Alerts and Updates

Even though the repeal and replacement of the ACA seems on its way, the ACA still remains the law of the land. Employers should continue to follow its requirements until the AHCA receives the signature of President Trump.

On May 4, 2017, the U.S. House of Representatives passed the American Health Care Act of 2017 (the “AHCA”), a key step to formally repealing and replacing the Patient Protection and Affordable Care Act (the “ACA”). The AHCA was initially proposed on March 6, 2017, but was briefly abandoned in late March when it failed to garner enough support among House Republicans. After intense negotiations among House Republicans over the past week, enough support was garnered for the AHCA to pass the House. The AHCA now heads to the Senate, where more difficult negotiations are expected.

As outlined in our prior March 7, 2017, Alert, the AHCA repeals a number of the ACA’s key features – such as the employer and individual mandates – and restructures the Medicaid program. The AHCA also makes some significant changes to some of the ACA’s most popular provisions – namely coverage for pre-existing conditions and mandated coverage of “essential health benefits” – while retaining others, such as the requirement to cover dependent children until age 26.

Repeal of ACA Taxes and Mandates

The House-approved version of the AHCA repeals the majority of the ACA’s taxes and mandates as of 2017. Specifically, the AHCA does the following:

Provision

ACA

AHCA Proposal

Proposed Effective Date of Change

Individual Mandate

Individuals required to purchase health insurance or pay penalty.

Penalty reduced to zero – effectively repealing individual mandate.

Retroactive to January 1, 2016

Employer Mandate

Employers with 50 or more full-time equivalent employees required to provide health insurance or pay penalty.

Penalty reduced to zero – effectively repealing employer mandate.

Retroactive to January 1, 2016

Cadillac Tax on High-Cost Employer Health Plans

40% excise tax on high-cost employer-sponsored health coverage (scheduled to go into effect in 2020).

Will not apply from 2020 to 2025

January 1, 2026 (at the earliest)

Over-the-Counter Medications

Excluded as “qualified medical expenses” – therefore, not payable on a tax-advantaged basis.

Repeals exclusion – eligible for tax-advantaged treatment.

January 1, 2017

Health Savings Account (HSA) Distribution Tax

Increased tax on distributions from HSAs that were not used for qualified medical expenses to 20%.

Reduces to pre-ACA level of 10%.

Distributions after December 31, 2016

Health FSA Contribution Limits

Imposed $2,500 annual limit.

Repeals limitation.

January 1, 2017

Medical Device Tax

Imposed 2.3% excise tax on sale of certain medical devices.

Repeals 2.3% medical device tax.

January 1, 2017

Employer Deduction for Medicare Part D Subsidy

Eliminated the ability for employers to take a tax deduction on the value of the subsidy received for offering sufficient prescription drug coverage to retirees.

Repeals that change and reinstates the business-expense deduction for retiree prescription drug costs without reduction by the amount of any federal subsidy.

January 1, 2017

Income Threshold for Medical Expense Deduction

Increased the adjusted gross income (AGI) threshold for deducting qualifying medical expenses from 7.5% to 10% if the taxpayer or spouse was aged 65 or older.

Reduces the AGI percentage threshold to 5.8%.

January 1, 2017

Medicare Tax Increase

Imposed Medicare Hospital Insurance surtax based on income at a rate equal to 0.9% of an employee’s wages.

Repeals the additional 0.9% Medicare tax.

January 1, 2023

Net Investment Tax

Imposed a net investment tax, applying a rate of 3.8% to certain net investment income of individuals, estates, and trusts with income above certain amounts.

Repeals the 3.8% net investment tax.

January 1, 2017

Remuneration from Certain Insurers

Added a limitation so that employers may not deduct remuneration paid to employees as “ordinary and necessary” business expenses for certain health insurance providers that exceeds $500,000.

Repeals the limit on the deduction of a covered health insurance provider.

Remuneration attributable to services performed starting in 2017

Tax on Prescription Medications

Imposed annual fee on brand pharmaceutical manufacturers.

Repeals the tax.

January 1, 2017

Pre-Existing Conditions and Essential Health Benefits

As originally drafted, the AHCA would have continued the ACA’s guaranteed coverage for those with pre-existing conditions and the requirement that all health insurance policies cover essential health benefits.[1] However, these provisions were heavily negotiated and amended by House Republicans to get the AHCA into a position where it could garner enough votes for passage.

As amended, the AHCA allows states to submit a waiver application to the Secretary of the U.S. Department of Health and Human Services to (1) specify their own essential health benefits beginning in 2020 and (2) charge higher premiums to those with pre-existing conditions who let their coverage lapse beginning in 2019. Charging higher premiums for those with pre-existing conditions is dependent upon the state operating a risk mitigation program or participating in a Federal Invisible Risk Sharing Program (FIRSP). Therefore, the AHCA would allow states to take pre-existing conditions into account when setting premiums; however, such conditions could not be taken into account for individuals who maintain continuous coverage.

In order to have such a waiver application relating to essential health benefits and pre-existing conditions approved, the state will need to explain how the waiver will provide one or more of the following:

  • Reducing average premiums for health insurance coverage in the state;
  • Increasing enrollment in health insurance coverage in the state;
  • Stabilizing the market for health insurance coverage in the state;
  • Stabilizing premiums for individuals with pre-existing conditions; or
  • Increasing the choice of health plans in the state.

Waivers may be in effect for up to 10 years, but can become void if, at any point during an approved waiver, a state ends its risk-sharing program.

Other Key AHCA Provisions

The AHCA also retains a number of the key provisions contained in its original March 2017 draft, including:

  • Expansion of HSAs: Increases the basic limit on aggregate HSA contributions for a year to equal the maximum on the sum of the annual deductible and out-of-pocket expenses permitted under a high-deductible health plan. In 2017, those limits would be $6,550 for self-only coverage and $13,100 for family coverage. The AHCA would also allow both spouses to make catch-up contributions to one HSA beginning in 2018.
  • Refundable Tax Credits: The AHCA provides for an advanceable, refundable tax credit for the purchase of state-approved, major medical health insurance. To be eligible, an individual must (1) not have access to government health insurance programs or an offer from an employer; (2) be a citizen, national or qualified alien of the United States; and (3) not be incarcerated. The tax credits are adjusted by age, as follows:
    • Under age 30: $2,000
    • Between 30 and 39: $2,500
    • Between 40 and 49: $3,000
    • Between 50 and 59: $3,500
    • Over age 60: $4,000
  • Continuous Health Insurance Coverage Incentive: Beginning in open enrollment for the 2019 benefit year, there will be a 12-month lookback period to determine if the applicant went longer than 63 days without continuous health coverage. If the applicant had a lapse in coverage for greater than 63 days, issuers will assess a flat 30% late-enrollment surcharge on top of their base premium, based on their decision to forgo coverage. This late-enrollment surcharge would be the same for all market entrants, regardless of health status, and would be discontinued after 12 months, thereby incentivizing enrollees to maintain coverage.

Conclusion

The House’s passage of the AHCA is a key step in the Republican Party’s promise to repeal and replace the ACA; however, a heated battle in the Senate is expected, with the AHCA likely to be significantly amended in order to be able to garner enough votes for passage. Of particular importance will be discussions around pre-existing conditions and essential health benefits. Although the amendments to the AHCA on those issues led to the AHCA’s passage in the House, it is expected that those same provisions may be problematic in the Senate. Even though the repeal and replacement of the ACA seems on its way, the ACA still remains the law of the land. Employers should continue to follow its requirements until the AHCA receives the signature of President Trump.