United States: GOP Repeal And Delay Of ACA Taxes Face Uncertain Outlook

GOP repeal and delay of ACA taxes faces uncertain outlook

House Republicans offered legislation to repeal the Affordable Care Act (ACA) on March 6 that would repeal or postpone $594 billion worth of ACA tax provisions over a staggered timeline. The legislation represents the GOP's first step toward fulfilling a campaign promise to replace the ACA, but it faces an uncertain future on the House floor and in the Senate.

The legislation was introduced as two separate bills that are meant to be combined into one reconciliation bill that would allow Senate passage with a simple majority vote. Full revenue scores are not yet available, and it is unclear whether the package will comply with all the restrictions imposed by the reconciliation process.

The House Ways and Means Committee is scheduled to mark up the tax package on March 8. At its heart, the tax title would repeal the excise taxes for individuals who fail to obtain coverage and employers that fail to offer coverage. This change would be effective retroactive for the 2016 tax year, so employers and individuals would escape tax on upcoming returns covering last year. In place of the individual excise tax, a new provision would allow insurers to increase premiums substantially for any 63-day lapse in coverage. The premium tax credit that individuals currently receive for purchasing insurance on the exchanges would be expanded in 2018 and 2019 to cover "catastrophic-only" coverage and plans not on the exchanges, but would then be repealed for 2020. It would be replaced by a new refundable tax credit of up to $4,000 that would be age-adjusted and phased out beginning when modified adjusted gross income (AGI) reached $75,000 for individuals and $150,000 for joint filers.

Most revenue-raising tax provisions in the ACA would be repealed effective beginning in 2018, including:

  • 3.8% Medicare tax on net investment income (NII)
  • 0.9% Medicare surtax on earned income over $200,000 for individuals and $250,000 for joint filers
  • Medical device excise tax (which would otherwise be effective again in 2018)
  • Health insurance industry fee (which would otherwise be effective again in 2018)
  • Pharmaceutical industry fee
  • Limit on the deductibility of salaries paid to health care executives
  • Ban on reimbursements for over-the-counter medication from Health Savings Accounts (HSAs), Flexible Spending Arrangements (FSAs) and Medical Savings Accounts (MSAs)
  • Increased penalties on impermissible HSA and MSA disbursements
  • Cap on FSAs (cap is $2,600 in 2017)
  • Increase from 7.5% to 10% in AGI floor for medical expense itemized deduction (7.5% floor would be retained for taxpayers aged 65 or older in 2017)
  • Limit on employer deduction related to Medicare Part D subsidy
  • 10% tax on tanning services

The legislation would not repeal the codification of economic substance doctrine, which was enacted as part of the ACA, or the Patient-Centered Outcomes Research Institute (PCORI) fee, which is scheduled to expire on its own in 2019. The 40% excise tax on high-cost health plans known as the "Cadillac tax" would be delayed instead of repealed. It was originally scheduled to become effective in 2018, was delayed until 2020 by recent legislation and would be further delayed until 2025 under the House GOP bill. The small business tax credit for small employers to purchase health coverage would be repealed beginning in 2020. The ACA employer-coverage reporting requirements would be retained, but amended. The legislation would also nearly double the limit on HSA contributions.

Outlook

The Joint Committee on Taxation has released revenue scores for most of the provisions. The tax title would lose an estimated $594 billion over the next 10 years without accounting for the changes to employer and individual health coverage tax credits and excise taxes, which the Congressional Budget Office will score.

The reconciliation process allows legislation to escape procedural hurdles in the Senate requiring 60 votes, but comes with many restrictions. Generally, no provisions that lose revenue outside the 10-year budget window can be included. Nearly all the tax provisions in the House bill would lose money outside of the budget window, but there is an exception for revenue-losing provisions that are offset with other provisions in the bill. It is unclear whether there is enough cost savings in the rest of the bill to offset the revenue lost by the tax provisions outside the budget window.

The bill also faces major political challenges. Conservative House Republicans have objected to the creation of a new refundable tax credit, the retention of the Cadillac tax and the new penalty for individuals who suffer coverage lapses. Many of these Republicans are pushing for "cleaner" repeal that does not replace or repair many of the ACA provisions they oppose. It may be difficult for the current package to survive a House floor vote, although support from the administration is helping bolster its chances.

Senate Republican leaders have not yet endorsed the House bill. Several moderate Senate Republicans have criticized its effect on some ACA provisions they now support. Even using the reconciliation process, Republicans can lose only two GOP votes in the Senate to pass the legislation without Democratic support.

The following covers some of the tax provisions in more detail.

Medicare taxes

The ACA included two Medicare-related tax increases. For earned income over $200,000 for singles and $250,000 for joints filers, the individual portion of Medicare payroll tax was increased 0.9% to 2.35% (making the self-employment rate 3.8%). The ACA then created a new equivalent 3.8% tax on NII to the extent AGI exceeded $200,000 for singles and $250,000 for joints filers. The House GOP bill would repeal both these taxes effective for 2018.

Cadillac tax

The Cadillac tax imposes a 40% tax on the value of certain health plans that exceed a set threshold. The tax was originally meant to curb over-spending on health care and slow cost growth, but has become very unpopular in both parties. An early draft of the House GOP bill would have replaced this provision with a cap on the exclusion from income for employer-provided health care.

Conservative Republicans objected to the cap, and the current bill instead retains but further delays the effective date of the Cadillac tax from 2020 to 2025. The tax is likely being retained only for revenue scoring reasons, and its unpopularity makes it ripe for further delay or repeal in the future.

HSAs, MSAs and FSAs

The ACA included the following provisions on HSAs, MSAs, and FSAs in order to raise revenue:

  • Ban on spending for over-the-counter medication without a prescription
  • Increased penalties on impermissible HSA and MSA disbursements
  • $2,500 yearly cap on FSA contributions (indexed and reached $2,600 in 2017)

The House GOP bill would repeal all three of these provisions and add new benefits for HSAs. The limit on HSA contributions would be increased to equal the maximum deductible, equivalent in 2017 to an increase from $3,400 to $6,550 for self-only coverage and $6,750 to $13,100 for family coverage. The increase would not be effective until 2018 (maximum deductibles in 2018 not available yet). In addition, if both spouses have attained age 55, and are thus eligible for the $1,000 catch-up contribution, and either one has family coverage, the spouses can contribute the catch-up contribution between their HSAs in whatever amounts they decide (including contributing the entire amount to only one of the spouse's HSAs). Under current law, this treatment is permitted for the regular annual contribution limit but not for the catch-up contributions.

House Republicans are very supportive of HSAs and originally proposed to make employer HSA contributions exempt from their proposed cap on the exclusion for employer-provided health coverage. The cap was removed in the final draft, but legislators are likely to continue to look for additional ways to incentivize HSAs.

Industry fees

The ACA created three fees or taxes meant to require the industries expected to benefit from health care reform to help pay for it. The 2.3% medical device excise tax is currently suspended for sales in 2016 and 2017, and the legislation would permanently repeal it before it takes affect again in 2018.

The health insurance industry fee was first imposed in 2014 as an $8 billion fee allocated based on market share among all insurers with "aggregate net premiums written." The fee rose to $11.3 billion for 2015 and 2016, but was suspended for calendar year 2017. The bill would repeal the fee starting in 2018, when it would otherwise be scheduled to return at a $14.3 billion level.

The pharmaceutical industry fee was first imposed in 2011. It reached $4 billion for 2017, but would be repealed beginning in 2018, when it would otherwise be scheduled to rise to $4.1 billion.

Health coverage taxes and credits

The ACA created a new tax to encourage individuals without insurance to obtain coverage, and provided a premium tax credit to help them purchase coverage on newly created exchanges. The bill also encouraged employers to offer insurance by imposing excise taxes for failing to offer coverage or failing to offer coverage that meets certain standards. These provisions were deeply unpopular with Republicans, and while the employer excise taxes would be repealed outright, the individual provisions would be replaced with somewhat similar provisions.

The legislation would expand the Section 36B premium tax credit in 2018 and 2019 before replacing it in 2020 with a new refundable tax credit. For 2018 and 2019, the credit could be used on plans outside the exchange and on "catastrophic only" plans, which were previously not permitted. However, taxpayers would be required to repay in full any excess premium tax credit in 2018 and 2019 if income is higher than the projection used to calculate the original credit.

In the place of a premium tax credit, the legislation would enact a new, refundable health insurance coverage tax credit that would be used to purchase health insurance coverage. There are certain restrictions on eligibility, and the credits, as offered, are based on the age of the individual:

  • Under age 30: $2,000
  • Age 30 to 39: $2,500
  • Age 40 to 49: $3,000
  • Age 50 to 59: $3,500
  • Age 60 and older: $4,000

The legislation would stack the credits for a family and be capped at $14,000 per year, but would be indexed for inflation. Notably, the credits would also begin to be phased out for single earners with modified gross income in excess of $75,000 per year (or $150,000 for joint filers).

Both the individual and employer excise taxes would be repealed effective for 2016, so if enacted, the bill would forgive tax from any lapses last year. However, the legislation would require insurers to impose a 30% surcharge on the premium of any individual with a lapse in coverage of more than 62 days. The provision would be effective for plan years beginning in 2019, and, like the individual ACA tax, it is meant to discourage individuals from waiting until they are sick to purchase coverage.

Other provisions

The legislation would also repeal the following provisions:

  • Executive compensation: The ACA limited the amount of employee pay insurance companies could deduct to $500,000 per employee if at least 25% of premium income comes from plans meeting creditable coverage requirements. This provision would be repealed beginning in 2018.
  • Employer coverage credit: The ACA created a credit for employers with 25 or fewer employees who offer health coverage. The current credit is 50% of coverage costs for insurance purchased through a state exchange in the first two years employers offer coverage but would be repealed starting in 2020.
  • Medicare Part D subsidy: The ACA eliminated the ability of an employer to take a deduction for prescription drug coverage provided to employees to the extent the employer received a retiree drug subsidy from the federal government that was excluded from income. This deduction would be reinstated beginning in 2018.
  • Medical expense deduction: The ACA raised the threshold for the itemized deduction for medical expenses from 7.5% of AGI to 10% of AGI. The change became effective for taxpayers 64 and younger in 2012 and seniors in 2017. The bill would repeal the change for those 64 and younger in 2018 and extend the 7.5% threshold for seniors to cover 2017 (before full repeal).
  • Tanning service excise tax: The bill would repeal the ACA's 10% tax on indoor tanning services, effective beginning in 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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