Tax Reform Watch: What the Proposed American Health Care Act Would Mean for Taxes – May 12, 2017 by Tracy Monroe

On May 4, 2017, the House narrowly passed along party lines a bill called the American Health Care Act (AHCA) in an effort to repeal and replace the Affordable Care Act (ACA). The Bill would eliminate most of the ACA’s taxes, including the penalties connected with the individual and employer mandates. The Bill now moves to the Senate where changes are expected, and the Senate could even prepare its own bill.
 
The movement forward on health care legislation provides some additional structure for what tax reform could look like. As explained in our previous blog on why we are still talking about repeal and replace, tax reform will most likely be achieved through the budget reconciliation process. Under reconciliation, a bill is technically allowed to decrease or increase the national deficit over the 10-year period covered by the budget resolution. However, after that period it then must sunset and conform with many other complicated rules. But, if key taxes can be repealed under the AHCA Bill or other resulting healthcare reform legislation, they will not be considered a revenue reduction measure under tax reform — moving one step closer to the goal of reforming our tax code in a revenue-neutral manner.
 
One key to the ACA structure is to have as many people as possible covered by health insurance. Part of this goal was accomplished through credits and other incentives to encourage health insurance, as well as penalties for individuals and employers who did not meet the mandate. The ACA also contained a number of tax provisions put in place to encourage compliance with or help offset the cost of healthcare reform. The Bill would repeal all of these with a few exceptions or delays.
 
One of the most significant taxes under the ACA is the Net Investment Income Tax (NII) on individuals equal to 3.8% of the lesser of net investment income or the excess of the individual’s modified adjusted gross income (MAGI) over a threshold of $250,000 for married filing jointly or $200,000 for individuals. Net investment income is generally interest, dividend or other income from investments or passive activities. The Bill would repeal the NII. Closely related to the NII is the 0.9 % additional employee Medicare tax on compensation and self-employment income above the thresholds outlined above. The Bill would delay its repeal until 2023.
 
The Bill also would repeal more obscure tax provisions, many of which were delayed and still have not gone into effect: 

  • The 2.3% medical device tax
  • 40% excise tax on high-dollar health plans (Cadillac plans)
  • 10% excise tax on tanning services
  • Fee imposed on health insurer providers
  • Tax credits to help offset the cost of health insurance, both for individuals and employers. (However, the Bill would create a new refundable credit for health insurance.) 

In addition, the threshold for claiming medical expenses would be returned to 7.5% of AGI; however, this deduction would likely be gone under future tax reform.
 
Some benefits under the Bill are the continued focus on health savings accounts and flexible spending accounts. For flexible spending accounts, the ACA-imposed limit of $2,500 would be removed. Additionally, the rule allowing flexible spending accounts to be used to purchase over-the-counter medicines would be restored. Additionally, under the Bill the annual deductible limit for health savings accounts (HSA) would increase to the sum of the maximum annual deductible and out-of-pocket expenses under a high-deductible plan.
 
The passage of the AHCA Bill by the House should send a signal to all involved in drafting tax reform. Specifically, tax proposals should take into consideration the potential ACA taxes being repealed. If healthcare reform is passed and removes key ACA taxes, that’s less “revenue loss” tax reform will need to contend with, potentially setting the stage for a smoother process. 
 
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