On May 4, 2017, the House of Representatives passed the American Health Care Act (AHCA), which repeals and modifies several requirements of the Affordable Care Act (ACA). While the bill’s future remains uncertain as it begins its journey through the Senate, employers should be familiar with its potential changes in order to prepare for the design and administration of health benefits in the future. A summary of the key AHCA provisions that may affect employers if the AHCA becomes law in its current form follows.
Repeals the Employer Mandate
The ACA contains an employer mandate which imposes a tax penalty on employers with 50 or more full-time employees who do not offer affordable, minimum value health coverage to their employees. Effective retroactively to 2016, the AHCA effectively removes this penalty by reducing the penalty amount to $0.00. This means such employers could terminate their employee health care plans or require employees to contribute more to health care premiums without facing a tax penalty. An employer will also have greater flexibility to determine which employees are eligible to participate in its health care plan as long as the criteria do not discriminate under applicable non-discrimination laws. For example, employers having 50 or more full-time employees will not have to be concerned about possible penalties for failure to offer coverage to employees working 30 hours or more per week and could only offer coverage to employees working 40 hours or more per week. In addition, employers with fewer than 50 full-time employees will not have to be concerned that crossing the 50 full-time employee threshold could subject them to the employer mandate penalty.
Reduces Essential Health Benefit Under State Waivers
The ACA requires insured health care plans to cover 10 essential health benefits (EHBs). The AHCA allows a state to obtain a waiver and set its own EHBs definition. If a state elects to exclude certain services from its EHB definition, insurers that may use the waiver definition could offer coverage with reduced premiums by covering fewer services, including, it appears, for insured employer health care plans. Although the language in the AHCA is not entirely clear, it is possible that such state waivers also may effectively reduce the requirements applicable to self-insured employer health care plans. For example, the ACA imposes, and the AHCA does not repeal, annual and lifetime limits, as well as annual out-of-pocket maximum employee costs for any EHBs under both insured and self-insured plans. Thus, if a state chooses to exclude a certain service from its EHB definition, it is possible that self-insured employer health plans may elect to apply the EHB standards under the state's definition and will no longer be subject to the prohibition against annual and lifetime limits or the maximum out-of-pocket costs with respect to such service.
Reduces Record-Keeping and Reporting
The ACA requires comprehensive recordkeeping regarding hours of employees and significant reporting regarding coverage. Although the repeal of the employer mandate removes some of the rationale for the recordkeeping burden, it does not remove the ACA’s reporting requirements. Later legislation is expected to remove these reporting obligations, but for now, employers’ reporting obligations remain.
Repeals Various Business Taxes
The AHCA repeals the ACA’s medical device tax, the tanning tax, the limit on the deduction of compensation paid to executives of health insurers, brand pharmaceuticals manufacturers tax and health insurers annual fee.
Reinstates Deduction for Reimbursed Retiree Prescription Drug Expenses
The ACA disallows an employer from deducting the amount it receives in government subsidies for Medicare Part D portions of its plan from its income taxes. The AHCA repeals the ACA provision and again allows such a deduction. However, because many employers replaced their Medicare Part D subsidy arrangements with an employer group waiver plan or with an account type retiree benefit arrangement, the reinstatement of this deduction may be of limited interest to employers.
The ACA has a 40% excise tax on “Cadillac” (high level coverage) health care offered by employers beginning in 2020. The AHCA will not remove the Cadillac Tax, but will further delay its implementation to 2026.
Repeals Medicare Taxes on High-Income Taxpayers and the Small Business Tax Credit
The AHCA repeals the 0.9% Medicare tax imposed under the ACA on taxpayers earning more than $250,000 (joint filers), $125,000 (married filing separately) or $200,000 (all other filers). For tax years after 2022, employers will no longer be responsible for withholding or reporting on this additional tax. The AHCA also repeals the ACA’s small business health insurance tax credit.
Breaks in Coverage
Although the AHCA repeals the ACA’s penalty on individuals not covered by insurance, it requires insurance companies to impose a 30% premium penalty for any individual who has a 63 day gap in coverage. Alternatively, a state may seek a limited waiver of the group rating provisions of the ACA so that insurance companies may underwrite individuals with a 63 day gap in coverage and potentially charge them even higher premiums, as long as a high risk pool is provided for individuals with pre-existing conditions. It appears, however, that these provisions are not applicable to employer plans and that under the AHCA, employer plans are still required to cover preexisting conditions no matter what gap in coverage may exist.
HSAs and Health Care FSAs
The AHCA makes changes to encourage expanded use of HSAs by significantly increasing the HSA contribution limits and reducing the penalty tax for using HSA funds for non-medical expenses, from 20% to 10%. The AHCA also repeals the ACA’s $2,500 indexed limit on health care FSA contributions. Both HSAs and FSAs will be permitted to reimburse costs of over-the-counter medication even if it is not purchased under a prescription or is insulin. The changes to HSAs may be an added encouragement for employees to enroll in high deductible health plans and to make HSA contributions.
Changes to the Individual Market
The AHCA does not eliminate the individual market created under the ACA, but it does make significant changes to it. Since health care benefits remain a large recruitment and retention factor for employers, any employer who may be considering terminating or limiting its health care plan should be aware of these changes so as to know the options available to its employees in the individual market. Under the AHCA, the ACA’s subsidies to reduce cost-sharing expenses are repealed as of 2020. In addition, the AHCA replaces the ACA’s income-based tax credit with a flat tax credit based on an individual’s age (increasing with age, and phased out based on level of income). This change would be phased in gradually during 2018 and 2019, and be fully in place starting in 2020. The AHCA increases the age premium variance from 3:1 to 5:1; states choosing to make a waiver may adopt an even higher ratio. While the AHCA tax credit increases with age, at most the credit provides a 2:1 ratio difference between the youngest and oldest brackets. Additionally, the credits do not contain any adjustment based on geographic location. Thus, this change will most significantly impact employees (and their families) making lower incomes, older employees, and employees living in high cost-of-living areas, making those people less likely to seek coverage via the individual market.
Changes to Medicaid
Finally, an employer also may want to consider the impact on its plan with respect to Medicaid changes under the AHCA. In general, the AHCA will reduce available Medicaid coverage. For example, employees who may have been eligible under ACA’s Medicaid expansion (those earning up to 133% of the federal poverty level - in states which elected the expansion), may not be eligible for the coverage beginning in 2020. Generally, the AHCA will reduce the coverage to only those earning up to 100% of the federal poverty level, so employees affected by this change will possibly look to the individual market or employer-provided coverage, if available.
Although the AHCA or any healthcare reform bill which may ultimately become law may give employers an opportunity to reduce coverage, competitive forces remain for an employer to offer more than the minimum permitted coverage. Thus, employers may well be selective regarding the degree to which they utilize such flexibility.
Of course, there are numerous potential roadblocks impeding the passage of the AHCA in its current form and any bill that may pass the Senate will likely be very different from the current version. The AHCA bill is framed as budget reconciliation legislation so that it can be passed in the Senate with just 51 votes, as opposed to the 60 votes needed to overcome a filibuster for regular legislation. In the Senate, however, the Byrd Rule allows Senators to raise a procedural objection in attempt to block legislation which is brought as budget reconciliation legislation if it is believed to have non-budgetary components. The Senate Parliamentarian, a non-elected and nonpartisan adviser, provides advice regarding the objection to the Senate Presiding Officer, Vice-President Mike Pence for a formal determination regarding the objection. Arguably components such as the age rating, continuous coverage requirements, and state waiver provisions will be determined to be non-budgetary and thus will likely be removed. After provisions that fail to satisfy the Byrd Rule requirements are removed, the remaining provisions will undergo scrutiny and debate by the Senate. Likely, many provisions will be modified by the Senate. If a modified bill is approved by the Senate, it will then have to be returned to and considered by the House for approval. Whether there will be sufficient political compromise to create a bill acceptable to enough Senators and Representatives remains to be seen.
There have been significant changes in health care benefits during the past few years and it does not appear that the end of significant change is near.
Susan M. Kurz
Chief Marketing & Client Development Officer