On March 9, Republican lawmakers in Congress took their first steps toward their promise of repealing and replacing the Affordable Care Act. Two House committees passed legislation to replace the ACA with a system of tax credits and a rollback of the Obama administration's Medicaid expansion.
The House Energy and Commerce Committee approved the bill on a party-line vote of 31 to 23 after the House Ways and Means Committee had approved the measure in a predawn session.
While House committee mark-ups on what’s being called the American Health Care Act are expected this week and next, it’s a wildcard whether a bill based on the House measure would survive a Senate vote. Several conservative Senate Republicans who say the bill doesn’t go far enough have indicated they won’t support it. Several moderate Senate Republicans who say the bill goes too far have indicated they won’t support it. It’s safe to say few if any Senate Democrats will back it.
Here are highlights of the House bills. Again, we’re only going to review the portions of the bills that deal with group health plans.
Group health benefits would not be taxable
The discussion draft that leaked last week would have subjected employees’ health benefits that exceed 90% of average premiums to income tax withholding, but, apparently, not to FICA withholding. Neither bill released last night taxes employees’ group health benefits. So, that’s a relief.
Continuous coverage requirement
The bills would repeal the ACA's individual mandate. In its place, individuals would have to maintain continuous coverage. This provision would also apply to small group plans. If coverage lapses for more than 63 days, insurers could charge 30% more for the first 12 months of renewed coverage. This provision would become effective with the 2019 plan year.
Surprise! Cadillac tax stays
It has been widely assumed that the 40% excise tax on high-cost group plans, commonly called the Cadillac tax would be repealed. The discussion draft did away with it. The House legislation keeps it. The Cadillac tax, currently slated to go into effect in 2020, would be retained but would now go live in 2025.
Additional Medicare tax would be repealed
The additional 0.9% additional Medicare tax would be repealed beginning next year. The discussion draft would have repealed the tax retroactive to the beginning of this year.
New W-2 reporting requirement
The two bills would repeal the employer play-or-pay provision, effective for months beginning after Dec. 31, 2015. Employer information reporting on Form 1095, therefore, would no longer be necessary.
Note: Large employers should still e-file their 1095s by the end of this month.
The ACA’s advance premium tax credits, however, would stay on the books in a modified form, until Dec. 31, 2019. Reminder: The free-rider penalty is triggered if a full-time employee of an applicable large employer buys individual insurance on the exchange and qualified for a premium tax credit.
Premium tax credits are expensive, which is why the ACA limits eligibility for them by requiring large employers to provide group coverage. Instead of filing Form 1095 to track employees to receive tax credits, the bills would require employers to report on W-2 forms the number of months employees had access to group health benefits. Stand-alone dental and vision plans, as well as COBRA, are excluded from this reporting requirement.
This W-2 reporting requirement is in addition to the requirement to report the aggregate cost of employees’ group health benefits in Box 12 with Code DD.
This new reporting requirement may also force the IRS’ hand, since Box 12 reporting is currently required only for employers that filed 250 or more W-2s during the preceding year.
The bills pick up the following provisions from the discussion draft, but change the effective date from tax years beginning after Dec. 31, 2016, to tax years beginning after Dec. 31, 2017. This takes care of any uncertainty related to employees’ 2017 pretax contributions:
- HSAs and health flexible spending accounts (FSAs) could again reimburse for over-the-counter drugs, effective for expenses.
- For 2017, employees can contribute $2,600 into their FSAs. The bills would repeal the dollar limit.
- The ACA doubled the tax penalty on distributions from HSAs that aren’t health-related to 20%, from 10%. The discussion draft would reduce the penalty to 15%, effective for distributions made after Dec. 31, 2017.
Effective with taxable years beginning after Dec. 31, 2019, the bills would repeal the current tax credit of 50% of the premiums that small businesses pay toward employees’ health insurance.
In addition to the proposed legislation, the following House of Representatives committee section-by-section summaries are available: