On May 4th the House of Representatives passed a bill by a 217 to 213 margin to repeal the Affordable Care Act (ACA) and replace it with The American Health Care Act (AHCA). If enacted in its current form, the new law would eliminate most of the taxes the ACA put in place. The House bill is now in the hands of the Senate where it will likely undergo significant changes.
As it stands, there are several significant components to the proposed law. All of the ACA taxes would be repealed, with the exception of the excise tax on high-dollar health plans (this will be delayed until a later date, possibly past 2020). The additional Medicare Tax (0.9%) on self-employment income and employee compensation will be repealed in 2023. Additionally, the new bill would remove the mandates of health care coverage for individuals and employers to insure employees, thus eliminating the penalties for non-compliance present in the ACA.
With the bill, the individual mandate would be eliminated, but insurance companies would be able to impose a 30% premium increase for up to a year as a deterrent for those individuals that let their insurance lapse for more than 63 days. The bill would also repeal the premiums assistance tax credit and instead create a new advanceable and refundable tax credit for individuals that purchase state approved major medical health insurance and unsubsidized COBRA coverage. These tax credits will be based primarily on age and will be subject to income phase outs. In order to qualify for the new credit, the individuals also cannot have access to government or employer health care.
The new legislation also changes the limitations on several tax provisions. Under the ACA, Health Flexible Spending Arrangements (FSAs) are limited to contributions of $2,500; under the AHCA this limitation would be repealed. When using FSAs or other similar arrangements under the ACA, medicine or other drug related over-the-counter medical expenses are only considered eligible for reimbursement if prescribed by a doctor. Under the AHCA this rule is eliminated and over-the-counter medications do not need to be prescribed to be eligible medical expenses.
The bill also changes the Adjusted Gross Income limitation for medical expense deductions on Schedule A of an individual’s 1040 from 10% (7.5% for those born before Jan. 2nd 1952) to 5.8%. Additionally the ACA limitations for Health Savings Account (HSA) contributions are $3,400 for individuals and $6,750 for family coverage. Under the AHCA self-only coverage contribution limitations would go up to $6,550 or $13,100 for family coverage. The AHCA tax on distributions from HSAs or Archer MSAs is altered as well. Under the AHCA there would be a 10% tax on HSA distributions that are not qualified (down from 20% under the ACA) and Archer MSA would bring a 15% tax on distributions that are not qualified (down from 20% under the ACA).
The AHCA also repeals the employer mandate, no longer requiring large businesses to offer employer sponsored health insurance. Under the AHCA, the penalty for large businesses not providing coverage is reduced to zero retroactively to January, 2016. In addition, for small businesses the Code Sec. 45R Small Employer Credit will be repealed under the proposed law. The AHCA also provides relief to businesses by repealing the tanning services excise tax and excise tax on the sale of medical devices.
In addition under the AHCA many of the ACA taxes will be eliminated such as Net Investment Income Tax (NIIT), additional Medicare Tax (0.9%), and several excise taxes. The AHCA will also change several limitations on HSAs, MSAs, FSAs and medical expense deductions. HSA contribution limitations will nearly double for self and family coverage, FSAs will not have a limit for contributions, and the AGI limitations for Schedule A medical deductions will be reduced to 5.8% of AGI. Businesses and individuals will see penalties reduced to zero for mandatory coverage (although individuals could see higher premiums for up to a year if coverage lapses for a certain time period). As previously stated, this bill is now in the hands of the Senate where it is likely be rewritten substantially, thus these are only proposed changes at the moment.
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