Repeal and Replace - Tax Implications of the Proposed American Health Care Act (AHCA)
The long-awaited Republican health care plan to repeal and replace Obamacare, titled the “American Health Care Act” (AHCA), was released by House Republicans on Monday, March 6. The AHCA is largely similar to a draft version that was leaked to the press a couple of weeks ago but with a number of significant modifications, including the addition of income-based phaseouts for the new health care coverage credit and delayed effective dates for several key provisions.
The proposed AHCA would repeal virtually all of the Affordable Care Act (ACA, or Obamacare), including the following tax provisions:
- The individual mandate - by making the penalty amounts zero, effective for months beginning after Dec. 31, 2015 (i.e., retroactive for 2016).
- The employer mandate - reducing the penalty amounts to zero, effective for months beginning after Dec. 31, 2015 (i.e., retroactive for 2016).
- The premium tax credit would be repealed for tax years beginning after Dec. 31, 2019. The credit would also be subject to a number of amendments, generally effective for tax years beginning after Dec. 31, 2017.
- The 3.8% net investment income tax (NIIT), effective for tax years beginning after Dec. 31, 2017.
- The 0.9% additional Medicare tax, effective with respect to remuneration received after, and tax years beginning after, Dec. 31, 2017.
- The higher floor for medical expense deductions, effective for tax years beginning after Dec. 31, 2017. Thus, the 7.5% floor that was previously in place would be restored.
- The small employer health insurance credit, effective for amounts paid or incurred in tax years after Dec. 31, 2019.
- The limitation on health Flexible Spending Account (FSA) contributions, for tax years beginning after Dec. 31, 2017.
- The so-called “Cadillac” tax on high-cost, employer-sponsored health plans would not apply to any tax period beginning after Dec. 31, 2019 and before Jan. 1, 2025.
- The exclusion from “qualified medical expenses” of over-the-counter medications for purposes of Health Savings Accounts (HSAs,), Archer Medical Savings Accounts, Health Flexible Spending Arrangements (Health FSAs), and Health Reimbursement Arrangements (HRAs,), effective for amounts paid, and expenses incurred, with respect to tax years beginning after Dec. 31, 2017.
- The medical device excise tax, for sales after Dec. 31, 2017.
- The annual fee on health insurance providers for calendar years beginning after Dec. 31, 2017.
- The elimination of a deduction for expenses allocable to Medicare Part D subsidy, effective for tax years beginning after Dec. 31, 2017.
- The 10% tanning tax, effective for services performed after Dec. 31, 2017.
The main feature of the proposed AHCA is a new refundable tax credit for health insurance, described below. The AHCA would also make a number of significant changes to strengthen HSAs in addition to those described above.
Health insurance coverage credit: The AHCA would create a new refundable tax credit for health insurance coverage—generally, state-approved major medical health insurance and unsubsidized COBRA coverage. The credit would generally equal the lesser of: (i) the sum of the applicable monthly credit amounts (below) or (ii) the amount paid by the taxpayer for “eligible health insurance” for the taxpayer and qualifying family members.
- Monthly credit amount: The monthly credit amount with respect to any individual for any “eligible coverage month” (in general, a month when the individual is covered by eligible health insurance and is not eligible for “other specified coverage,” such as coverage under a group health plan or under certain governmental programs, like Medicare and Medicaid) during any tax year would be 1/12 of:
- (A) $2,000 for an individual who has not attained age 30 as of the beginning of the tax year;
- (B) $2,500 for an individual age 30 - 39;
- (C) $3,000 for an individual age 40 - 49;
- (D) $3,500 for an individual age 50 - 59; and
- (E) $4,000 for an individual age 60 and older.
- Income-based phaseout. The credit would phase out at higher levels of income. Specifically, it would be reduced by 10% of the excess of the taxpayer's modified adjusted gross income (MAGI) for a tax year over $75,000 (double that for a joint return). The $75,000 amount, as well as the dollar amounts in (A) through (E), above, would be adjusted for inflation.
- Other limitations on the credit. The credit would be subject to a $14,000 aggregate annual dollar limitation with respect to the taxpayer and the taxpayer's qualifying family members (generally meaning the taxpayer's spouse, dependent, and any child of the taxpayer who hasn't attained age 27). Married couples would have to file jointly in order to receive the credit, and no credit would be allowed with respect to any individual who is a dependent of another taxpayer for a tax year beginning in the calendar year in which such individual's tax year begins.
- Advance credit payments. The AHCA would also create a new Code Sec. 7529, which would direct a number of Agency heads to consult and establish a program for making payments to providers of eligible health insurance for taxpayers eligible for the new Code Sec. 36C credit, no later than Jan. 1, 2020.
- Excess amounts. The AHCA would also create an “excess health insurance coverage credit,” which would provide a mechanism under which “excess” credit amounts (generally, the amount, if any, by which the Code Sec. 36C credit amount exceeds the amount paid for coverage) can, at the taxpayer's request, be contributed to a designated HSA of the taxpayer. However, no such payment would be made with respect to taxpayers (or account beneficiaries) with “seriously delinquent tax debt”.
- Penalty for lapse of insurance. To discourage healthy individuals on insurance plans from leaving, which would drive up overall premiums, the plan would impose up to a 30% premium penalty for up to a year on those who let their insurance lapse for longer than 63 days.
- Effective date. The above amendments relating to the Code Sec. 36C health coverage credit would apply to months beginning after Dec. 31, 2019, in tax years ending after that date.
The AHCA would make a number of changes intended to strengthen and enhance HSAs, including:
- Increased contribution limits: The AHCA would increase the maximum HSA contribution limits to equal the sum of the amount of the HSA deductible and out-of-pocket limitation, effective for tax years beginning after Dec. 31, 2017. These limits are currently $2,250 plus inflation ($3,400 for 2017) for self-only coverage and $4,500 plus inflation ($6,750 for 2017) for family coverage. Under the AHCA, they would be at least $6,650 for self-only and $13,100 for family coverage beginning in 2018.
- “Catch-up contributions” by both spouses: The AHCA would allow both spouses to make “catch-up contributions” to the same HSA, effective for tax years beginning after Dec. 31, 2017.