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House Passes Health Care Bill by Slim Margin; Senate Hints That It Will Rewrite the Bill

(Parker Tax Publishing May 2017)

On May 4, 2017, the House passed The American Health Care Act of 2017 (AHCA) by a vote of 217 - 213. The bill would repeal all of the Affordable Care Act's (ACA) tax provisions except for the "Cadillac tax" on high cost employer-sponsored health plans. Most of the tax changes would be effective beginning in 2017 or 2018, but the repeal of the individual and employer mandates would be retroactive to January 1, 2016. The bill would replace the ACA's means-tested premium tax credit with an age-based health insurance credit. H.R. 1628 (May 4, 2017).

Tax Provisions in Healthcare Bill

The following are the AHCA's tax changes:

(1) Repeals the penalties for individuals who are not covered by a health plan that provides at least minimum essential coverage ("the individual mandate"). The repeal is retroactive to January 1, 2016.

(2) Repeals the penalties for certain large employers who do not offer full-time employees and their dependents minimum essential health coverage under an employer-sponsored health plan ("the employer mandate"). The repeal is retroactive to January 1, 2016.

(3) Repeals the 3.8 percent net investment income tax (NIIT) in Code Sec. 1411, effective for tax years beginning on or after January 1, 2017.

(4) Repeals the 0.9 percent additional Medicare tax, effective for remuneration received on or after January 1, 2023.

(5) Reduces the income threshold for determining medical expense deductions under Code Sec. 213 from 10 percent to 5.8 percent, effective January 1, 2017.

(6) Makes several modifications to the premium assistance tax credit in Code Sec. 36B, effective in 2018 and 2019. Beginning in 2020, the mean-tested tax credit will be replaced with a new, age-based credit, ranging from $2,000 to $4,000. The new credits will be phased out for modified adjusted gross income between $75,000 and $115,000 ($150,000 and $190,000 for married filing jointly).

(7) Imposes liability on taxpayers for the full amount of excess advance payments of the premium assistance tax credit, beginning in 2018. Under current law, liability for certain low-income households was limited to an applicable dollar amount.

(8) Repeals the small business tax credit under Code Sec. 45R, which provides a credit to certain employers who provide health care to employees, effective January 1, 2020. The bill also modifies the credit to prohibit it from being used for health plans that include coverage for abortions (other than any abortion necessary to save the life of the mother or any abortion with respect to a pregnancy that is the result of an act of rape or incest) for tax years beginning on or after January 1, 2018.

(9) Delays the implementation of the excise tax on high cost employer-sponsored health coverage (commonly referred to as "the Cadillac tax") until 2025. Under current law, the tax goes into effect in 2020.

(10) Permits tax-favored health savings accounts (HSAs), Archer Medical Savings Accounts (MSAs), health flexible spending arrangements (FSAs), and health reimbursement arrangements to be used to purchase over-the-counter medicine that is not prescribed by a physician.

(11) Repeals the increase in the tax on distributions from HSAs and Archer MSAs that are not used for qualified medical expenses. The Bill reduces the tax on HSA distributions from 20 percent to 10 percent and reduces the tax on Archer MSA's from 20 percent to 15 percent, effective for distributions made on or after January 1, 2017.

(12) Repeals limitations on contributions to flexible spending accounts, effective January 1, 2017.

(13) Repeals the medical device excise tax in Code Sec. 4191, effective for sales after on or after January 1, 2017.

(14) Repeals the elimination of the deduction for expenses allocable to a Medicare Part D subsidy, effective for tax years beginning on or after January 1, 2017.

(15) Repeals the tax on prescription medications.

(16) Repeals the tanning tax, effective for services performed after June 30, 2017.

Non-Tax Provisions

The following is a summary of some of the AHCA's other key provisions:

(1) Requires insurance companies to impose a 30% surcharge on the health insurance premiums of individuals who let their coverage lapse for at least 63 days.

(2) Allows children to stay on their parents' healthcare plans until age 26 (unchanged).

(3) Continues use of state healthcare exchanges.

(4) Relaxes the current-law requirement that prevents insurers from charging older people premiums that are more than three times larger than the premiums charged to younger people. Unless a state sets a different limit, the legislation would allow insurers to charge older people five times more than younger ones, beginning in 2018.

(5) Provides that states may opt-out of providing essential health benefits.

(6) Provides that states may opt-out of requiring premiums to be the same for all people of the same age, so while individuals with pre-existing conditions must be offered health insurance there is no limit on what insurance companies can charge. A new $8 billion fund (for five years) would help lower premiums for these individuals through use of high-risk pools.

(7) Provides that states may opt-out of limitations on premium differences based on age.

(8) Freezes the ACA's federally subsidized Medicaid expansion beginning in 2020 and capping the growth in per-enrollee payments for most Medicaid starting the same year.

(9) Creates a Patient and State Stability Fund for risk sharing to help states lower premiums ($15 per year for 2018-2019, $10 billion per year for 2020-2026).

CBO Estimates and Potential Senate Action

The Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation are in the process of preparing a cost estimate for the House-passed version of the AHCA. The CBO anticipates being able to release that estimate the week of May 22.

In the meantime, initial work on healthcare legislation has begun in the Senate. Some Senators have indicated that the Bill coming from the House will have to be substantially reworked. "I think it needs a lot of improvement," said Sen. Shelley Moore Capito (R-W.Va.). While Sen. John Cornyn (R-Texas) promised a Senate healthcare bill this year, Senate Majority Leader Mitch McConnell (R-Ky.) cautioned that getting healthcare legislation through the Senate would be "a big challenge."

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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