2017 health care reform: An analysis of the American Health Care Act’s tax provisions
On May 4, the House of Representatives, by a vote of 217 to 213, passed the American Health Care Act, the Republican plan to repeal and replace the Affordable Care Act, as amended. The bill now heads to the Senate for its consideration. This article examines the AHCA's many tax provisions.
The AHCA, in its original form, was released by House Republicans on March 6 and approved by the House Ways and Means Committee and Energy and Commerce Committee on March 9.
The Congressional Budget Office released its scoring of the AHCA on March 13, estimating the AHCA's fiscal and coverage impacts. In short, CBO projected that the AHCA would reduce federal deficits by $337 billion over the 2017-2026 period, with the bulk of the savings coming from reductions in outlays for Medicaid and the elimination of the ACA's subsidies for nongroup health insurance (e.g., the premium tax credit and cost-sharing reductions), and that over the same period, approximately 24 million people would be uninsured as compared to under current law.
A number of amendments were subsequently issued shortly thereafter, which made some substantive and technical changes to the bill and also accelerated the effective date of a number of provisions. CBO updated its report, which generally projected smaller savings over the next 10 years (down from $337 billion to $150 billion).
Another amendment (Amendment #31) was adopted by the House Committee on Rules early on March 24th, which included a delay of the repeal of the 0.9 percent Additional Medicare Tax and a provision requiring states to establish their own "essential health benefits" standards (i.e., in lieu of the federal standards under the ACA). The House was originally scheduled to vote on the bill that day, but the vote was cancelled due to lack of support. Although it had appeared that lawmakers were going to turn their efforts to tax reform, they returned to health care shortly thereafter and made further changes to the bill to gain additional support.
Notably, in April, an amendment authored by Rep. Tom MacArthur, R-N.J., emerged. Under the MacArthur Amendment, states could apply for a waiver from a number of key ACA market reforms, including essential health benefits and certain financial protections for high-risk individuals. Two more amendments were introduced and adopted thereafter—the Upton Amendment, which would provide $8 billion in additional funding for individuals who, as a result of their state obtaining a waiver under the MacArthur amendment, would be subject to increased premiums; and the Palmer-Schweikert Amendment, which would create a $15 billion "risk sharing program" to help states lower premiums.
The AHCA, as amended, would repeal virtually all of the ACA, including the following tax provisions. Except as otherwise provided, the repeal would go into effect in 2017 (the due dates in the original bill were largely accelerated by Amendment #5, as reflected below):
• The individual mandate, retroactively effective beginning in 2016
• The employer mandate, retroactively effective beginning in 2016
• The premium tax credit, effective in 2020 (and modified pending its repeal)
• The 3.8 percent net investment income tax
• The 0.9 percent additional Medicare tax, effective 2023
• The higher floor for medical expense deductions (the AHCA provides a new, lower floor, detailed below)
• The small employer health insurance credit, effective 2020
• The limitation on health Flexible Spending Account contributions
• The so-called "Cadillac" tax on high cost employer-sponsored health plans, while not repealed, would be delayed until 2026
• The exclusion from "qualified medical expenses" of over-the-counter medications for purposes of Health Savings Accounts, Archer Medical Savings Accounts, Health Flexible Spending Arrangements, and Health Reimbursement Arrangements
• The ACA's increase to the additional tax on HSAs and Archer MSAs for distributions not used for qualified medical expenses, reducing the percentages from 20 to 10 and 15 percent, respectively
• The annual fee imposed on branded prescription drug sales
• The medical device excise tax
• The annual fee on health insurance providers
• The elimination of a deduction for expenses allocable to Medicare Part D subsidy
• The 10 percent tanning tax, effective June 30, 2017
• The disallowance of any deduction for "applicable individual remuneration" in excess of $500,000 paid to an applicable individual by certain health insurers.
The main feature of the AHCA's ACA replacement would be a new refundable tax credit for health insurance, described below. The AHCA would also make a number of significant changes to strengthen HSAs in addition to those described above, as well as reduce the "floor" for deductible medical expenses.
• Health insurance coverage credit. The AHCA would create a new refundable tax credit for health insurance coverage equal to the lesser of:
i. The sum of the applicable monthly credit amounts (below) or
ii. The amount paid by the taxpayer for "eligible health insurance" for the taxpayer and qualifying family members.
Observation: The original bill provided that the new credit would be in a new Code Sec. 36C. However, one of the amendments (Amendment #4), instead of creating a new Code Section, instead strikes the existing text of Code Sec. 36B and replaces it with the text for the new credit, effective for 2020. Citations below to "new Code Sec. 36B" reflect the renumbering in Amendment #4.
• Monthly credit amount. The monthly credit amount with respect to any individual for any "eligible coverage month" (in general, a month when the individual is covered by eligible health insurance and is not eligible for "other specified coverage", such as coverage under a group health plan or under certain governmental programs, like Medicare and Medicaid) during any tax year would be 1/12 of:
A. $2,000 for an individual who has not attained age 30 as of the beginning of the tax year;
B. $2,500 for an individual age 30-39;
C. $3,000 for an individual age 40-49;
D. $3,500 for an individual age 50-59; and
E. $4,000 for an individual age 60 and older.
• Income-based phaseout. The new Code Sec. 36B credit would phase out at higher levels of income. Specifically, it would be reduced by 10 percent of the excess of the taxpayer's modified adjusted gross income (MAGI, as specifically defined) for a tax year over $75,000 (double that for a joint return). The $75,000 amount, as well as the dollar amounts in (A) through (E), above, would be adjusted for inflation.
• Other limitations on the credit. The new Code Sec. 36B credit would be subject to a $14,000 aggregate annual dollar limitation with respect to the taxpayer and the taxpayer's qualifying family members (generally meaning the taxpayer's spouse, dependent, and any child of the taxpayer who hasn't attained age 27). In addition, monthly credit amounts would be taken into account only with respect to the five oldest qualifying individuals of the family. With limited exception, married couples would have to file jointly in order to receive a new Code Sec. 36B credit, and no credit would be allowed with respect to any individual who is a dependent of another taxpayer for a tax year beginning in the calendar year in which such individual's tax year begins.
• Coordination between the credit and other rules. The AHCA would also provide special rules for, among other things, coordinating the new Code Sec. 36B credit with the medical expense deduction under Code Sec. 213, and calculating the credit where the taxpayer (or any qualifying family member) has a "qualified small employer health reimbursement arrangement" under Code Sec. 9831(d)(2).
• Advance credit payments. The AHCA would also direct a number of agency heads to establish an advance payment program for individuals covered under qualified health plans.
The AHCA would make a number of changes intended to strengthen and enhance HSAs, effective beginning in 2018, including:
• Increased contribution limits. The AHCA would increase the maximum HSA contribution limits to equal the sum of the amount of the HSA deductible and out-of-pocket limitation. These limits are currently $2,250 as adjusted for inflation ($3,400 for 2017) for self-only coverage and $4,500 as adjusted for inflation ($6,750 for 2017) for family coverage. Under the AHCA, they would be at least $6,650 for self-only and $13,100 for family coverage beginning in 2018 ("at least" because these amounts will likely increase due to inflation adjustments by 2018).
• "Catch-up contributions" by both spouses. The AHCA would also amend Code Sec. 223(b)(5) to allow both spouses to make "catch-up contributions" to the same HSA.
• Pre-HSA medical expenses. Finally, the AHCA would amend Code Sec. 223(d)(2) to provide a special rule under which, if an HSA is established within 60 days of the date that certain medical expenses are incurred, it would be treated as having been in place for purposes of determining if the expense is a "qualifying medical expense."
• Lower floor for medical expense deduction. The AHCA would provide a 5.8 percent floor for medical expense deductions under Code Sec. 213(a). The ACA had raised the longstanding 7.5 percent floor to 10 percent (with the higher floor phased in over time for certain older taxpayers), effective in 2017.
The amended bill will likely be scored by the CBO in the coming weeks, which may well inform the Senate's deliberation. Senator Bob Corker, R-Tenn., told MSNBC there was no way the healthcare bill would receive a quick up-or-down vote in the Senate and predicted senators would spend "at least a month" studying it.
Republicans hold a narrow 52-seat majority in the Senate, and so Republicans can only afford to lose a few votes and keep the bill moving forward.