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Senate healthcare bill mirrors House retroactive repeal of ACA taxes

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Senate Republicans released healthcare reform legislation on June 22 that follows the House’s lead in repealing Affordable Care Act (ACA) taxes, but breaks from the House bill in several other key areas.

Senate Republican leadership assembled the Better Care Reconciliation Act (BCRA) largely in secret after the House narrowly approved the American Health Care Act (AHCA) in May. Both bills would repeal and replace much of the ACA but differ over how they handle subsidies for coverage, coverage requirements and Medicaid reform.

Senate Majority Leader Mitch McConnell, R-Ky., postponed a vote on the measure until after the July 4 recess, and he is scrambling to make changes that would allow it to pass. Republicans can afford to lose only two Senate votes and still pass the bill without Democratic support, and the bill has run into opposition from both moderates and conservatives. Even if it passes the Senate, the House and Senate would have to resolve the differences between the bills before enactment.

Like the AHCA, the BCRA would repeal the excise taxes for individuals who fail to obtain coverage and employers that fail to offer coverage. This change would be effective retroactively for the 2016 tax year, so employers and individuals who paid those taxes would potentially be allowed refunds. In place of the individual excise tax, both the BCRA and AHCA would impose new restrictions on individuals who have a 63-day lapse in coverage.

The BCRA would generally preserve the premium tax credit that individuals currently receive for the purchase of insurance on the various health insurance exchanges through 2019, but would make major changes beginning in 2020. By contrast, the AHCA would expand the premium tax credit for 2018 and 2019 before replacing it with a very different refundable credit beginning in 2020.

The BCRA and the AHCA both repeal revenue-raising tax provisions in the ACA. Most of these taxes would be repealed retroactively for all of 2017, including the following:


  • The 3.8% Medicare tax on net investment income (NII) under Section 1411
  • Limits on the deductibility of salaries paid to health care executives
  • The ban on reimbursements for over-the-counter medication from Health Savings Accounts (HSAs), Flexible Spending Arrangements (FSAs) and Medical Savings Accounts (MSAs)
  • Increased penalties on impermissible HSA and MSA disbursements
  • Limit on employer deductions related to the Medicare Part D subsidy

The BCRA would repeal the cap on FSAs in 2018, while the AHCA proposed a repeal in 2017. The two bills also differ on the adjusted gross income (AGI) floor for medical expenses, with the BCRA reverting from 10% back to 7.5% in 2017 while the AHCA would go all the way down to 5.8%. The BCRA would also retain the “tanning tax,” a 10% tax on indoor tanning salons, for three months longer than the AHCA, repealing it beginning Oct. 1, 2017.

Both the AHCA and BCRA would retain the 0.9% Medicare surtax on earned income until 2022. Under both bills the 40% excise tax on high-cost health plans known as the “Cadillac tax” would be delayed until 2026 instead of repealed. Both bills would repeal the medical device excise tax and the health insurance industry fee before they are scheduled to come back into effect. The fee on the pharmaceutical industry remains currently in effect, but both bills would repeal it in 2018.


Neither bill would repeal the codification of economic substance doctrine, which was enacted as part of the ACA, or the Patient-Centered Outcomes Research Institute (PCORI) fee, which is scheduled to expire on its own in 2019. The small business tax credit for small employers to purchase health coverage would be repealed by both bills beginning in 2020, and both bills make enhancements to HSAs.

The Congressional Budget Office (CBO) estimated that the BCRA will save $321 billion, but that 22 million Americans would lose health coverage over the next 10 years. The tax changes are estimated result in a net tax cut of over $600 million, significantly less than the $1 trillion tax cut under AHCA, primarily due to more generous tax credits in the Senate bill. The CBO similarly estimated that 23 million Americans would lose coverage under the House bill.

The CBO estimate of how many would lose coverage hurts the bill’s chances, but the overall savings estimate means that the bill should generally be eligible to use the reconciliation process, which allows Republicans to avoid the Senate’s 60-vote procedural hurdle. However, reconciliation bills also generally cannot include provisions that don’t have a revenue effect at all, and there is some question over whether all the BCRA provisions qualify.

Several Republican Senators are already looking to negotiate changes in the BCRA before they can support it, and passage in the Senate is not assured. If McConnell can muster the votes, passage would represent a major step toward enactment, but obstacles would remain. Many of the changes made by the Senate will be unpopular with conservative House Republicans, including retaining protections for taxpayers with pre-existing conditions and allowing children to stay on their parents’ insurance until they are 26. The Senate bill actually deepens the Medicaid cuts that many House conservatives favor, but it softens the initial blow with a slower implementation.

The AHCA passed the House with only a 217-213 vote, with 20 Republicans voting against it. It seems unlikely that the House would accept a more moderate Senate bill without insisting on further changes. Settling on a version that satisfies both Senate moderates and House conservatives will prove challenging.
The following covers some of the tax provisions in more detail.

Medicare taxes
The ACA included two Medicare-related tax increases. For earned income over $200,000 for singles and $250,000 for joint filers, the individual portion of the Medicare payroll tax was increased 0.9% to 2.35% (making the self-employment rate 3.8%). The ACA then created a new equivalent 3.8% tax on NII to the extent AGI exceeded those same income thresholds. The BCRA and AHCA would both repeal the tax on NII retroactively for 2017, but retain the 0.9% surcharge on earned income until 2023.

Cadillac tax
The Cadillac tax imposes a 40% tax on the value of certain health plans that exceed a set threshold. The tax was originally meant to curb over-spending on health care and slow cost growth, but has become very unpopular in both parties.

Both the BCRA and the AHCA would further delay the effective date of the Cadillac tax from 2020 to 2026. The tax is likely being retained only for revenue scoring reasons, and its unpopularity makes it ripe for further delay or repeal in the future.

HSAs, MSAs and FSAs
The ACA included the following provisions on HSAs, MSAs and FSAs in order to raise revenue:

  • Ban on spending for over-the-counter medication without a prescription
  • Increased penalties on impermissible HSA and MSA disbursements
  • $2,500 yearly cap on FSA contributions (indexed and reached $2,600 in 2017)

The AHCA would repeal all three beginning in 2017, while the BCRA would retain the FSA cap until 2018 but repeal the other two in 2017.

Both the BCRA and the AHCA propose enhancements for HSAs. The bills would increase the limit on HSA contributions, starting in 2018, to equal the maximum deductible, equivalent to an increase in 2018 from $3,450 to $6,650 for self-only coverage and from $6,900 to $13,300 for family coverage. The BCRA would also allow spouses to each contribute the maximum individual amount and allow HSA withdrawals for expenses up to 60 days before the account was established. The BCRA and the AHCA would both allow eligible spouses to contribute the catch-up contribution between their HSAs in whatever amounts they decide (including contributing the entire amount to only one of the spouse’s HSAs). Under current law, this treatment is permitted for the regular annual contribution limit but not for the catch-up contributions.

Industry fees
The ACA also created three fees or taxes meant to require the industries expected to benefit from health care reform to help pay for it. The 2.3% medical device excise tax is currently suspended for sales in 2016 and 2017, and both the BCRA and the AHCA would permanently repeal it before it takes effect again in 2018.

The health insurance industry fee was first imposed in 2014 as an $8 billion fee allocated based on market share among all insurers with “aggregate net premiums written.” The fee rose to $11.3 billion for 2015 and 2016, but was suspended for 2017. Both the BCRA and the AHCA would repeal the fee before it would otherwise be scheduled to return at a $14.3 billion level.

The pharmaceutical industry fee was first imposed in 2011. It reached $4 billion for 2017, but would be repealed beginning in 2018 under both the BCRA and the AHCA, when it would otherwise be scheduled to rise to $4.1 billion.

Health coverage taxes and credits

The ACA created a new tax to encourage individuals without insurance to obtain coverage, and provided a premium tax credit to help them purchase coverage on newly created exchanges. The bill also encouraged employers to offer insurance by imposing excise taxes for failing to offer coverage or failing to offer coverage that meets certain standards. These provisions were deeply unpopular with Republicans, and while the employer excise taxes would be repealed outright by the BCRA and the AHCA, the individual provisions would be replaced with somewhat similar provisions.

The BCRA and the AHCA would both retain the Section 36B premium tax credit in 2018 and 2019 with minor modifications. The bills would require taxpayers to repay in full any excess premium tax credit beginning in 2018 if their income is higher than the projection used to calculate the original credit. The AHCA would also expand the credits for 2018 and 2019 so that they could be used on plans outside the exchange and on “catastrophic-only” plans, which were previously not permitted.

The AHCA would repeal the premium tax credits in 2020 altogether and replace them with a refundable tax credit based on the age of individuals. The BCRA would retain the credits, but make significant changes to them. The credits would only be available for taxpayers at 350% of the poverty level and below (rather than 400%), and would bar access for certain aliens and individuals with access to employer coverage. The credits would also be benchmarked to a lower-cost plan and the credit percentages would depend on age as well as income.

Both the BCRA and the AHCA would repeal the individual and employer excise taxes effective for 2016, so if enacted, the legislation would forgive taxes from any lapses last year. However, both the BCRA and AHCA include provisions meant to replace with individual mandate with different kinds of penalty meant to discourage coverage lapses. The AHCA would require insurers to impose a 30% surcharge on the premium of any individual with a lapse in coverage of more than 62 days. The BCRA would create a six-month waiting period to purchase insurance for individuals with a 632 day lapse in coverage.

Other provisions
The legislation would also repeal the following provisions:

  • Executive compensation: The ACA limited the amount of employee pay insurance companies could deduct to $500,000 per employee if at least 25% of premium income comes from plans meeting creditable coverage requirements. This provision would be repealed by both the BCRA and the AHCA beginning in 2017.
  • Employer coverage credit: The ACA created a credit for employers with 25 or fewer employees who offer health coverage. The current credit is 50% of coverage costs for insurance purchased through a state exchange in the first two years employers offer coverage but would be repealed by both the BCRA and the AHCA starting in 2020.
  • Medicare Part D subsidy: The ACA eliminated the ability of an employer to take a deduction for prescription drug coverage provided to employees to the extent the employer received a retiree drug subsidy from the federal government that was excluded from income. This deduction would be reinstated beginning in 2017 under both the BCRA and the AHCA.
  • Medical expense deduction: The ACA raised the threshold for the itemized deduction for medical expenses from 7.5% of AGI to 10% of AGI. The change became effective for taxpayers 64 and younger in 2012 and seniors in 2017. The BCRA would return the threshold to 7.5% for all taxpayers beginning in 2017. The AHCA would lower the threshold to 5.8% for all taxpayers beginning in 2017.
  • Tanning service excise tax: The BCRA would repeal the ACA’s 10% tax on indoor tanning services, effective Sept. 30, 2017. The AHCA would make repeal effective June 30, 2017.

Takeaway
It remains unclear whether the Senate and House can agree on a bill that President Donald Trump will sign into law. Deep divisions remain between moderate and right-wing Republicans with regard to both the AHCA and the BCRA, and public opinion on the proposals has not generally been positive. Nevertheless, passage of the law would result in dramatic changes, and would also have an impact on the IRS, which is generally charged with administering significant portions of the ACA.

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Contacts
Dustin Stamper
Director, Washington National Tax Office
T +1 202 861 4144

Mel Schwarz
Partner, Washington National Tax Office
T +1 202 521 1564

Eddie Adkins
Partner, Washington National Tax Office
T +1 202 521 1565

Jeff Martin
Senior Manager, Washington National Tax Office
T +1 202 521 1526

Shamik Trivedi
Manager, Washington National Tax Office
T +1 202 521 1511


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