Proposed Tax & Other Changes in the American Health Care Act
Author: Shawn Loader
On March 6, 2017, the House Ways and Means Committee and the House Energy and Commerce Committee released the first major proposed legislation from the 115th Congress with the American Health Care Act. This combined bill fulfills several promises made during the presidential campaign and takes the first steps toward achieving certain anticipated tax reform objectives through the repeal of most Patient Protection and Affordable Care Act (ACA) revenue provisions. The bill’s release was preceded in January with the approval of a budget blueprint that will facilitate the consideration of this bill through the reconciliation process, which might present an easier pathway to passage. Read “Election Results May Lead to Tax Changes in the New Year” for more on reconciliation.
Unless otherwise stated, the effective dates for the bill’s proposed changes are for tax periods beginning after December 31, 2017. Notable bill provisions include:
Provisions Affecting Individuals
- Repeal of the 3.8 percent tax on net investment income for single taxpayers earning more than $200,000 ($250,000 for joint filers)
- Repeal of the 0.9 percent additional Medicare tax on wages and self-employment earnings in excess of $200,000 ($250,000 for joint filers)
- Reduction of the 10 percent adjusted gross income (AGI) threshold for claiming medical expenses as itemized deductions to the 7.5 percent pre-ACA level
- Repeal of the additional 20 percent tax on nonqualified distributions from health savings accounts (HSA) and Archer medical savings accounts (MSA); HSAs reduced to 10 percent and Archer MSAs reduced to 15 percent
- Elimination of the shared responsibility penalty for failing to maintain minimum essential health care coverage for individual taxpayers (effective for tax years after December 31, 2015)
- Elimination of ACA-imposed restrictions on purchasing over-the-counter medications with flexible spending account (FSA) funds
Provisions Affecting Businesses
- Repeal of the 10 percent excise tax on indoor tanning services
- Repeal of the 2.3 percent tax on the sale price of taxable medical devices
- Repeal of the annual fee requirement for branded prescription drug manufacturers and importers
- Repeal of the annual fee requirement for entities engaged in providing health insurance
- Elimination of the shared responsibility penalty for failing to provide minimum essential health care coverage for applicable larger employers (effective for tax years after December 31, 2015)
- Elimination of salary deferral limits for FSAs provided within an employer’s cafeteria plan
The proposal retains some popular ACA characteristics, including provisions protecting individuals with pre-existing conditions from coverage denial or inflated premiums and the prolonged eligibility of dependents to remain covered until age 26 under their parents’ plan.
Despite the individual and employer mandates losing the enforcement mechanisms of available penalties, the reporting requirements established with the ACA will remain in the proposal. In addition, the “Cadillac tax” on high-cost health insurance plans also remains, but with a deferral until 2025.
Annual HSA contributions would increase to the amount of the annual deductible and out-of-pocket expenses permitted within a high-deductible plan. This means the limit would be at least $6,550 for individuals and $13,100 for married couples jointly filing in 2018. The proposal would end the prohibition of using HSA or Archer MSA funds for over-the-counter medications. In addition, the proposal contains a provision to allow married couples age 55 or older to make catch-up contributions individually to a family HSA.
A key element of the proposed changes is an incentive to some in the form of a refundable tax credit to help health care coverage costs for individuals not covered by an employer’s group plan or a variety of plans sponsored through a government program, e.g., TRICARE, Children’s Health Insurance Program, U.S. Department of Veterans Affairs and Medicare. This credit will have advance payment provisions paid directly to an approved insurance provider, with any excess deposited into an HSA for the individual’s use toward paying for other qualified health expenses. The credit will be age-based, ranging from $2,000 annually for individuals under age 30 and up to $4,000 annually for individuals age 60 and older. The credit amounts are combined for families—based on the five oldest household members—and capped at $14,000 per year. These amounts are phased out by 10 percent of a taxpayer’s modified AGI exceeding $75,000 ($150,000 for joint filers). Married couples must jointly file to claim this credit, and taxpayers eligible as dependents on another’s return can’t claim the credit on their individually filed Form 1040.
This proposed credit structure would be effective for tax years beginning after December 31, 2019, and replace the current premium tax credits for individuals purchasing insurance through the current health care marketplace, proposed to phase out completely by that same date. In the interim, the proposed legislation removes the existing excess advance payment limit applied to individuals with income below 400 percent of the federal poverty level for tax years between the bill’s passing and 2019. The small business health care tax credit also is proposed to sunset for tax years beginning after December 31, 2019.
Other notable changes with the proposed legislation focus on enabling individual states to customize Medicaid approaches to fit their population’s needs, creating incentives for individuals to maintain continual coverage rather than purchasing it as needed and providing guidance to insurers regarding the allowable age-based adjustments to premiums charged.
The proposed legislation’s changes are numerous and wide-reaching. While the reconciliation process represents the most likely successful path for this legislation, success isn’t considered a certainty in any political environment. Furthermore, the Congressional Budget Office has yet to release a cost estimate for the bill, which could affect what provisions ultimately survive. BKD will continue to monitor this bill as it proceeds through the legislative process. Consult your BKD advisor for factual assessments of the current law and potential planning opportunities any changes might offer.