On March 6th, the Republicans took aim to repeal and replace the Affordable Care Act (ACA) by introducing the American Health Care Act (AHCA). This act is an attempt by the Republicans to dismantle the ACA and deliver on one of President Trump’s campaign promises. The AHCA is by no means a complete overhaul of the ACA. Many ACA provisions remain intact or are modified with certain provisions being added. The AHCA, if enacted, will be of particular importance to employers, providing the framework for a strategic road map to plan and design future health care benefits for their employees.
Since the AHCA is being passed through the budget reconciliation process, only revenue related portions of the ACA can be changed. Thus, various ACA market reforms and patient protections would remain in place.
Key ACA items retained by the AHCA:
- The requirement to cover dependent children through age 26
- The prohibition on waiting periods in excess of 90 days
- The requirement to cover essential health benefits for individual and small group market plans
- The prohibition against lifetime or annual dollar limits on essential health benefits
- The annual cap on out-of-pocket expenditures for essential health benefits
- Uniform coverage of emergency room services for in-network and out-of-network visits
- Required first-dollar coverage of preventive health services
- The prohibition of preexisting condition exclusions
- Enhanced claims and appeals provisions
- Provider nondiscrimination
Employers will welcome many of the new proposed features of the AHCA, such as the elimination of employer penalties for failure to offer insurance to full-time employees and the further delay of the Cadillac Tax. This and other features of the proposed AHCA that may impact employers and employees are summarized below.
- Cadillac Tax Delay –The bill delays the Cadillac Tax, the excise tax on employers who provide high cost health insurance from 2020 to 2025. The taxes being retained as a potential revenue raiser. Therefore, employers and plan sponsors should keep the Cadillac Tax on their radars.
- Penalties - The penalties under the individual and employer mandates under the ACA would be reduced to zero, retroactive to January 1, 2016. While this is a welcomed development for employers and employees, cumbersome employer reporting to both the Internal Revenue Service (IRS) and covered individuals will likely continue to be required in some form.
- Premium Subsidies - Government subsidies in the form of premium subsidies and cost-sharing reduction for individuals will be eliminated by 2020. Instead, they will be replaced with new health care tax credits to assist with the purchase of coverage on the individual market. The credits will not be available if the individual has access to other coverage either through an employer-sponsored plan or some form of governmental coverage. The credits which are based on age start at $2,000 for individuals under age 30 and increase in $500 increments for each consecutive 10 year age increment to a maximum of $4,000 for those over age 60. The credits are cumulative for a family to a maximum of $14,000. The credits also phase out for those making over $75,000 per year or more ($150,000 for joint filers). For every thousand dollars of income over those thresholds the credit is reduced by $100.
- HSAs and HFSAs - The AHCA also modifies the tax rules related to Health Flexible Spending Accounts (HFSAs) and Health Savings Accounts (HSAs). The AHCA would remove the annual contribution cap of $2,550 on HFSAs. Additionally, HFSAs and HSAs would again be able to reimburse on a non-taxable basis over-the-counter medication without a prescription. Contribution limits for HSAs are also increased to $6,550 (individual) and $13,100 (family). The excise tax on HSA distributions not used for medical expenses is rolled back to 10 percent and spouses will be able to make catch-up contributions to the same HSA account.
- Repealed Taxes - The following taxes would also be repealed under the proposed legislation as of the end of 2017: the medical device tax, the 3.8 percent tax on net investment income for certain individuals, the tax on over-the-counter medicines; the annual fee on certain health insurance issuers; and the Medicare tax increase on high wage earners.
- Medicare Part D - Deductibility of company provided Medicare Part D subsidies would be reinstated.
- Continuous Coverage - In lieu of the individual mandate, the law would require individuals to maintain continuous coverage (with no more than a 63-day break). If continuous coverage is not maintained then an insurance company can assess a 30 percent surcharge on any premium payments for the next 12 months. Just like the individual mandate, this provision is designed to encourage individuals to maintain coverage, even if they do not need it. You may recognize the 63 day break rule from the creditable coverage rules of HIPAA.
- Medical Expense Deductions - For individuals, the medical expense deduction will be rolled back to 7.5 percent of a taxpayer’s adjusted gross income from the current 10 percent limit imposed under the ACA. This change would be effective beginning in 2018. The special 7.5 percent of AGI rule for taxpayers who are 65 years or older, or turned 65 during the tax year, would be extended through 2017.
- Compensation Deductions - The ACA compensation limit of $500,000 for health insurance company executives will be repealed effective 2018.
- Medicaid - Beginning in 2020, the current Medicaid expansion will be repealed and replaced by state block grants based upon the Medicaid population in that state. While the bill proposes an increase in payments to the states, the percentage increase is fixed and not pegged to increases in health care costs.
The AHCA is a work in progress and faces many hurdles before the act is passed as law. Employers should continue to keep watch for further AHCA revisions. If enacted, employers will need to understand how these changes may impact their employee benefits. If you have questions about the American Health Care Act, please contact us.