On March 6, 2017, the House of Representatives’ Ways and Means Committee and Energy and Commerce Committee released budget reconciliation recommendations that will, after mark-up beginning on March 8th, form the American Health Care Act (the “AHCA”). The AHCA is intended to be the law that “repeals and replaces” the Affordable Care Act (“ACA”). The Ways and Means Committee bill certainly repeals most of the taxes applied under the ACA and the Energy and Commerce Committee bill significantly alters Medicaid and how that program is funded. Nevertheless, the AHCA would retain a number of key ACA provisions, albeit modified in some respects.
The proposed AHCA has already faced strong opposition from members of both parties and, thus, it is likely that this legislation will either undergo revisions or be substituted with another bill. In any event, the draft AHCA, when read in conjunction with other recent attempts to repeal and replace the ACA, provides a roadmap of where Congress appears to be heading. Below are key takeaways that employers and plan sponsors should be aware of and a few things they should keep an eye on as things develop.
1. Individual and Employer Mandates
Like other efforts to repeal and replace the ACA, the AHCA would essentially repeal the ACA’s individual and employer mandates effective after December 31, 2015. The AHCA does this by “zeroing-out” the penalties for not having minimum essential coverage (individual mandate) or for not offering adequate minimum essential coverage to full-time employees (employer mandate).
Instead of imposing a tax penalty on individuals who do not enroll in minimum essential coverage, the AHCA attempts to encourage individuals to have coverage by allowing insurance carriers to charge a 30% premium surcharge to those who fail to have continuous coverage (i.e., a break in coverage of 63 days or more would trigger the surcharge). Although the AHCA keeps in place the ACA’s prohibition against preexisting condition exclusions, the 30% surcharge appears to be another means of discouraging people from waiting until they have a health issue to purchase coverage.
Outside of the effective repeal of the employer mandate, the AHCA’s impact on group health plans appears to be minimal. However, if the 30% surcharge is part of the final legislation, it is likely that plan sponsors will be required to provide notices similar to the certificates of creditable coverage required in pre-ACA days.
2. Employer Reporting Obligations to Continue
Although the individual and employer mandates would be repealed, it is likely that the ACA reporting obligations (Forms 1094-B/C and 1095-B/C) will remain in place, at least in some forms. Until 2020, individuals will still be able to get premium credits when purchasing coverage on Marketplaces. Thus, the reporting requirement under Section 6055 of the Internal Revenue Code (the “Code”) remains important. With the employer mandate repeal, reporting under Code Section 6056 seems less important, but it may nevertheless continue until 2020. After 2020, tax credits would be available under the AHCA, so the IRS would likely still need employers to report at least some information regarding coverage.
3. Cadillac Tax Repealed (but really just delayed)
Despite the AHCA provision “repealing” the so-called Cadillac Tax, the legislation merely delays the effective date of the tax until 2025. The Cadillac Tax was originally slated to be effective in 2018, but it was delayed until 2020 in prior budget legislation. Given that the AHCA is also budget reconciliation legislation, the newest delay may simply be a procedural step toward future repeal. Employers and plan sponsors should nevertheless keep the Cadillac Tax on their radars.
4. Many ACA-Related Taxes Repealed
The AHCA would repeal or modify, effective after December 31, 2017, numerous taxes created or modified by the ACA, some of which would have a direct or indirect impact on group health plans. For example, the branded prescription drug tax, medical device tax, and the health insurance tax would be repealed. The Medicare tax on investment income and the Medicare surcharge on high-earners would also be repealed. The annual contribution limitation on health flexible spending accounts (“HFSAs”) would be removed. The penalty for ineligible distributions (those made before age 65 for non-medical expenses) under health savings accounts (“HSAs”) would be reduced to 10%. The Retiree Drug Subsidy would again be deductible.
5. Popular ACA Reforms Remain
Because the AHCA is budget reconciliation legislation, only revenue-related portions of the ACA can be repealed or modified. Thus, various ACA market reforms and patient protections would remain in place. These include:
- The requirement to cover dependent children through age 25;
- The prohibition on waiting periods in excess of 90 days;
- The requirement to cover essential health benefits (individual and small group market plans only);
- The prohibition against lifetime or annual dollar limits on essential health benefits;
- The annual cap on out-of-pocket expenditures on essential health benefits;
- Uniform coverage of emergency room services for in-network and out-of-network visits;
- Required first-dollar coverage of preventive health services;
- The prohibition of preexisting condition exclusions;
- Enhanced claims and appeals provisions; and
- Provider nondiscrimination.
6. Employee Tax Exclusion Remains Intact
Previous attempts to repeal and replace the ACA included revenue-generating provisions to pay for the repeal of the ACA-related taxes. In prior legislation, this would have been accomplished by eliminating or reducing the employer deduction for health benefit expenses or by capping the employee tax exclusion for the cost of coverage. The AHCA does not currently include a similar provision, but it is certainly possible that such a provision can be added as the AHCA is negotiated and revised.
7. HFSA/HSA Expansion
The AHCA also modifies the tax rules related to HFSAs and HSAs. As noted above, the AHCA would remove the annual contribution cap on HFSAs. Additionally, HFSAs and HSAs would now be able to reimburse on a non-taxable basis over-the-counter medication without a prescription. The annual contribution limit to HSAs would be increased to $6,550 (individual) and $13,100 (family). Spouses would both be able to make catch-up contributions to the same HSA.
8. New Tax Credit Scheme Could Cause Administrative Issues for Plan Sponsors
What appears to be one of the more politically controversial aspects of the AHCA is the new advanced tax credit scheme. At its core, the AHCA proposal is very similar to the premium tax credits available under the ACA – individuals would get an advanced tax credit to help pay for individual insurance market premiums. The amount of the credit would be based on age and would be available only to individuals with income less than $75,000 (individual) or $150,000 (jointly with a spouse). The credit would be administered under the rules similar to the Health Coverage Tax Credit (“HCTC”) (see our July 16, 2015 blog entry for more information on the HCTC).
Individuals enrolled in group health plans would not eligible for the tax credit, unless they are enrolled in COBRA coverage that is not subsidized by the employer. Importantly, in order to receive the credit, the coverage (whether individual market or COBRA) cannot cover services related to abortion (subject to certain exceptions).
This arrangement would likely create administrative headaches for plan sponsors and COBRA administrators. The new tax credit scheme appears to require monthly reporting by eligible coverage providers, so COBRA administrators would have to develop procedures to comply with this requirement. Employers sponsoring plans that cover abortion services will need to consider the impact that will have on COBRA qualified beneficiaries. Providing COBRA coverage that covers abortion will prevent a qualified beneficiary from getting a tax credit, but simply carving abortion coverage out from COBRA coverage is not likely a viable option because COBRA coverage must be identical to active employee coverage. Should this provision find its way to the final legislation, plan sponsors and COBRA administrators will need to work with counsel and other consultants to develop a compliance strategy.
Given the opposition the AHCA is facing, it is very likely that there will be changes to the legislation as it makes its way through Congress. We will continue to monitor legislative efforts and will provide updates as substantive developments occur.