- The U.S. House of Representatives passed the American Health Care Act of 2017 (AHCA) to partially repeal and replace parts of the Affordable Care Act (ACA).
- The future of the AHCA in the U.S. Senate is uncertain – it is unclear whether there will be sufficient consensus for any ACA "repeal and replace" bill and it is likely that the AHCA will undergo revisions in an attempt to build sufficient consensus.
- Employers should continue to monitor the situation and, if the bill is signed into law, should review the AHCA for potential consequences and opportunities.
Holland & Knight originally issued this alert in March 2017 regarding the American Health Care Act (AHCA) as it stood on that date. This client alert provides an update on the AHCA as passed by the U.S. House of Representatives.
The House Committee on Ways and Means and the House Energy and Commerce Committee released proposed legislation on March 6, 2017, to partially repeal and replace parts of the Affordable Care Act (ACA), which was signed into law seven years earlier. The legislation was pulled from the floor of the House in late March and underwent major revisions. On May 4, 2017, the House passed the legislation with significant amendments. The AHCA now rests with the U.S. Senate, where its future is uncertain.
The bill contains a number of changes related to patient access, reforms to Medicaid and individual insurance markets. As discussed below, the legislation also has an impact on employers.
The ACA requires applicable large employers (those employers with at least 50 full-time equivalent employees) to offer health insurance to full-time employees or pay a penalty. The bill amends the Internal Revenue Code of 1986, as amended (Code) to be effective as of Jan. 1, 2016, to reduce the penalty for failing to offer health insurance to zero dollars. If signed into law, the effective date of this provision would give employers that were impacted by the penalty in 2016 retroactive relief from such penalties.
While the penalty for failing to offer health insurance is eliminated in the bill, the reporting obligations imposed upon employers by the ACA is not. The bill creates new Sections of the Code which provide individuals who purchase eligible health insurance with an advance, refundable tax credit based on the individual's age beginning in 2020. Among other criteria, to be eligible to receive the credit, the individual must be a citizen, national or qualified alien of the United States, not have access to government health insurance programs or an offer of coverage from his or her employer and not be incarcerated.
Although the proposed legislation required an individual who is seeking to have the credit advanced during the year to submit a written statement from his or her employer regarding whether such individual is eligible for coverage, the bill that passed does not contain such a requirement but rather gives authority to the Secretary of the U.S. Department of Health and Human Services (HHS) and the Secretary of the Treasury to promulgate regulations as necessary to ensure robust verification that the individual is not eligible for employer coverage. The legislation does require an employer to include information about the offer of coverage on the IRS Form W-2, which is provided to employees and filed with the IRS. This will help the IRS determine whether such individual is eligible for the coverage. Interestingly, unlike the current reporting regime which impacts applicable large employers, this reporting could impact employers of all sizes.
Essential Health Benefits
The ACA requires health plans in the individual and small group market to cover 10 categories of "essential health benefits." These include, for example, emergency care, prescription drug coverage and maternity and newborn care. The ACA prohibits health plans – including those offered by large employers – from imposing annual or lifetime dollar limits, and limits the amount an enrollee can pay out of pocket on these essential health benefits. As amended, the AHCA allows states to develop their own definition of essential health benefits beginning in 2020. This change could have a significant impact on employer-provided health plans.
Under current guidance, large employers may use any state's benchmark of essential health benefits to determine whether it has met the obligation on annual and lifetime limits and out-of-pocket expenses. Currently, there is not a lot of variation in states' benchmark plans because of the federal standard imposed by the ACA that sets forth the 10 categories of essential health benefits. If states are able to develop their own essential health benefit definition and large employers are still able to use any state's benchmark, employers could impose annual or lifetime dollar limits on certain benefits which may have previously been defined as essential health benefits under the ACA.
This means that, if, for example, a state chooses to exclude emergency care or prescription drug coverage as an essential health benefit, plans of large employers could impose annual or lifetime limits on such coverages. Although it is likely that some employers will keep robust plans in place to attract and retain workers, if passed into law, and taken advantage of by states, large employers could have additional flexibility on what is offered to its employees and their dependents.
Delay of "Cadillac Tax"
The ACA originally imposed a non-deductible, high-cost plan excise tax, commonly known as the "Cadillac tax," equal to 40 percent of the cost of health coverage that exceeds certain premium thresholds. Originally scheduled to take effect in 2018, Congress delayed implementation of this tax until 2020. In addition, Congress further made this tax a deductible expense for those employers that would be subject to it. Under the bill, the Cadillac tax implementation date has been delayed further so that it will not apply to any taxable period before Jan. 1, 2026 (a year later than originally proposed in March). However, given the unpopularity of this tax there has been considerable debate about possibly replacing it. As currently formulated, it is unlikely that this tax will ever come into effect.
Health Savings Accounts
In addition to lowering taxes on distributions from a health savings account (HSAs) that an individual uses for something other than a qualified medical expense, the bill makes a number of changes to rules applicable to HSAs that may be offered by employers.
Beginning next year, the bill raises the limits on annual health savings account contributions per year from the recently released 2018 limits – $3,450 for self-only coverage and $6,900 for family coverage – to a limit that will be equal to the maximum amount of the annual deductible and out-of-pocket expense limits under a high deductible health plan (HDHP). If the recently released 2018 limits for HDHP's were to stay in place next year, the HSA limits would increase to $6,650 for self-only coverage and $13,300 for family coverage.
Also beginning next year, the bill would allow married individuals that are age 55 or older to make catch-up contributions (additional contributions of up to $1,000 currently allowed to be made to health savings accounts by individuals that are age 55 or older) to the same HSA, rather than solely to a separate health savings account in the name of the spouse making the catch-up contribution.
Finally, the bill provides that, beginning in 2018, if a HSA is established during the 60-day period beginning on the date that an individual's coverage under an HDHP begins, then, solely for purposes of determining whether an amount paid is for a qualified medical expense, such HSA is to be treated as if it was established when the coverage began.
Health Flexible Spending Accounts
Currently, Section 125(i) of the Code limits voluntary employee salary reductions for contributions to a health flexible spending account to a maximum of $2,600 for 2017 (which may or may not be matched by the employer). The bill removes the cap on employee salary reduction contributions to health flexible spending account this year (one year earlier than originally proposed in March).
Repeal of Medicare Surtax
Currently, an additional Medicare tax of 0.9 percent applies to an employee's wages (or a self-employed individual's self-employment income) above $200,000 for an individual or $250,000 for a married couple that an employer withholds on such employee's wages. Beginning in 2023 (five years later than originally proposed in March), the bill repeals this additional 0.9 percent Medicare tax.
Medicare Part D Subsidy
Prior to the ACA, employers who offered certain levels of prescription drug benefits to its retired employees were eligible to receive a subsidy from the federal government to help such employers assist its Medicare-eligible former employees receive greater prescription drug benefits. The ACA eliminated the ability for employers to take a tax deduction based on the value of this subsidy. Beginning this year (the proposed legislation originally delayed this effective date until 2018), the bill once again allows a deduction for employers for retiree prescription drug costs.
Small Business Tax Credit
Beginning in 2020, the bill rolls back the ACA's tax credit for certain employers with less than 25 full-time equivalent employees that provided qualified healthcare coverage for its employees through the small business health options program, or SHOP marketplace. Under the ACA, such employers could have received a credit of up to 50 percent of the premiums such employers paid for its employees.
While the full rollback of the credits is not applicable until 2020, such employers described above will not be eligible for a credit between 2018 and 2020 if the coverage it purchases for its employees includes coverage for abortions (other than those that are necessary to save the life of the mother or with respect to pregnancies that are the result of rape or incest).
Remuneration from Certain Insurance Providers
As a result of ACA, Code Section 162(m)(6) currently limits the amount of remuneration paid to officers, directors or employees that certain health insurance providers can deduct as an ordinary and necessary business expense to $500,000. The bill provides that this $500,000 limitation will expire for individuals performing services beginning in 2017. Thus, if this bill becomes law, beginning this year, such providers would only be subject to the general $1 million limitation set forth in Code Section 162(m).
At this time, it is important to note that all of the revisions and changes set forth above have not yet become law. Notwithstanding strong pressure to support final passage, the fate of the bill is still to be determined. Employers should continue to monitor the situation and, if the bill is signed into law, should review the AHCA for potential consequences and opportunities.