This is the first in a new series of Baker Tilly articles exploring the impact of ongoing U.S. healthcare reform.
A priority of the 115th Congress and the incoming Trump administration is the repeal and replacement of the Affordable Care Act (ACA). In this article we examine the bill summary of The American Health Care Reform Act of 2017 proposed by the Republican Study Committee (RSC). Early indications are that this proposal will not be enacted via one comprehensive measure, but rather a series of bills over the coming weeks and months. However, the Senate recently enacted a budget resolution allowing for ACA repeal via the reconciliation process. This resolution would allow a budget reconciliation measure repealing the ACA with only 51 votes in the Senate and not subject to the normal filibuster procedures. Lawmakers have not yet determined the content of the ACA repeal legislation.
The initial legislation proposed would fully repeal the healthcare related provisions in the ACA effective Jan. 1, 2018. Presumably, this means that the current individual and employer mandates would be eliminated and the benefit coverage requirements would no longer be needed as part of coverage offerings. Of major significance is that the proposal would be paid for by eliminating health coverage as a nontaxable fringe benefit; instead providing a standard above-the-line deduction for health insurance costs. At this point it is unclear if the initial legislation would also repeal ACA related taxes, such as the 3.8 percent net investment income tax and the medical device tax or if those taxes will be addressed as part of overall tax reform.
Senator Orrin Hatch recently told reporters that not all Republicans appear to have the same approach to eliminating the ACA's taxes, however. Repealing the tax revenues without a replacement plan in place would upset insurance markets. Hatch added that insurers are already in turmoil because of the harmful impact of the healthcare law.
As reported in Tax Notes Today, Hatch said lawmakers don't intend to repeal the tax revenues immediately without having a replacement ready. "That's why they're asking for two or three years to be able to do it. That's an intelligent approach to it," Hatch said. House Speaker Paul Ryan echoed the view toward replacement being a part of the repeal process during a weekly press conference with Republican leaders, saying “it is our goal to bring it all together concurrently.” However, BNA reported that House Ways and Means Committee Chairman Kevin Brady recently said that all tax provisions associated with the ACA must be immediately repealed in legislation to kill the law.
By eliminating the current tax exclusion for employer-paid health insurance (i.e., employer-paid health insurance coverage would be taxable wages) and self-employed health deduction (i.e., no more above-the-line adjustment), a standard deduction for health insurance (SDHI) would instead be created. The SDHI would be an above-the-line tax deduction, $7,500 for individuals and $20,500 for families with qualifying health insurance, and could offset both income and payroll taxes. Employers would not lose their ability to deduct healthcare costs as a business expense.
The proposal also expands usage of health savings accounts (HSA). Currently, HSAs have limited uses and are typically used in conjunction with high deductible health plans. Included in this reform plan, certain restrictions would be lifted: veterans could contribute to HSAs for VA medical services; Native Americans could contribute to HSAs for Indian Health Service (IHS) or tribal medical services; individuals participating in medical-sharing ministries could establish HSAs and individuals enrolled in TRICARE could be eligible for HSAs. Also, contributions to HSAs could be used to purchase long-term care insurance, COBRA coverage and other HSA-qualified policies. The proposal additionally expands upon the list of qualifying medical expenses currently eligible for purchase using HSA contributions. Annual contributions to HSA accounts would be increased to match the deductible and out-of-pocket expense limitation; currently $6,550 for single taxpayers and $13,100 for families in 2017.
In addition, extension of Health Insurance Portability and Accountability Act (HIPAA) protections to Americans with pre-existing conditions is included in reform. Individuals with pre-existing conditions would be protected from insurance exclusions as long as continuous coverage is maintained.
Other elements of the reform proposal include allowing Americans to purchase licensed health insurance in any state, regardless of their resident state. Insurance would still be subject to consumer protections, fraud and abuse laws of the policy holder’s state of residence and federal antitrust laws would be expanded to apply to the health insurance business in order to protect competition and consumers. Small employers would be allowed to pool together, using Association Health Plans (AHPs), their health insurance in order to lower costs and offer more accessibility.
With a 2018 effective date, current coverage options, reporting requirements and mandate penalties are still in effect for the 2017 calendar year. It is possible that transition rules would be enacted to ease the conversion from the ACA to the reformed policies. For now, the information reporting for 2016 health insurance benefits and coverage remains in place. This means Forms 1094/1095 B and C are due to employees by Mar. 2, 2017 and to the IRS by Feb. 28, 2017 (paper) or Mar. 31, 2017 (electronic).
Including employer-provided health insurance premiums as part of an employee’s taxable compensation could mean a tax increase to many taxpayers. The cost of many medical plans exceeds the SDHI amounts listed above. For participants in such plans, to the extent that any premium co-pay their employer subjects them to does not reduce their net benefit below the SDHI amount, those taxpayer will have taxable income on a previously tax free benefit.
As mentioned above, the incoming administration has indicated a desire to expand the use and applicability of health savings accounts. Currently, there are limits to their use and annual contributions. However, monies retained in the accounts grow tax-deferred and withdrawals are tax free if used for qualifying medical expenses (the definition of which would expand under the current proposal, as noted previously). If employers or the government (potentially for low-income taxpayers) were to legislatively encourage taxpayers to make contributions, then HSAs could become a useful tool in managing an individual’s healthcare costs in a tax-favored manner.
As with any proposed legislation, certain key elements may stay in place or differ from the items outlined above once negotiations begin. The details of the replacement/modification of the ACA is likely to be very fluid and changing often as Congress works through different details and considers potential unintended consequences of revisions. A recent Politico article summarized Senator Rand Paul thoughts on the repeal of the ACA and reported that “replacing the law will just be the beginning, predicting it would take many subsequent changes to the law for Congress to get its hands around the problem.” Stay tuned.
Baker Tilly tax specialists will continue to keep you informed on significant healthcare reform proposals and enacted legislation.
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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.