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.
Attorneys in the Employee Benefits and Executive Compensation practice group at Duane Morris will continue to monitor these developments and assist employers through the changes.
For Further Information
If you have any questions about this Alert, please contact any of the attorneys in our Employee Benefits and Executive Compensation Practice Group or the attorney in the firm with whom you are regularly in contact.
[1] The essential health benefits that were mandated in every insurance policy in the individual and small group markets under the ACA are: (1) ambulatory services, (2) emergency services, (3) hospitalization, (4) maternity and newborn care, (5) mental health services and addiction treatment, (6) prescription drugs, (7) rehabilitative services and devices, (8) laboratory services, (9) preventative services and (10) pediatric services.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.