The Road to Further Reform: AHCA's Proposed Provisions

As you likely recall, on May 4, the U.S. House of Representatives passed the American Health Care Act (AHCA) by a vote of 217 to 213. After the bill is scored by the Congressional Budget Office (CBO), the Senate is expected to review it as it prepares its own version of the bill. Although additional changes to the AHCA are highly probable, employers may want to familiarize themselves with the proposed provisions.

A Brief History of the Bill

The AHCA, in its original form, was released by House Republicans on Monday, March 6, and approved by the House Ways and Means Committee and Energy and Commerce Committee on March 9.

Yellow road sign - Reform Ahead

The CBO released its scoring of the AHCA on March 13, estimating the bill's fiscal and coverage impacts. In short, the agency projected that the AHCA would reduce federal deficits by $337 billion over the 2017 to 2026 period, with the bulk of the savings coming from reductions in outlays for Medicaid and the elimination of the ACA's subsidies for nongroup health insurance — such as the premium tax credit and cost-sharing reductions. But, over the same period, the CBO estimated that about 24 million people would be uninsured as compared to under the ACA.

A number of amendments were subsequently issued shortly thereafter, which made some substantive and technical changes to the bill and accelerated the effective date of a number of provisions. The CBO updated its report, which generally projected smaller savings over the next 10 years (down from $337 billion to $150 billion).

Another amendment was adopted by the House Committee on Rules early on March 24, which included a delay of the repeal of the 0.9% additional Medicare tax and a provision requiring states to establish their own "essential health benefits" standards in lieu of the existing ACA standards. The House was originally scheduled to vote on the bill that day, but the vote was canceled because of a lack of support. Although it had appeared that lawmakers were going to turn their efforts to tax reform, they returned to health care a short time later and made further AHCA changes to gain additional support.

Notably, in April, an amendment authored by Rep. Tom MacArthur (R-NJ) emerged. Under the MacArthur amendment, states could apply for a waiver from a number of key ACA market reforms, including essential health benefits and certain financial protections for high-risk individuals.

Two more amendments were introduced and adopted thereafter: 1) the Upton amendment, which would provide $8 billion in additional funding for individuals who, as a result of their state obtaining a waiver under the MacArthur amendment, would be subject to increased premiums, and 2) the Palmer-Schweikert amendment, which would create a $15 billion "risk-sharing program" to help states lower premiums.

Provisions To Be Eliminated

The AHCA, as amended, would repeal most of the ACA's tax provisions, including (but not limited to) the following:

Except as otherwise noted, the repeal would go into effect in 2017. (The due dates in the original bill were largely accelerated.) Importantly, however, the "Cadillac tax" on high-cost employer-sponsored health plans wouldn't be repealed but would be delayed until 2026.

Possible New Provisions

The main tax feature of the AHCA would be a new refundable tax credit for health insurance. The bill would also make a number of significant changes to strengthen HSAs in addition to those described above, as well as reduce the "floor" for deductible medical expenses. Here are some highlights:

Health insurance coverage credit. The AHCA would create a new refundable tax credit for health insurance coverage equal to the lesser of:

Monthly credit amount. During any tax year, the monthly credit amount with respect to any individual for any "eligible coverage month" (generally, a month when the individual is covered by a "qualified health plan" and ineligible for "other specified coverage") would be 1/12 of:

Income-based phaseout. The new health insurance coverage credit would phase out at higher income levels. 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 monthly credit amounts noted immediately above, would be adjusted for inflation.

Other limitations on the credit. The new health insurance coverage credit would also be subject to a $14,000 aggregate annual dollar limitation with respect to the taxpayer and his or her qualifying family members (generally meaning spouse, dependent and any child of the taxpayer who hasn't attained age 27). In addition, monthly credit amounts would be taken into account only with respect to the five oldest qualifying family individuals.

With limited exception, married couples would have to file jointly in order to receive a new health insurance coverage credit. No credit would be allowed with respect to any individual who's a dependent of another taxpayer for a tax year beginning in the calendar year in which such individual's tax year begins.

Coordination between the credit and other rules. The AHCA would provide special rules for, among other things, coordinating the new health insurance coverage credit with the medical expense deduction. In addition, there would be rules for calculating the credit where the taxpayer (or any qualifying family member) has a "qualified small employer health reimbursement arrangement."

Advance credit payments. The AHCA would direct a number of agency heads to establish an advance payment program for individuals covered under qualified health plans.

HSA Reforms

Effective beginning in 2018, the AHCA would make a number of changes intended to strengthen and enhance HSAs. These include:

Increased contribution limits. The bill would increase the maximum HSA contribution limits to equal the sum of the amounts of the high-deductible health plan deductible and out-of-pocket limitation. The HSA limits are currently $2,250 as adjusted for inflation ($3,400 for 2017) for self-only coverage and $4,500 as adjusted for 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 ("at least" because these amounts will likely increase because of inflation adjustments by 2018).

Catch-up contributions by both spouses. The AHCA would allow both spouses to make catch-up contributions to the same HSA.

Pre-HSA medical expenses. The bill would provide a special rule under which, if an HSA is established within 60 days of the date that certain medical expenses are incurred, it would be treated as having been in place for purposes of determining whether the expense is a "qualifying medical expense."

Lower floor for medical expense deduction. The AHCA would provide a 5.8% floor for medical expense deductions. The ACA had raised the longstanding 7.5% floor to 10%, effective in 2013 for taxpayers under age 65 and in 2017 for taxpayers 65 or older.

Lengthy Journey Expected

Senate Majority leader Mitch McConnell (R-KY) has formed a 13-member working group that will "craft a plan to pass legislation to repeal and replace" the ACA. Presumably, it will do so by hammering out a version of the AHCA that it believes will pass and have no issue acquiring the President's signature.

But whether and when this will happen is hard to say. As of this writing, most participants in the process and observers are expecting this to be a journey of weeks, or even months. Work with your health care benefits advisor to keep up on the latest developments.

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