Yesterday, the House of Representatives passed the American Health Care Act (“AHCA”), the legislation to repeal and replace virtually all of the Affordable Care Act (“ACA”), by a vote of 217-213.
Key Provisions Affecting Employers
Elimination of Employer Mandate
Postponement of the Cadillac Tax
- The ACA’s employer mandate requires employers with 50 or more full-time employees to offer “essential minimum coverage” that is affordable to a certain percentage of their full-time employees or be subject to tax penalties.
- The AHCA would repeal the employer mandate by reducing any tax penalties to zero, effective January 1, 2016. While this would be welcome relief for employers, the AHCA does not repeal the ACA reporting requirements to the IRS and covered individuals, that track employer’s offer of coverage and employee’s enrollment in coverage for purposes of assessing penalties under the employer and individual mandate.
Repeal of Limits on Health FSAs
- The ACA imposes a 40% excise tax on certain high-cost employer-sponsored health plans starting in 2020.
- The AHCA does not repeal this “Cadillac” tax but would delay its imposition until after December 31, 2025.
The ACA limits the amount a person can contribute to a health flexible spending account (FSA) to $2,500, indexed for cost of living adjustments.
Changes to Health Savings Accounts
- The AHCA would repeal this limit, effective for taxable years after December 31, 2016. The AHCA also would make over-the-counter medications eligible for reimbursement under health FSAs, beginning in 2017.
The AHCA contains a number of provisions designed to expand the use of health savings accounts (HSAs).
Deductibility of Employer-Provided Medicare Part D Subsidies Reinstated
- The HSA contribution limit would increase to $6,550 (or $13,100 for family coverage), beginning in 2017.
- The tax for HSA distributions not used for qualified medical expenses would be rolled back from 20% to 10%, beginning in 2017.
- Also beginning in 2017, spouses would be allowed to make “catch-up” contributions to the same HSA.
- Over-the-counter medications would be eligible for reimbursement under HSAs, beginning in 2017.
- Individuals would be able to make withdrawals from their HSAs for medical expenses incurred before the HSA was created, provided the individual incurs the expense and creates the HSA within 60 days of when the underlying high deductible health plan coverage begins.
- The ACA eliminated the employer’s ability to deduct any federal subsidy it received to cover the spending costs for prescription drug coverage for retirees.
- The AHCA repeals this ACA change and reinstates the business expense deduction for retiree prescription drug costs.
Prospect for Passage
- The AHCA would repeal the following tax provisions, effective as of December 31, 2016:
- 3.8% tax on net investment income.
- The additional 0.9% Medicare tax increase on high earners would be repealed effective in 2023.
- $500,000 compensation deduction limit (with no exception for performance-based compensation) currently applicable to most health insurance providers.
The American Health Care Act now goes to the Senate, where, as the press reports, it faces significant challenges to passage in its current form.