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    Highlights of Tax Provisions of American Health Care Act

    Posted by Natalie Takacs on Mar 14, 2017 9:09:52 AM

    American Health Care Act Provisions.jpgIn a step toward repealing and replacing the Affordable Care Act (“ACA”), on March 9, 2017, the House Ways and Means Committee approved the House GOP’s American Health Care Act (“AHCA”) along party lines by a 23-16 vote. In the version of the bill approved by the Ways and Means Committee, the AHCA would repeal all of the ACA tax provisions, with the exception of the so-called “Cadillac” excise tax on high-dollar health plans (which would be delayed until 2025). 

    From a non-tax perspective, the bill retains the following key provisions of the ACA: 

    • Dependents are permitted to stay on their parents’ healthcare plans until age 26;
    • Health insurers are prohibited from denying coverage or raising rates to patients based on pre-existing conditions and from placing lifetime limits on coverage. 

    The bill now advances to the Budget and Rules Committees, and, according to House Speaker Paul Ryan, R-Wis, the House is expected to vote on the measure by the end of March. 

    The following are the highlights of the tax-related provisions of the bill as approved by the Ways and Means Committee:

    Individual and Employer Mandate Penalties

    The penalties imposed by the ACA on individuals who do not have health insurance and on employers who do not offer health insurance would be repealed retroactively to January 1, 2016.  In lieu of these penalties, to discourage healthy individuals from going uninsured, the AHCA would permit insurance companies to impose up to a 30 percent premium penalty for up to 1 year on individuals who let their insurance lapse. 

    Net Investment Income Tax

    The net investment income tax (“NIIT”) generally imposes a 3.8 percent surtax on the investment income (i.e., interest, dividends, capital gains, etc.) of married taxpayers whose modified adjusted gross income for the tax year exceeds $250,000 ($200,000 for single taxpayers).  The AHCA would repeal the NIIT for tax years beginning after December 31, 2017. 

    Additional Medicare Tax

    The additional Medicare tax requires individuals to pay an additional .9 percent Medicare tax on wages and self-employment income in excess of $250,000 for married taxpayers ($200,000 for single taxpayers).  The AHCA would repeal the additional Medicare tax for tax years beginning after December 31, 2017. 

    Cadillac Tax

    The ACA had introduced a 40 percent excise tax on employer-sponsored health insurance plans (known as “Cadillac” plans) whose cost exceeds certain thresholds.  This tax had been scheduled to apply to tax years beginning after December 21, 2017.  The AHCA would retain this tax but would delay it until 2025.  The Congressional Research Service projects that the excise tax will be imposed on plans that cost more than $10,080 for single health plans and $29,100 for family plans. 

    New Refundable Credit for Health Insurance Coverage

    The AHCA would repeal the premium assistance tax credit (currently available to certain taxpayers who purchase health insurance through the exchange) and replace it with an advanceable, refundable tax credit for eligible individuals to purchase state-approved, major medical health insurance and unsubsidized COBRA coverage.  Eligible individuals must not have access to government health insurance programs or an offer of health insurance from any employer. 

    The credits would be adjusted by age, as follows:

    Age   Credit
    <30 $2,000 
    30-39 $2,500
    40-49 $3,000
    50-59 $3,500
    60+ $4,000


    The total credit would be capped at $14,000 per family.  The credits are available in full for married taxpayers making less than $150,000 ($75,000 for single taxpayers) and phase out by $100 for every additional $1,000 of income. 

    IRS Forms 1095 Reporting

    The AHCA would replace the current Form 1095 reporting requirements with a simplified reporting on Form W-2s to indicate when an employer has provided an offer of coverage to an employee.   

    Small Employer Health Insurance Credit

    Under current law, qualified small employers are eligible for a tax credit if they offer health insurance to their employees.  The AHCA would repeal the credit for tax years beginning after December 31, 2019 (after 2018 if the health plan includes coverage for elective abortions). 

    Medical Expense-Related Provisions

    Medical Expense Deduction

    The ACA increased the threshold for individuals under the age of 65 to claim an itemized deduction for unreimbursed medical expenses from 7.5 percent of adjusted gross income (“AGI”) to 10 percent of AGI.  The AHCA would return the threshold to 7.5 percent effective for 2018. 

    Health Flexible Spending Arrangements

    Under the ACA, contributions to health flexible spending accounts (“FSAs”) was limited to $2,500 (adjusted for inflation).  The AHCA would repeal this limitation starting in 2018. 

    Over-the-Counter Medicines

    The ACA restricted reimbursements for medicines and drugs to prescribed drugs.  The AHCA would permit reimbursements for over-the-counter medicines after December 31, 2017. 

    Health Savings Accounts

    Under current law, the maximum amount that may be contributed to a Health Savings Account (“HSA”) in 2017 is $3,400 for individuals and $6,750 for families.  Beginning in 2018, the AHCA would increase this limit to cover the maximum annual deductible and out-of-pocket expenses permitted under a high deductible plan, resulting in projected maximum contributions of at least $6,550 for self-only coverage and $13,100 for family coverage. 

    Conclusion

    As Democrats - and even some Republicans - have expressed criticism of the version of the AHCA approved by the House Ways and Means Committee, it is possible that significant changes may be made to the bill before it is enacted.  Nonetheless, the bill gives us an important first official look at what future legislation may look like.  To help you better understand the potential impact of the current version of the AHCA on your personal and business taxes, we will be publishing future communications that explore several of the proposed tax provisions in greater detail and identify potential tax planning strategies that may be employed to reduce your taxes.  In the meantime, if you would like to discuss the potential impact of the bill, please contact Natalie Takacs at (216) 928-5403 or a member of your engagement team.   

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    Topics: Tax Planning & Strategies

    Natalie Takacs

    Written by Natalie Takacs

    Natalie, a Senior Manager in M&M's Personal Tax Advisory Group, has 20+ years of experience in the areas of individual, stock options, trust, and estate and gift tax.

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