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Health Care Reform Moves to the Senate (article)

CBIZ is monitoring the health care reform legislation, as it could affect tax reform discussions.On May 4, 2017, the House passed the American Health Care Act of 2017 (AHCA),.  Since the initial bill was officially introduced on March 20, 2017 there have been several amendments made to the law’s text. The bill will now progress to the Senate for consideration. Its fate in the Senate is unclear at this point. Every indication is that the bill will undergo significant scrutiny and substantial changes. 

Individual & Employer Shared Responsibility Provisions

While the AHCA retains the actual language of the current law as it relates to potential penalties, the employer-shared responsibility “no coverage” excise tax, and the “inadequate or unaffordable” excise tax, as well as the penalty applicable to individuals who fail to maintain essential health coverage, is reduced to zero. If these provisions are preserved in the final law, they would be made retroactive to those impacted by the penalty in 2016.

For individuals, the AHCA would repeal the ACA’s premium assistance tax credit and cost-sharing available to individuals who fall below 400 percent of the federal poverty level, replacing it with an advanced, refundable tax credit for the purchase of state-approved, major medical health insurance and unsubsidized COBRA coverage for U. S. citizens who do not have access to employer or government-sponsored coverage, or who are otherwise exempt. The credits are age-adjusted as follows:

Age of Individual

Amount of Credit

Under 30

$2,000

Between 30 and 39

$2,500

Between 40 and 49

$3,000

Between 50 and 59

$3,500

Over 60

$4,000

The credits are capped at $14,000, and are available to individuals whose income is less than $75,000 per year ($150,000 joint filers). The credit phases out by $100 for every $1,000 in income higher than those thresholds. Additionally, due to differences between California law and the AHCA, it is not currently clear that California residents will be able to use these credits.

Market Reforms 

While AHCA purports to maintain many of the market provisions of the ACA such as coverage of adult children up to age 26 and the prohibition of caps on lifetime and annual limits, it grants states the right to seek a waiver for up to 10 years for certain purposes. In particular, states could apply for waivers to establish their own essential health benefit package in the individual and small group market (the initial bill would have retained the ACA’s ten essential health benefits mandate), as well as set their own cost sharing limits, including out-of-pocket limits.

With regard to preexisting conditions, a state could seek a waiver that would permit health status underwriting for individuals who experience extended gaps in coverage. Accordingly, the bill would address gaps in coverage by allowing insurers to impose a 30 percent premium increase for 12 months if an individual experiences more than a 63-day gap in coverage. Furthermore, employer-sponsored plans would be allowed to use the coverage rules of any state of their choosing. Thus, employer plans could limit coverage of pre-existing conditions or impose caps on coverage, even if their state did not seek a waiver. As an alternative, states establishing a high risk pool could engage in more aggressive underwriting for individuals who will be placed in the high risk pool.

The latest amendment to AHCA provides for an additional $8 billion in federal funds for the period between 2018 and 2023 to be allocated to states with health status underwriting waivers. Consulting firm Avalere Health conducted analysis and found that the AHCA would allocate $23 billion to help people with pre-existing conditions, which would cover about 110,00 people. Furthermore, Avalere found that if states used all other forms of funding provided by the AHCA’s Patient and State Stability Fund, around 600,000 people could be covered. According to Avalere, around 2.2 million individuals today have pre-existing chronic conditions.

Waivers could also be sought to allow aged-based or other premium rating also known as community rating requirements. Currently, the law limits the cost of the most generous plan for older individuals to three times the cost of the least generous plan for younger individuals. The AHCA would loosen the ratio to five-to-one and allow states to set their own ratio. The aged-based rating provision is creating concern for AARP, among many other professional associations and patient advocacy groups. If a state successfully sought a waiver for these requirements, insurers would also be able to charge more based on a patient’s health history, regardless of whether there was a lapse in coverage longer than 63 days. 

Repeal of ACA Provisions 

Among the ACA provisions that would be repealed include:

  • The Small Business Tax Credit, beginning in 2020;
  • Flexible medical spending account cap (currently $2,600, indexed for 2017);
  • Health insurance tax imposed on insurers;
  • Reduction of Medicare Part D retiree drug subsidy;
  • Medicaid tax imposed on high earners – the unearned income and 0.9 percent tax surcharge, beginning in 2023;
  • Medical device excise tax;
  • Branded prescription drug tax;
  • For health savings accounts and other reimbursement arrangements, the tax favored status of over-the-counter medications would be returned; and
  • The 3.8 percent net investment tax on individuals, estates, and trusts with income above certain levels.

With regard to other ACA-imposed taxes, the AHCA further delays the imposition date of the Cadillac tax on high cost of employer-sponsored coverage until 2026. In addition, the income threshold for the medical expense tax deduction would be returned to 5.8 percent of income, from 10 percent under the ACA. Notably, this bill does not repeal the ACA’s Patient-Centered Outcomes Research (PCOR) fee. The ACA’s requirement to pay the transitional reinsurance fee ended last year.

With regard to the employer’s reporting obligation under the ACA to include the cost of health coverage on the Form W-2, the bill would create a new entry on the W-2 whereby the employer would indicate whether an individual was offered coverage. Presumably, this could ultimately take the place of the current IRC Section 6056 reporting obligations, i.e., the C series of the Forms 1094 and 1095.  For the moment, this obligation remains in full force and effect.

HSA Expansion 

The AHCA intends to expand Health Savings Accounts (HSA) beginning in 2018 in the following ways:

  • Increase the annual tax-free contribution limit to equal the limit on out-of-pocket cost sharing under qualified high deductible health plans (HDHP), subject to indexing.  For 2017, the HDHP annual out-of-pocket limit is $6,550 for individual/self-only coverage, $13,100 for family coverage.  In 2018, the HDHP out of pocket limit is indexed at $6,650 for individual/self-only and $13,300 for family;
  • Both spouses could make catch up contributions to the same HSA;
  • Modify qualified medical expense definition to include over-the-counter medications;
  • Reduce tax penalty for HSA withdrawals used for non-qualified expenses from 20 percent to 10 percent; and
  • Create a special rule for certain medical expenses incurred prior to establishing an HSA.

Changes to Medicaid 

The ACHA would roll back the Medicaid expansion framework established by the ACA. The bill would create a per capita Medicaid funding system and allow states to impose a work requirement for certain able-bodied individuals.

We will keep you updated as this bill progresses in the Senate. In this interim, remember the Affordable Care Act has not been repealed, and remains in full force and effect.

For more information on tax reform, please contact your CBIZ MHM tax professional.

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CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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