On March 6, 2017, House Republicans introduced two coordinated bills to the Ways and Means Committee and the Energy and Commerce Committee designed to repeal and replace the Affordable Care Act (“ACA”). The bills are collectively referred to as the “American Health Care Act” (which will be referred to hereafter as the “Proposed Legislation”). The Ways and Means Committee bill is directed toward the tax provisions of the ACA, whereas the Energy and Commerce Committee bill pertains primarily to Medicaid matters. On March 9, 2017, both committees approved the legislation along party-line votes. The joint measure now proceeds to the House Budget Committee for consideration before a final House vote, which is expected later this month. If the legislation passes the House, it will be sent to the Senate for a vote.
The Proposed Legislation is a measure that nobody seems to like. Many influential groups, such as the American Medical Association, the American Nurses Association, the American Hospital Association and the AARP, oppose the Proposed Legislation. On the other side of the spectrum, a number of conservatives have strongly expressed their view that the Proposed Legislation leaves too many entitlements, referring to the measure as “Obamacare-Lite.” In the middle is President Trump, who promised during the campaign to swiftly repeal and replace the ACA.
So much opposition seems to suggest that the measure will not be enacted. On the other hand, legislation that nobody likes often becomes law. Consequently, we should be prepared for at least some of the proposals to be enacted.
Against that background, below are key aspects of the Proposed Legislation that will be of interest to employers, and to their employees.
1. Protected ACA Provisions
The Proposed Legislation does not eliminate all of the provisions of the ACA because it can’t. Republicans only have 52 members in the Senate, and so do not have the 60 votes needed to override a filibuster against any action to fully repeal the law. The particulars of the Proposed Legislation are thus limited to those dealing with tax and spending issues, which can be enacted via a budget reconciliation process with a simple majority of the Senate.
The provisions of the ACA saved from repeal include those pertaining to the following:
The coverage of preexisting conditions;
The coverage of adult children up through age 26;
The maximum 90-day waiting periods;
The limits on annual out-of-pocket expenditures on essential health benefits;
The prohibitions on lifetime and annual limits;
Required first-dollar coverage of preventive health services;
The uniform coverage of emergency room services for in-network and out-of-network visits; and
The external review of claims.
2. Individual and Employer Mandates
The ACA requires most individuals to purchase health insurance or pay a penalty tax. The law similarly requires larger employers to offer affordable health insurance coverage to eligible full-time employees or potentially pay a penalty.
These insurance mandates cannot be repealed outright under the simple majority budget reconciliation process. However, the tax aspects of the mandates can be stricken. Accordingly, the Proposed Legislation provides for the reduction of the penalties to $0, effectively repealing the mandates.
The repeal of the penalty would apply for months beginning after December 31, 2015, thereby providing retroactive relief to those impacted by the penalty in 2016.
Comment: Effective for plan years beginning on and after January 1, 2014, the employer mandate required the offering of coverage to eligible full-time employees, which was defined as employees averaging more than 30 hours of service per week. Previously, many employers required a greater number of worked hours for benefit eligibility purposes, such as those regularly working 35 or 40 hours per week. If the ACA employer mandate penalty is eliminated, employers will be able to revisit their eligibility hours of service standards, and, if appropriate, reinstate practices that were in effect before 2014.
3. Modifications to Premium Tax Credit Rules
Key features of the Proposed Legislation are those pertaining to the premium tax credit available to lower-income individuals who are not offered affordable coverage under an employer plan, and who purchase a policy on the Marketplace Exchange.
Under the Proposed Legislation, the premium tax credit is repealed, beginning in 2020.
For years through 2019, the following new rules will apply:
Premium tax credits will continue to be available for insurance policies purchased under the Marketplace Exchange. However, the credits will also be available for the purchase of “catastrophic-only” qualified health plans, and for certain qualified plans not offered through a Marketplace Exchange.
Premium tax credits will not be available to purchase a policy that offers elective abortion coverage.
4. New Refundable Tax Credit for Health Insurance
Controversial provisions of the Proposed Legislation are those that create a refundable tax credit for the purchase of state-approved, major medical health insurance and unsubsidized COBRA coverage.
To be eligible for the refundable tax credit, an individual:
Must not have access to government health insurance programs or an offer of insurance from any employer;
Must be a citizen, national or qualified alien of the United States; and
Must not be incarcerated.
The amount of the annual tax credit is based on age:
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
The credit is available for each person. The credits are additive for a family, but capped at $14,000. The credits will be adjusted for inflation.
The tax credits are available in full to those making $75,000 per year ($150,000 joint filers). The credit phases out by $100 for every $1,000 in income higher than those thresholds.
5. Late Enrollment Insurance Surcharge
In lieu of the individual insurance mandate is a continuous coverage incentive of the Proposed Legislation that is designed to limit adverse selection in health care markets. Under this provision, if, during the 12-month period preceding the enrollment in new insurance, an applicant had a lapse in coverage for greater than 63 consecutive days, then the insurer may assess a flat 30 percent late-enrollment surcharge on top of the base premium.
In the case of an individual who ceased to be eligible for dependent coverage because of age, the surcharge will apply if the individual does not apply for coverage during the first open enrollment period following the date of the termination of coverage.
The late-enrollment surcharge may be assessed for 12 months.
The late-enrollment insurance surcharge will apply to special enrollments occurring during the plan year 2018, and for open enrollments occurring on and after January 1, 2019.
6. Delay (But Not Yet the Full Repeal) of the Cadillac Tax
The ACA imposed a 40 percent excise tax on high-cost, employer-sponsored health coverage, known as the “Cadillac Tax.” The Cadillac Tax is scheduled to go into effect in 2020.
The Proposed Legislation changes the effective date of the tax. Specifically, the tax will not apply until plan years beginning on or after January 1, 2025 (unless, of course, it is fully repealed before then).
7. Repeal of Other ACA-Imposed Taxes and Restrictions
The Proposed Legislation would eliminate a number of taxes created by the ACA, effective for tax years beginning after December 31, 2017. The taxes slated to be repealed include those mentioned below:
OTC Drug Cost Reimbursements. Under current law, over-the-counter medications cannot be reimbursed under FSAs, HRAs, or other tax-advantaged health savings accounts. The Proposed Legislation provides for the removal of this prohibition.
Repeal of Limitations on Contributions to FSAs. The ACA limits the amount an individual may contribute to a health FSA ($2,600 for 2017). The Proposed Legislation removes the limit (although an employer, through plan design, may impose its own).
Increased HSA Contribution Limit. The Proposed Legislation 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. Thus, the basic limit will be at least $6,550 in the case of self-only coverage and $13,100 in the case of family coverage, beginning in 2018.
Repeal of Net Investment Tax and Medicare Tax. The ACA imposes a net investment tax, applying a rate of 3.8 percent to certain net investment income of individuals, estates, and trusts with income above certain amounts. It also imposes a Medicare Hospital Insurance (“HI”) surtax based on income at a rate equal to 0.9 percent of a highly compensated employee’s wages or a self-employed individual’s income. Both taxes will be eliminated.
It is expected that the Proposed Legislation will be modified as it works its way through the legislative process. We will continue to monitor the legislation for further developments.