09 May 2017 Tax-law changes in House health care bill would affect employers and insurers The House of Representatives has passed an amended version of H.R. 1628, the American Health Care Act (AHCA or House bill) in a vote of 217-213. (For prior discussion of the unamended House bill, see Tax Alert 2017-433.) This Alert summarizes the key tax law changes in the House bill affecting employers and health insurers that are likely to be considered by the Senate going forward. A chart below updates the effective dates for the repealed and delayed tax provisions, as passed by the House. The AHCA would repeal and amend portions of the Patient Protection and Affordable Care Act (commonly referred to as the ACA). In particular, the AHCA would significantly change the ACA Medicaid expansion and the manner in which Medicaid would be funded. It would also permit states to waive certain ACA requirements, such as the limitation on age rating health insurance pricing beginning in 2018 and the requirement to cover individuals with pre-existing conditions in certain circumstances beginning in 2019. Also, under the waiver program, beginning in 2020, states could define the "essential health benefits" that must be covered by health insurance, rather than following the ACA rules. To obtain the waiver, a state would apply to the Department of Health and Human Services (HHS) for approval; however, the waiver application will be automatically approved, unless the state is notified by HHS within 60 days. A state's waiver application must explain how the waiver accomplishes only one or more of the following: reduction in health insurance premiums, increase in enrollment, stabilization of the health insurance market, stabilization of premiums for individuals with pre-existing conditions, or increase in the choice of health plans in the state. The House bill makes a number of other changes that are designed to address concerns related to the cost of health insurance premiums, the cost of government subsidies and individuals' choice of health care policies available in the marketplace. The House bill would also repeal or delay the tax provisions that were enacted with the ACA to raise the revenue to fund the cost of expanding health care coverage. The Congressional Budget Office (CBO) provided a revenue estimate dated March 23, 2017 of the AHCA, as amended by the manager's amendments. This CBO estimate concluded that the tax changes, together with the changes to certain coverage provisions, would result in a loss of revenue of nearly $1 trillion over 10 years. The CBO has not yet published a revenue estimate of the tax changes and other provisions of the final AHCA, as amended, that was passed by the House of Representatives. The Senate will now take up the AHCA. The Senate is expected to make significant changes to the House bill. Because a Senate health reform bill likely will differ materially from the House bill, questions remain about both the timing and the substance of the law changes that ultimately may be enacted. Once the Senate passes its legislation, the House and Senate would conference to prepare and vote on a joint bill to be signed by the President. The timing of the Senate process is not certain and could take several weeks or even months to complete. In the meantime, the ACA continues to be the law. Employers continue to be subject to the employer mandate and reporting requirements, as well as the various ACA market reform provisions. Employers and insurers will need to consider the potential effect of future changes and will want to follow the legislative process. Because the timing of the repeal of a tax provision may have a material revenue impact, the effective dates of the tax provisions are often the last items to be determined in final legislation. Under current law, Code Section 5000A imposes an excise tax on individuals (referred to as the "individual mandate") who do not maintain health insurance for themselves and their family members, unless a specific exception applies. Premium tax credits under Code Section 36B are available to individuals below certain income thresholds who do not have access to employer-provided or government coverage and who purchase their coverage through a state or federal exchange (also referred to as "marketplace" coverage.) The individual "mandate" and the premium tax credit provisions are coordinated with the requirement that employers of a certain size must offer health insurance coverage to their full-time employees. Individuals with access to employer-provided coverage meeting certain affordability and minimum value requirements are not eligible to receive a premium tax credit. An employer in a controlled group that employs 50 or more full-time employees (or full-time equivalents) is subject to an excise tax (referred to as the "employer mandate") under Code Section 4980H if: (i) it fails to offer coverage to full-time employees and dependents that is affordable (as defined in the ACA) and meets certain other requirements (e.g., no annual limits, coverage to children up to age 26); and (ii) any of its full-time employees purchases coverage on the marketplace and receives a premium tax credit. The House bill essentially would repeal the excise taxes for both the individual mandate and the employer mandate by reducing the taxes to zero retroactively to 2016. The income-based premium tax credits would continue to be available through 2019. Beginning in 2020, the premium tax credit would be age-based starting at an annual credit of $2000 for individuals under age 30 to $4000 for individuals over age 60. The credit would be additive for individuals in a family (capped at $14,000) and phased out for individuals with incomes above $75,000 ($150,000 joint filers). To be eligible for the tax credit, the individual could not be eligible for employer-sponsored health care coverage or government coverage such as Medicare or Medicaid. Implications: The IRS enforces the Code Section 4980H tax based on employers' health plan coverage reporting provided on Forms 1095-C and 1094-C and insurers' coverage reporting on Forms 1095-B and 1094-B. Although those forms have already been filed, the IRS has not yet assessed any employer with a Code Section 4980H excise tax for 2016 because it must "match" the employer reporting with individual return information to determine which individuals have received premium tax credits for exchange coverage. The House bill would require employers beginning in 2020 to report on employees' Forms W-2 for each month of the year whether the employee received an offer of eligible employer-sponsored coverage. This Form W-2 reporting is designed to provide the IRS with the information necessary to administer the age-based premium tax credit. The House bill does not repeal the current-law Code provisions that establish the employer and insurer reporting obligations needed to enforce both the employer and the individual mandates. However, if provisions similar to those provided in the House bill were ultimately enacted, one would anticipate administrative changes to the details around employer and insurer reporting obligations. The ACA enacted Code Section 4980I, which imposes an excise tax (referred to as the "Cadillac tax") on insurers that provide group health care coverage and employers with self-insured coverage if the cost of the employer-sponsored coverage exceeds a specified dollar amount. The policy rationale for the Cadillac tax is to impose a further incentive on employers to manage health care costs. The Cadillac tax has been viewed has a proxy for eliminating the income tax exclusion for employer-provided health care, which some view as skewing preferences and contributing to health care cost inflation. Code Section 4980I has drawn criticism across the spectrum from insurers, large employers and unions. The original 2018 effective date of Section 4980I was delayed to 2020. The House bill would not repeal Section 4980I, but would further delay its effective date to 2026. Implications: The further delay of Code Section 4980I implementation would provide employers with a reprieve, but leaves open for continued debate some form of taxation of employer-provided health care. Prior to the enactment of the ACA, employers could receive both a tax-free subsidy for offering a Medicare Part D prescription drug plan to their retirees and take a full income tax deduction for the prescription drug costs. Under Code Section 265(a), an employer cannot take a deduction for any expense related to tax-exempt income. But, before being amended by the ACA, Code Section 139A exempted the Medicare Part D subsidy from those normal tax rules and employers were entitled to deduct the costs related to the retiree prescription drug expenses even if the costs were reimbursed through the tax-free subsidy payments. Thus, certain employer dollars spent on retiree drug costs were both reimbursable and deductible. The ACA eliminated the provision in Code Section 139A that permitted the deduction of retiree prescription drug costs without regard to receipt of the Medicare Part D subsidy. The tax-free subsidy remained available, but the reimbursed dollars were no longer deductible effective for tax years beginning in 2013. Thus, under current law, employers may deduct only the post-retirement prescription drug benefit costs net of any Medicare Part D subsidy that they receive. The House bill would repeal the ACA amendment to Code Section 139A effective for tax years beginning in 2017. Accordingly, employers would once again receive the tax-free subsidy for Medicare Part-D programs and also would be entitled to deduct the full cost of retiree prescription drug benefits that they provide. Implications: In the advent of the ACA, many large employers sought to pre-fund and deduct insurance premiums or VEBA contributions (consistent with Code Sections 419 and 419A) for future retiree prescription drug benefits before the changes to Code Section 139A took effect. Pre-funding allowed the employer to secure the income tax deduction for prescription drug benefits that would have been eliminated in later years. Large employers that provide retiree health programs and receive Medicare Part D subsidies will again need to assess the availability of an income tax deduction for these benefits (to the extent not already pre-funded and deducted). Further planning may also be merited because large employers may also expect future income tax rate reductions after 2017. The ACA limited the contributions to and reimbursements from both HSAs and FSAs. In particular, over-the-counter medications generally are not eligible for reimbursement; contributions to FSAs are limited to $2500 per year (with a cost of living adjustment); and the penalty for HSA distributions for non-medical benefits was increased. The House bill repeals these ACA limitations on both FSAs and HSAs effective for calendar years beginning in 2017. The House bill increases the aggregate annual HSA contributions to equal the maximum annual deductible and out-of-pocket expenses permitted under a high deductible health plan effective in 2018. In 2017, those limits would be $6,550 in the case of self-only coverage and $13,100 in the case of family coverage. Implications: Employers should consider these additional tax savings opportunities for employees as they design their health plan offerings. The ACA amended Sections 3101(b) and 1401(b) to impose an additional .9% Medicare (HI) tax on wages and self-employment earnings above $200,000 ($250,000 for joint filers). The House bill would repeal the additional .9% tax, but the repeal would not be effective until tax years beginning in 2023. Employers will continue to need to withhold for the .9% tax on wages for higher-income employees. The ACA also added Section 1411 to the Code, which imposes an additional 3.8% tax on "net investment income." The House bill would repeal this tax effective for tax years beginning in 2017. The House bill generally would not repeal or modify the ACA market reform provisions that amended the Public Health Service Act (PHSA), ERISA and the Code. These provisions require health plans and policies to include a number of specific benefits, including coverage to children up to age 26 and preventive services. The ACA also prohibits employer-sponsored group health plans and other coverage from imposing an annual or lifetime limit on any of the "essential health benefits," as defined by the ACA. As previously discussed, the House bill would permit a state to adopt its own definition of the essential health benefits and apply to waive out of the ACA rules. This House bill waiver provision raises questions about whether employers could re-design their employee health care coverage to impose annual or lifetime limits on a medical service or coverage that is not considered an "essential health benefit" under state law, but have been an essential benefit under the ACA definition. Implications: The application of the "essential health benefit" rules to employer-sponsored group health plans is a topic that likely will continue to be debated in the Senate. Employers will want to follow closely as it directly affects their decisions on employer-sponsored health plan design and employee benefits. Section 9010 of the ACA, referred to as the "health insurance provider tax," is a fee that is administered by the IRS. The health insurance provider tax applies to all health insurance issuers that write group or individual coverage, including insurers receiving premiums from government programs, such as Medicare and Medicaid. The amount of the tax is based upon the relative amount of premiums for US health risks that the insurer receives and is treated as a nondeductible excise tax. The health insurance provider tax was first payable in 2014; a one-year moratorium for the tax otherwise payable in 2017 was previously enacted by Congress. The ACA added Code Section 162(m)(6), which imposes a $500,000 federal income tax deduction limitation for compensation paid to any individual providing services to a covered health insurance provider. This deduction limitation applied for tax years beginning after December 31, 2012, and applies in the tax year that the compensation payment otherwise would be deductible. Because Code Section 162(m)(6) applies on a controlled group basis, the deduction limitation may apply to non-insurance businesses that are members of a Code Section 414 controlled group with a health insurer, unless the total amount of health premiums collected meets a de minimis test (i.e., 2% of gross revenues of the controlled group). In contrast to the $1 million deduction limit that applies to public companies, the $500,000 limit applies to individual service providers (regardless of whether they are an executive officer) and there are no performance-based compensation exceptions. Furthermore, the deduction limitation applies to current compensation, as well as deferred compensation, and applies to the deduction of deferred compensation even if the service provider is no longer employed by the health insurer or a member of the controlled group. Implications: If provisions similar to those in the House bill were enacted, the deduction limitation would be terminated as of the effective date and would not apply to current compensation or deferred compensation payments. While the House bill provides for a 2017 effective date, it is possible that any legislation ultimately enacted could include a prospective effective date, which would mean that health insurers might consider delaying (if possible) payment of compensation to further defer the deduction into a tax year in which the $500,000 limit does not apply. (Note: an exception under the Section 409A deferred compensation rules generally would allow such deferrals.) There is also the possibility that the deduction limit could merely be amended or left in place in final legislation. Although the $500,000 deduction limit has been criticized as highly complex to administer and overly burdensome to a particular industry, broader tax reform discussions could expand deduction limitations for executive pay. Thus, some uncertainty remains about the prospects of a full repeal of Section 162(m)(6). The following chart lists the ACA taxes and fees that would be repealed or delayed by the House bill and the corresponding effective dates.
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