On March 6, 2017, the Ways and Means Committee of the U.S. House of Representatives released a section by section summary of the tax related sections of the American Health Care Act (the “AHCA”). On March 9, 2017, the Ways and Means Committee completed its markup of the AHCA’s tax provisions with no changes. The AHCA is the legislation that is intended to repeal and replace the Patient Protection and Affordable Care Act (commonly referred to and hereinafter referred to as “Obamacare”).
While it is still very early in the process and the AHCA is expected to be substantially modified during the legislative process, employers should monitor the deliberations to evaluate the AHCA’s potential impact on their employee benefit programs. This blog will identify provisions of the AHCA that may impact employers’ employee benefit programs.
The initial AHCA deliberations were considered on a dual track. The Ways and Means Committee considered the tax related provisions and the Energy and Commerce Committee considered the non-tax provisions. On March 9, 2017, the Energy and Commerce Committee completed that committee’s mark-up of the non-tax provisions. Both parts of the AHCA will now be considered by the House Budget Committee. This blog will review certain tax-related provisions and the section references contained herein refer to the Ways and Means section by section summary.
Section 4 repeals the small business tax credit (under Section 45R of the Internal Revenue Code (the “IRC”)) effective for tax years after December 31, 2019. Further, from January 1, 2018 to December 31, 2019, the small business tax credit will not be available with respect to qualified health plans that provide coverage for elective abortions.
Generally, IRC Section 45R provides a tax credit to certain small employers (less than 25 full time equivalents (“FTEs”)) who assist their employees in enrolling in qualifying health insurance. If Section 4 is adopted, employers who qualify for the small business tax credit will need to evaluate their health insurance offerings to determine whether they provide elective abortion benefits and, if so, evaluate whether to modify these offerings so as to eliminate benefits for elective abortions (so as to continue to qualify for the tax credit for the two years prior to its repeal). In addition, these employers will need to evaluate their employee health programs to develop a strategy in response to the loss of the tax credit in 2020.
Section 6 repeals the “Employer Mandate” effective for months beginning after December 31, 2015. Generally, the “Employer Mandate” requires certain employers (with 50 or more FTEs) to provide health insurance to their employees or pay an excise tax penalty. Employers will want to monitor the deliberations to confirm that the “Employer Mandate” remains repealed. Further, the December 31, 2015 effective date results in retroactive relief to employers with excise tax liability with respect to calendar months in 2016 which may provide an refund opportunity (if the employer has paid the excise taxes).
Section 7 delays the implementation date of the “Cadillac Tax” from January 1, 2020 to January 1, 2025. Generally, Obamacare imposed a 40% excise tax on high cost-employer sponsored health care coverage. The “Cadillac Tax” is the subject of several of my prior blogs. See Cadillac Tax: Delayed and Deductible, December 28, 2015; Health Coverage Includable in “Cadillac Tax” Calculations, November 19, 2015; and New IRS Excise Tax on High Cost Health Plans – the “Cadillac Tax”, September 30, 2015.
With the delay of the implementation date of the “Cadillac Tax” rather than its repeal, employers should continue to implement cost reduction programs designed to bring down the cost of their health plans (with the goal of getting below the high cost thresholds).
Section 8 provides that over the counter medications will be qualified medical expenses effective January 1, 2018. Generally, health plans, flexible spending arrangements (“FSAs”), health reimbursement accounts (“HRAs”), and certain other health care arrangements will help pay or permit the reimbursement of qualified medical expenses. Obamacare excluded over the counter medications from the definition of qualified medical expenses. If Section 8 is adopted, employers will need to review their health plans (including FSAs and HRAs) and make a determination as to whether to cover over the counter medications. Please note that plan amendments may be required to implement the employer’s plan design changes.
Section 10 repeals the reduced limit for annual benefits under flexible spending accounts. Generally, Obamacare limited the annual benefits available under FSAs to $2,500 (adjusted for inflation). If Section 10 is adopted, employers will need to determine the appropriate level of FSA contributions to be permitted under their cafeteria plans (and amend the plans accordingly).
Section 16 increases the limit on annual contributions to health savings accounts so that the maximum contribution is the sum of the annual deductible and the out-of-pocket expenses payable with respect to the applicable high deductible plan. The Ways And Means summary indicates that the “basic limit will be at least $6,550 in the case of self-only coverage and $13,000 in the case of family coverage beginning in 2018”. The current 2017 limits are $3,400 of self-only coverage and $6,750 for family coverage.
In addition, Section 17 will permit both spouses to make catch-up contributions to the same health savings account effective January 1, 2018.
If Sections 16 and 17 are adopted, employers who contribute to health savings accounts for their employees participating in high deductible health plans will need to review their health savings account programs and make a determination as to what level they are willing to contribute to their employees’ health savings accounts. Again, please note that plan/document amendments may be required to implement these plan design changes.
In summary, while we are still very early in the process, the American Health Care Act is likely to contain a number of provisions that will require employers to review and modify their employee benefit programs. Therefore, employers should continue to monitor the AHCA deliberations and consider their options if these provisions (or variations of these provisions) are adopted.