McGuireWoods Healthcare Reform Guide: Installment No. 58

This is the 58th in a series of WorkCite articles concerning the Patient Protection and Affordable Care Act and its companion statute, the Health Care and Education Reconciliation Act of 2010 (referred to collectively as the ACA). This article reviews the impact, on employers, of the draft bills released March 6, 2017, by House Ways and Means and Energy and Commerce committees (collectively, the Proposal) that would repeal and replace various provisions of the ACA.

The Republican leadership is aiming for a House floor vote on the Proposal as early as next week, and if it passes, it may go to the Senate for an immediate vote without hearings. President Trump has endorsed the Proposal.

As the Proposal goes through committee markup scheduled for today, plan sponsors will finally get a picture of the changes that shape employer-sponsored healthcare coverage.

Background

The two House committees spent several weeks developing the Proposal, which includes many of the ideas previously advanced by the Trump administration and the House Republican leadership, most recently a Feb. 16 policy memorandum issued by House Republican leaders, followed by an early draft of their replacement legislation.

Although called the American Health Care Act, the Proposal is by no means a complete overhaul of the ACA. Instead, various ACA provisions would be repealed or modified, and certain provisions would be added.

Aspects of the Proposal Affecting Employers

Here are key provisions in the Proposal that would that affect employers:

  • Elimination of the Employer Mandate and Associated Penalties
  • The ACA’s “employer mandate” requires each employer of 50 or more full-time employees to offer “minimum essential coverage” to full-time employees that is “affordable,” or face penalties. The Proposal would repeal the mandate and the penalties, effective for months after Dec. 31, 2016, thus providing retroactive relief.
  • Further Postponement of the Tax on Cadillac Plans
  • The ACA includes a 40 percent excise tax on high-cost employer-sponsored healthcare coverage, so-called “Cadillac” plans that have “excess benefits.” Each “coverage provider” (which could be the employer, in the case of a self-funded plan) is liable for its applicable share of the excess benefit for each taxable period.
  • Under current law, this tax will go into effect in 2020. The Proposal would change the effective date of the tax so it would not apply for any taxable period beginning after Dec. 31, 2019, and before Jan. 1, 2025. If the tax ever does take effect, some employers may scale back the benefits offered by their health plans.
  • Repeal of ACA Elimination of Deduction for Expenses Allocable to Medicare Part D Subsidy
  • Prior to the ACA, as an incentive for employers to offer retiree drug coverage, employers who offered sufficient prescription drug coverage to their employees qualified for a retiree drug subsidy to help cover actual spending for prescription drug costs. The ACA eliminated employers’ ability to deduct the value of this subsidy. Effective for taxable years beginning after Dec. 31, 2017, the Proposal would repeal this ACA change and reinstate the business-expense deduction for retiree prescription drug costs without reduction by the amount of any federal subsidy.
  • Government Assistance to Purchase Health Coverage
  • Effective beginning in 2020, the Proposal would replace the ACA income-based tax subsidies with financial assistance through an advanceable, refundable credit that could be used to purchase health insurance coverage that is offered in the individual health insurance market within a state (not employer-sponsored coverage). This new credit is age-rated in 10-year bands and increases in value as the individual ages; it also phases out as a taxpayer’s adjusted gross income exceeds $75,000 ($150,000 for joint filers). The Proposal provides that the credit could also be used to purchase unsubsidized COBRA healthcare continuation coverage under an insured employer group health policy (but not under a self-insured group health plan). Any coverage purchased with such a credit must meet certain requirements and cannot be coverage where substantially all of the coverage is of “excepted benefits” (such as vision or dental coverage) or where the coverage includes abortion coverage (with exceptions for rape, incest and life of the mother).
  • More individuals may enroll in COBRA coverage if they receive the payment assistance that the Proposal would provide. (There is no comparable COBRA payment assistance available under the ACA in its current form.) As COBRA enrollees often have significant health issues, an increase in the number of such enrollees could result in higher premiums charged for all coverage under the group insurance policy in future years.
  • Enhancements to Health Savings Accounts
  • If an employer sponsors a high-deductible health plan (HDHP), employees covered thereunder can contribute to health savings accounts (HSAs). Employer contributions are also permitted. Under the Proposal, effective Jan. 1, 2018, the HSA contribution limit would increase to at least $6,550 (or $13,100 for family coverage). In addition, “over-the-counter” medications would be again eligible for reimbursement under HSAs.
  • Also beginning in 2018, the Proposal would allow spouses to make “catch-up” contributions to the same HSA and would reduce, from 20 percent to 15 percent, the excise tax penalty assessed when HSA and Archer medical savings account funds are not used for qualified medical expenses. In addition, taxpayers would be permitted to receive reimbursement of medical expenses incurred before an HSA is created, provided the individual incurs the expense and creates the HSA within 60 days of when the underlying HDHP coverage starts.
  • These HSA enhancements may encourage more employers to offer HDHPs.
  • Enhancements to Health Flexible Spending Accounts
  • The ACA limits the amount an employer or individual may contribute to a health flexible spending account (FSA) to $2,500, indexed for cost-of-living adjustments. The Proposal would repeal this limit for taxable years beginning after Dec. 31, 2017.
  • As with HSAs, over-the-counter medications would be again eligible for reimbursement under FSAs, effective beginning in 2018.

Taxation of Group Health Insurance Coverage

Under current law, with some exceptions, employees are not taxed on the value of all or part of their group health coverage. There had been some discussion before the release of the Proposal that it would include a provision for such taxation. However, the Proposal does not do so.

If employees were taxed for some portion of the value of group health coverage, it is possible that the tax would extend to FICA “wages” as well as income tax “wages,” meaning employers would have to pay their matching share of FICA taxes on that portion of such coverage that is FICA wages.

ACA Provisions Not Addressed by the Proposal

The Proposal does not address various other aspects of the ACA that affect employers, including the following:

  • Market Reforms.
  • The Proposal would not modify the requirements under the ACA — set forth under the Internal Revenue Code, the Public Health Service Act and ERISA — which provide for certain consumer or market protections (for example, coverage for adult children until age 26, no pre-existing condition exclusions, no rescission of coverage, 90-day waiting period limitation, etc.) and disclosure obligations. It remains unclear whether ACA tax penalties may still be assessed on plan sponsors who fail to provide for such protections, disclosure or coverage under their group health plan(s).
  • Employer Reporting
  • Plan sponsors will have reporting obligations to the IRS to assist with the administration of the tax credits. Though the Proposal does not address the exact reporting that will be required, it may be more simplified than the current ACA reporting requirements.
  • Importantly, the Proposal would not repeal those Internal Revenue Code sections added by the ACA, as to reporting of health coverage by employers and insurance companies that track employers’ offers of coverage and employees’ enrollment in coverage for purposes of assessing compliance with the individual and employer mandates. With the Proposal’s repeal of those mandates, it is unclear whether and to what extent this reporting remains relevant.
  • Minimum Coverage and Nondiscrimination Requirements for Insured Group Health Plans
  • The Internal Revenue Code has imposed minimum coverage and nondiscrimination requirements on self-insured group health plans since 1980. The ACA imposed similar requirements on insured group health plans, but these requirements have not taken effect because the IRS has yet to issue regulations. The Proposal would not eliminate the ACA-imposed requirements.

Budget Reconciliation

The Proposal leaves unaddressed the financing of certain of its provisions that neither modify nor replace ACA provisions. Currently, the Congressional Budget Office, which is required to analyze budget decisions before implementation by Congress, is reviewing the Proposal to determine if it provides the budget savings mandated through the reconciliation process.

Prospects for Passage

News reports indicate opposition to the Proposal from some Republicans as well as from Democrats, meaning its passage is far from certain, even though Republicans control both houses of Congress.

Insurance companies may also voice their concerns. As indicated above, the Proposal would not repeal the requirement that health insurance be offered without exclusions for pre-existing conditions. The Proposal would eliminate the requirement that individuals maintain health coverage or pay penalties and would impose in its place a mandatory 30 percent increase in health insurance premiums for an individual who seeks to purchase coverage after a lapse in continuous health coverage for longer than 63 days. This new premium increase may not be a sufficient incentive for healthy individuals to acquire coverage before they incur significant medical expenses, and the absence of such individuals in the insurance pool may drive up premium costs for those who do maintain continuous coverage through an ACA insurance exchange. Premiums for employer-sponsored group health insurance might increase as well.

As new information is available and further developments are released as to the Proposal, expect updates to this article and additional insights on the “repeal-and-replace” journey.