addressing substantiation for and reimbursement of medical expenses, payroll reporting, coordination with marketplace activity and the failure to satisfy the QSEHRA requirements. The IRS provides an example (Q&A 38) which includes suggested language for a QSEHRA notice. In addition, a Subchapter S corporation does not fail to be an eligible employer if it reimburses health insurance premiums for its 2 percent shareholder-employees.

ACA reporting

Similar to 2016 reporting, the ACA informational returns (Forms 1095-B, 1095-C, 1094-B and 1094-C) are due Jan. 31, 2018, to employees and to the IRS by March 31, 2018, if filed electronically, or Feb. 28, 2018, if paper filed. At the time of publication, only draft forms are available for 2017. Currently, there are no substantial changes to the 2017 drafts as compared to 2016 forms. As in the prior year, ALEs must complete information for all 12 months for any employee who was full-time for one or more months during the year. Instructions for each of the forms are available at irs.gov.

Medical device tax

While in moratorium during 2016 and 2017, the medical device excise tax comes back for sales of taxable medical devices made after Dec. 31, 2017. Form 720, “Quarterly Federal Excise Tax Return,” is due April 30, 2018, for first-quarter 2018 sales. Taxable medical devices are those listed with the Food and Drug Administration under section 510(j) of the Federal Food, Drug and Cosmetic Act unless the device falls within an exemption, such as the retail exemption. The tax is 2.3 percent of the sales price.

ACA-related taxes

The net investment income tax, also known as the 3.8 percent “NIIT,” and the 0.9 percent additional Medicare tax, are both still intact. Even during the multiple iterations of repeal-and-replace bills in Congress over the past several months, these taxes remained in most cases -- likely to balance the cost of repeal. In addition, the recently released tax reform framework does not repeal either tax. So, it appears these taxes remain for the foreseeable future.

As a refresher, the 3.8 percent NIIT is basically a surtax on an individual’s interest, dividend, capital gain, rental and royalty income. Pass-through income from passive activities is also subject to the NIIT. Form 8960, "Net Investment Income Tax — Individuals, Estates, and Trusts," is used to calculate the NIIT which is assessed when AGI exceeds certain thresholds based on filing status. The additional Medicare tax is a surtax on an individual’s earned income in excess of certain thresholds: $200,000 for an individual or $250,000 on a married joint return. Form 8959, “Additional Medicare Tax,” is the form that calculates the amount of this tax.

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.