House-Passed GOP Health Care Bill Completes First Leg of Rocky Journey to Repeal, Replace ACA

May 30, 2017

After some legislative fits and starts, the House of Representatives passed the American Health Care Act (AHCA) (H.R. 1628), by a 217-to-213 vote. The AHCA would eliminate many of the Patient Protection and Affordable Care Act's (ACA) taxes, including the penalties connected with the individual and employer mandates. It also would allow states to request waivers from some ACA market reforms, such as the age and community rating rules and essential health benefits requirements. States also could waive the ACA's ban on charging individuals with pre-existing conditions more for health insurance coverage. In addition, the AHCA contains several changes to Medicaid, including terminating states' ability to expand Medicaid eligibility.

However, it's important for employer-sponsored group health plans to note that the AHCA would not affect the non-tax provisions of the ACA. Those provisions, such as allowing dependents to stay on their parents' plan until age 26, cannot be addressed via the AHCA because the Republicans are using the budget reconciliation process to move the legislation through Congress. That process allows bills to pass the Senate with 51 rather than 60 votes, but the provisions must affect the federal budget, spending, or debt limit. Thus, the provisions of the AHCA that affect employers are tax related.

Road to repeal and replace. Since the ACA's passage in 2010, the Republicans have been attempting to repeal and replace it. It was, in fact, one of President Trump's chief campaign promises. With the Republicans retaining their majority in the House and Senate after the election, President Trump went to work on the task immediately after taking office by issuing an executive order entitled, "Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal." However, the road to repeal and replace was subsequently littered with speed bumps.

Possible roadblock. Although President Trump and fellow Republicans were thrilled about advancing the AHCA, it appears they will encounter a roadblock in the Senate. Shortly after the vote, media reports indicated that Senate Republicans planned to write their own bill and might not even vote on the AHCA.

Senate Majority Leader Mitch McConnell (R-Ky), while supportive of its approval, called the AHCA an "important first step," signaling the Senate's expected changes. Such changes would then rely on subsequent House approval. According to McConnell, Senate consideration of the AHCA will not occur until procedural and budgetary scorekeeping reviews are completed. Thus, the timeline for enactment, if successful in Congress, could span from weeks to months.

According to Sen. Chris Coons (D-Del.), McConnell is not likely to rush through the legislative process. "My guess is that Leader McConnell is going to take some time here, and while he may ultimately pass a bill in the Senate, I think he will send it to conference with the House," he said. Coons further predicted that the conference will "go on a very long time" and that a final bill will not be seen until after the 2018 elections.

EMPLOYER MANDATE

The employer shared responsibility provisions have not been eliminated, but they have been reduced to zero, both for the $2,000 payment for the failure to offer minimum essential coverage and for the $3,000 payment for the failure to offer coverage that is either affordable or of minimum value.

Currently, if a large employer (those with at least 50 full-time employees during the preceding calendar year) fails to offer minimum essential coverage to at least 95 percent of its full-time employees and their dependents, and at least one full-time employee obtains a premium tax credit through a state health exchange, the shared responsibility penalty is $2,000, adjusted for inflation, times the total number of full-time employees (minus 30) employed by the employer. This is assessed monthly, at 1/12 of the $2,000 penalty.

If a large employer offers minimum essential coverage to at least 95 percent of its full-time employees and their dependents but the coverage is either not affordable or not of minimum value, and at least one full-time employee obtains a premium subsidy through a state health exchange, then the employer would pay $3,000, adjusted for inflation, times each full-time employee who receives subsidized coverage in an exchange, subject to a statutory maximum. This is also assessed monthly, at 1/12 of the $3,000 penalty.

The zeroing out of the employer mandate is effective starting after December 31, 2015. However, despite the fact that the AHCA would eliminate the exchanges' premium subsidies, the AHCA does not eliminate employer health coverage reporting requirements, even after December 31, 2015, so, presumably, employers would still have to report whether they made offers of coverage, even after such offers are no longer required.

TAX PROVISIONS

Small business health insurance tax credit. The ACA created a small business health insurance tax credit, which is available for employers with fewer than 25 full-time workers that contribute at least 50 percent of the cost of each of their employees' self-only health coverage. To qualify for the credit, the small employer must obtain health coverage through the Small Business Health Options Program (SHOP) exchange. The credit is available for two consecutive tax years only. According to the Government Accountability Office (GAO), claims for the small employer tax credit have consistently been lower than the number of employers originally thought eligible for the credit, limiting the effect of the credit on the expansion of health insurance coverage through small employers.

The AHCA would repeal the small business tax credit beginning in 2020. Between 2018 and 2020, under the bill, the small business health insurance tax credit generally would not be available with respect to a qualified health plan that provides coverage relating to elective abortions.

Cadillac tax. The ACA imposes a 40 percent excise tax on high cost health coverage, otherwise known as the "Cadillac tax." The excise tax will be imposed on the cost of employer-sponsored health plans that exceed an aggregate value of $10,200 for individual employee-only coverage and $27,500 for family coverage. The ACA scheduled this tax to take effect in 2018. However, the Consolidated Appropriations Act of 2016 delayed implementation of the Cadillac tax to 2020.

The AHCA would further delay the Cadillac tax. The tax would not apply for any taxable period beginning after December 31, 2019, and before January 1, 2025. Thus, the tax would apply only for taxable periods beginning January 1, 2026.

Many of the AHCA's supporters are happy with the delay, but still want full repeal of the excise tax on high cost health plans. "A delay of the 'Cadillac tax' is helpful, but work remains to be done," said the ERISA Industry Committee (ERIC). "ERIC urges the Senate to permanently repeal the Cadillac tax and ensure that the bill going to the President does not subject employers and employees to any additional taxation."

HSAs. Health Savings Account (HSA) distributions that are not used exclusively to pay qualified medical expenses of any account beneficiary must be included in gross income. Currently, an additional tax of 20 percent of that includible amount is imposed. The AHCA would reduce that additional tax to 10 percent, for distributions made after December 31, 2016.

The AHCA would allow both spouses to make catch-up contributions to one HSA, where at least one spouse has family coverage under a high deductible health plan (HDHP). The annual contribution limit can be divided between them, and this would include the catch-up contribution if both spouses are age 55 or older. For purposes of the limitation on catch-up contributions, no other HDHP coverage of either spouse would be taken into account. This would apply to taxable years beginning in 2018.

Also, under the AHCA, the maximum contribution limit to an HSA would be increased to the sum of the limit for the associated HDHP deductible plus other out-of-pocket expenses (other than premiums) for self-only and family coverage, which, for 2018, are $6,650 and $13,300, respectively. This would apply to taxable years beginning after December 31, 2017, and it would almost double the 2018 limits of $3,450 for self-only coverage and $6,900 for family coverage. As under present law, the annual HSA contribution limit for an individual would generally be the sum of the limits determined separately for each month (that is, 1/12 of the limit for the year, including the catch-up limit, if applicable), based on the individual's status and health plan coverage as of the first day of the month.

The AHCA would permit qualified medical expenses incurred before the establishment of an HSA to be reimbursed from the HSA if the account is established within 60 days from the point that coverage starts for the account beneficiary under the associated HDHP. This provision would be effective beginning in 2018.

The AHCA would also decrease the additional tax on HSA distributions that are not used for qualified medical expenses.

Over-the-counter medications. The ACA changed the definition of qualified medical expenses for certain health-based account plans to include amounts paid for medicine or a drug only if such medicine or drug is a prescribed drug or is insulin. The provision applies to reimbursements from health flexible spending arrangements (health FSAs) or health reimbursement arrangements (HRAs), and distributions from HSAs or Archer medical savings accounts (Archer MSAs). The AHCA would strike this provision, and would allow reimbursements for over-the-counter medications to be reimbursed once again from FSAs, HRAs, HSAs, and Archer MSAs. This provision would be effective with respect to taxable years beginning after December 31, 2017.

FSAs. Currently, in order for a health FSA to be a qualified benefit under a cafeteria plan, an employee's salary reduction contributions cannot exceed a dollar limit ($2,600 for 2017). This limitation on health FSA salary reduction contributions would be repealed, effective for taxable years beginning after December 31, 2017.

Medical devices. The ACA imposes a 2.3 percent excise tax on the sale of certain medical devices. In 2015, Congress approved a moratorium on the excise tax for two years. Effective after December 31, 2017, the AHCA would repeal the medical device tax.

Health insurance provider fee. The ACA imposes an annual fee on health insurance providers. In 2015, Congress imposed a moratorium on the fee for one year (2017). The AHCA would repeal the fee after December 31, 2017.

Medicare Part D subsidy. The ACA prohibits firms receiving the Medicare Part D retiree drug subsidy from claiming as a deduction on their corporate tax returns the amount of prescription drug costs for which they are reimbursed. While the subsidy amount remains tax-free, firms are not able to count it as part of their business expenses to be deducted from their taxes. The AHCA would reinstate the business expense deduction by employers for the value of providing retiree prescription drug subsidies without deduction for the amount of any federal subsidy, including Medicare Part D. This provision would be effective for tax years after December 31, 2017.

Medicare tax. The 0.9 percent additional Medicare tax would be repealed under the AHCA. An amendment to the House bill, however, would delay its repeal until 2023.

Deduction for excess remuneration paid by insurers. Under the ACA, the allowable deduction for applicable individual remuneration and deferred deduction remuneration attributable to services performed by applicable individuals that is otherwise deductible by a covered health insurance provider is limited to $500,000. The AHCA would repeal this provision for taxable years beginning after December 31, 2017.

PROVISIONS NOT AFFECTED

Employers will recall that the ACA and its companion, the Health Care and Education Reconciliation Act of 2010 (HCERA), are behemoths. As such, they contain numerous provisions that the AHCA does not address and that are not employer-related. Also, as previously mentioned, many of the employer-related provisions cannot be addressed via the reconciliation process. Thus, the AHCA's repeal-and-replace moniker is a misnomer and, furthermore, whatever its fate, many employer-related provisions that require ongoing compliance would remain in place, including the following:

  • grandfathered plans rules;
  • coverage of dependents up to age 26;
  • reviews of premium increases;
  • prohibition on lifetime and annual limits;
  • prohibition on rescissions of health coverage;
  • requirement to provide preventive care services;
  • requirement that insurers maintain minimum loss ratios;
  • uniform explanation of coverage documents (Summary of Benefits and Coverage);
  • group health plan reporting requirements;
  • claims appeals processes;
  • employer disclosure of health care coverage on W-2 forms;
  • small employer simple cafeteria plans, and
  • waiting period limit.