On May 4, 2017, the House approved the American Health Care Act (“AHCA”) along party lines by a 217-213 vote. The version of the AHCA approved by the House would repeal all of the ACA taxes, with the exception of the so-called “Cadillac” excise tax on high-dollar health plans (which would be delayed until 2025). The bill now moves to the Senate, where changes are expected. The following are the highlights of the tax-related provisions of the bill as approved by the House:
Individual and Employer Mandate Penalties
The penalties imposed by the ACA on individuals who do not have health insurance and on employers who do not offer health insurance would be repealed retroactively to January 1, 2016. In lieu of these penalties, to discourage healthy individuals from going uninsured, the AHCA would permit insurance companies to impose up to a 30 percent premium penalty for up to 1 year on individuals who let their insurance lapse.
Net Investment Income Tax
The net investment income tax (“NIIT”) generally imposes a 3.8 percent surtax on the investment income (i.e., interest, dividends, capital gains, etc.) of married taxpayers whose modified adjusted gross income for the tax year exceeds $250,000 ($200,000 for single taxpayers). The AHCA would repeal the NIIT effective January 1, 2017.
Additional Medicare Tax
The additional Medicare tax requires individuals to pay an additional .9% Medicare tax on wages and self-employment income in excess of $250,000 for married taxpayers ($200,000 for single taxpayers). The AHCA would repeal the additional Medicare tax effective January 1, 2023.
The ACA had introduced a 40% excise tax on employer-sponsored health insurance plans (known as “Cadillac” plans) whose cost exceeds certain thresholds. This tax had been scheduled to apply to tax years beginning after December 21, 2017. The AHCA would retain this tax but would delay it until 2026. The Congressional Research Service projects that the excise tax will be imposed on plans that cost more than $10,080 for single health plans and $29,100 for family plans.
New Refundable Credit for Health Insurance Coverage
For 2018 & 2019, the AHCA would modify the ACA’s income-based premium tax credit as follows:
- Increase credit amounts for young adults with income above 150% FPL and decrease amounts for adults 50 and older above that income level.
- Eliminate the cap on repayment of excess advance credits.
- Permit premium tax credits to be used to purchase catastrophic plans.
- Permit premium tax credits to be used to purchase qualified health plans sold outside of the exchange. In the case of off-exchange policies, however, the credit will not be advanceable (e.g., it can only be claimed on a tax return.)
Starting in 2020, the AHCA would repeal the ACA’s income-based premium tax credit and replace it with an age-based credit, as follows:
|30 - 39||$2,500|
|40 - 49||$3,000|
|50 - 59||$3,500|
The total credit would be capped at $14,000 per family. The credit is available in full for married taxpayers making less than $150,000 ($75,000 for single taxpayers) and phases out by $100 for every additional $1,000 of income.
IRS Forms 1095 Reporting
The AHCA would replace the current Form 1095 reporting requirements with a simplified reporting on Form W-2s to indicate when an employer has provided an offer of coverage to an employee.
Small Employer Health Insurance Credit
Under current law, qualified small employers are eligible for a tax credit if they offer health insurance to their employees. The AHCA would repeal the credit effective January 1, 2020 (January 1, 2018 if the health plan includes coverage for elective abortions).
Medical Expense-Related Provisions
Medical Expense Deduction
The ACA increased the threshold for individuals under the age of 65 to claim an itemized deduction for unreimbursed medical expenses from 7.5% of adjusted gross income (“AGI”) to 10% of AGI. The AHCA would reduce the AGI threshold from the 7.5% threshold found in pre-ACA law to a 5.8% AGI threshold. The 5.8% threshold would be effective January 1, 2017.
Health Flexible Spending Arrangements
Under the ACA, contributions to health flexible spending accounts (“FSAs”) was limited to $2,500 (adjusted for inflation). The AHCA would repeal this limitation effective January 1, 2017.
The ACA restricted reimbursements for medicines and drugs to prescribed drugs. The AHCA would permit reimbursements for over-the-counter medicines effective January 1, 2017.
Health Savings Accounts
Under current law, the maximum amount that may be contributed to a Health Savings Account (“HSA”) in 2017 is $3,400 for individuals and $6,750 for families. Effective January 1, 2017, the AHCA would increase this limit to cover the maximum annual deductible and out-of-pocket expenses permitted under a high deductible plan, resulting in projected maximum contributions of at least $6,550 for self-only coverage and $13,100 for family coverage.
To help you better understand the potential impact of the current version of the AHCA on your personal and business taxes, we will be publishing future blogs that explore several of the proposed tax provisions in greater detail and identify potential tax planning strategies that may be employed to reduce your taxes. In the meantime, if you would like to discuss the potential impact of the bill, please contact Natalie Takacs at (216) 928-5403 or a member of your engagement team.