6 Key Components of the Recently Proposed American Health Care Act (AHCA) - A Global Tax Blog Article from KLR

Global Tax Blog

6 Key Components of the Recently Proposed American Health Care Act (AHCA)

posted Mar 10, 2017 by Loree Dubois, CPA in the Global Tax Blog

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On March 6, House Republicans unveiled a 123-page proposal for replacing the Affordable Care Act (ACA). Here are the basics of that bill, known as the American Health Care Act.

1. No More ACA-Related Taxes - The American Health Care Act proposes repealing taxes on prescription drugs, over-the-counter medications, health-insurance premiums and medical devices. Starting in 2018, the bill would specifically eliminate the 0.9% Medicare surtax, the 3.8% net investment income tax and the 10% tax on indoor tanning services. In addition, the controversial Cadillac tax, a 40% excise tax on high cost employer-provided plans, would be pushed back until 2025. 

For taxpayers who itemize deductions, the bill would return the threshold for deducting medical expense from 10% to 7.5% of adjusted gross income (AGI). The change would go into effect for all taxpayers in 2018. But if you or your spouse is age 65 or older, the bill would also retroactively allow you to apply the 7.5% AGI-threshold for 2017.

2. Repeal of Individual and Employer Mandate Penalties - Under current law, most individuals are required to purchase health insurance, and certain businesses must provide health insurance to their employees. Individuals and businesses that don’t comply with the mandates must pay penalties to the IRS.

Retroactive to January 1, 2016, neither individuals nor employers would be required to comply with these mandates (or be charged penalties) under the American Health Care Act. The current proposal retains the ACA reporting requirements for employers, however.

Even if the mandate is repealed, many employers will still provide affordable health insurance coverage, because they want their compensation packages to be competitive — and they care about their employees’ health and well-being.

The bill would also strongly encourage individuals to continue purchasing coverage once the mandate is repealed. Under the American Health Care Act, insurers would be allowed to impose a 30% penalty on top of the monthly premium rate on individuals who let their coverage lapse for 63 continuous days or longer.

3. Protections for Patients - The bill would continue to prohibit health insurers from denying coverage or charging more money to patients based on pre-existing conditions. It would also still allow young people to be covered by their parents’ health care plans until they turn 26.

4. Federally Funded Programs - The bill would give $100 billion to states to create programs that fit the needs of their patient populations through December 31, 2026. The so-called “Patient and State Stability Fund” would be allocated to states to help high-risk individuals obtain affordable coverage.

Additionally, the bill would transition to a per-capita allotment for joint federal-state Medicaid programs. Starting in 2020, the proposal would freeze expanded enrollment in the Medicaid program created by the ACA. Those who have gained coverage under the ACA would be allowed to keep their Medicaid coverage. But those who lose Medicaid coverage when their income rises wouldn’t be allowed to rejoin the program.

5. Savings Accounts for Qualifying Medical Expenses- Health savings accounts (HSAs) and health flexible spending accounts (FSAs) are two types of tax-advantaged savings accounts that individuals can use to pay for qualifying medical expenses.

HSAs would be enhanced and expanded under the American Health Care Act. Starting in 2018, annual contribution limits would nearly double to $6,550 for individuals or $13,100 for families. And the bill would expand how these accounts could be used.

In addition, the bill would repeal the $2,500 limit on annual contributions to a health FSA by an individual or employer. This change would also go into effect in 2018.

6. Tax Credits for Coverage - Under the American Health Care Act, low- and middle-income people who don’t receive health insurance through a work or government program would generally be eligible for a monthly tax credit to offset the costs of purchasing health insurance coverage.

The refundable tax credits would range from $2,000 to $14,000 annually based on:

  • Age. For example, the credit for a 27-year-old would be $2,000; the credit for a 60-year-old would be $4,000.
  • Filing status. Credits would be additive for a family and capped at $14,000 per family.
  • Income. Credits would be available in full to single people who make up to $75,000 a year or joint filers who make up to $150,000 a year. For every $1,000 in income above these thresholds, the credit would be phased out by $100.

The credits would be indexed for inflation and go into effect in 2020 under the proposal.

Work in Progress

Republicans are eager to replace the ACA, and President Trump has voiced his support for the American Health Care Act. But the bill has a long way to go before it’s made into a law.

*** UPDATE *** On March 20, House Republicans released a Manager’s Amendment to the American Health Care Act. The amendment makes a number of substantive changes to the proposal, including accelerating the repeal of certain ACA-related taxes, delaying implementation of the Cadillac tax and lowering the floor for medical expense deductions to 5.8%. The House is expected to vote on the proposal on Thursday, March 23. But it’s still uncertain whether the proposed legislation will have sufficient support to pass the House and Senate.

We’re monitoring this landmark proposal, and we’ll keep you informed as more details unfold.