On Monday night the House of Representatives unveiled legislation to repeal and replace the Patient Protection and Affordable Care Act (the “ACA”), which would reduce numerous federal taxes by eliminating almost all of the tax increases that were introduced as part of the ACA. A copy of the bill is available here. According to analysis released yesterday by Congress’ Joint Committee on Taxation, the bill, titled the American Health Care Act (“AHCA”), is expected to reduce taxes by approximately $600 billion over ten years. Although the bill leaves untouched the economic substance doctrine that was codified with the ACA, the bill notably provides significant taxpayer relief by:
- Repealing the 3.8% tax on certain net investment income under Section 1411 for taxable years starting after December 31, 2017
- Repealing the 0.9% Medicare surtax under Sections 3101 and 1401 on wages above certain thresholds starting after December 31, 2017
- Reducing to zero the penalty/tax on employers that do not offer qualifying health insurance, effective starting in 2016
- Reducing to zero the penalty/tax on individuals who do not purchase qualifying health insurance, effective starting in 2016
- Repealing the annual fees imposed on health insurance providers and certain manufacturers and importers of branded prescription drugs, effective starting in 2018
- Delaying from 2020 to 2025 the imposition of an excise tax on certain high-value health insurance plans (commonly referred to as “Cadillac plans”)
- Generally lowering the threshold for deductibility of medical expenses for taxable years starting after December 31, 2017 and extending through 2017 the lower threshold under current law for taxpayers aged 65 or older
- Repealing the tax on medical devices under Section 4191 for sales after December 31, 2017
- Repealing the limitation on salary reduction contributions for health flexible spending arrangements under Section 125(i) for taxable years beginning after December 31, 2017
- Increasing the maximum contributions to Health Savings Accounts (“HSAs”) under Section 223 and lowering the applicable tax on distributions from HSAs includible in income for taxable years beginning after December 31, 2017
- Expanding the definition of qualified medical expenses to include non-prescription over-the-counter medicine for purposes of HSAs, Archer MSAs under Section 220, and Health Flexible Spending Arrangements and Health Reimbursement Arrangements under Sections 105 and 106 for taxable years beginning after December 31, 2017
- Repealing the sales tax on indoor tanning services under Section 5000B starting in 2018
- Eliminating the limitation on deductibility of remuneration for services paid by health insurance providers under Section 162(m) for taxable years beginning after December 31, 2017
Unlike prior versions of the bill leaked to the press in recent weeks, the AHCA does not include a cap on the exclusion from income for employer-provided health insurance under current law.
Starting in 2020, the AHCA replaces the tax credits available to individuals under current law to purchase health insurance in the individual market, which are generally determined by reference to a taxpayer’s income and the cost of health insurance, with tax credits determined exclusively by age (but which are phased out for taxpayers with incomes above $75,000, or $150,000 in the case of joint return taxpayers). For the 2018-2019 transition period, the bill adjusts the tax credits available under current law based on the taxpayer’s age, generally increasing the credits for younger taxpayers and decreasing them for older taxpayers. The bill also repeals the tax credit available to certain small employers to purchase health insurance for their employees for taxable years starting after December 31, 2019. Like the ACA, the AHCA establishes a mechanism by which the Secretary of Health and Human Services would make advance payments of the tax credits directly to providers of insurance in the individual market.
The AHCA also imposes an information return requirement on insurers in the individual market, who would be required to report information with respect to individuals who receive the benefit of the AHCA’s refundable tax credits (on a monthly basis with respect to individuals on whose behalf the insurer receives the advance payments mentioned above).
The AHCA has not yet been evaluated by the Congressional Budget Office, which will report on the overall cost of the bill and its expected effects on the health insurance market, including the number of individuals expected to be insured under the plan. The bill is being marked up today by the House Committee on Ways and Means and the Energy and Commerce Committee. Although some House Republicans have expressed concern with the bill, House Speaker Paul Ryan has expressed confidence that the bill will secure passage in the House. Top Senate Republicans have indicated that the bill may move straight to the Senate floor for debate and amendment after being passed by the House, rather than through the committee process. However, based on reactions by certain Senate Republicans reported in the media, the AHCA may have a steep uphill climb to passage in the Senate.
Notably, the AHCA’s effect on the budget and, in particular, revenues, would form the baseline for evaluating any tax reform proposals included in Fiscal Year 2018 budget resolutions.