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Draft Republican bill would replace Obamacare and include age-based health insurance credit

A draft reconciliation bill that was recently leaked to the press provides significant insight into the Republican strategy to repeal and replace the Affordable Care Act (ACA, or Obamacare). The bill would repeal the individual and employer mandates and the premium tax credit and enact a new health insurance coverage credit that varies depending on the age, rather than the income, of the individual. It would also repeal the 3.8% net investment income tax and the 0.9% additional Medicare surtax.

RIA observation: Back on January 13, Congress approved a budget reconciliation resolution that instructed the relevant committees—i.e., the House Committee on Ways and Means, the House Energy and Commerce Committee, the Senate Finance Committee, and the Senate Committee on Health, Education, Labor, and Pensions—to come up with legislation by Jan. 27 to repeal the ACA. The effect of this measure was to reduce the necessary Senate votes from 60 to 51 to approve the repeal legislation. This draft bill may well have originated from one of these committees, but there is no indication at this point which committee(s) or politician(s) wrote it or how much support it has. In addition, as the draft is dated February 10th, it may not represent the most recent Republican consensus and any final version, if issued, may contain changes.

ACA repeal. The draft legislation (cited as “Bill Sec.” throughout) would repeal virtually all of the ACA, including the following tax provisions:

  • ...The individual mandate under Code Sec. 5000A—by making the penalty amounts zero, effective for months beginning after Dec. 31, 2015. (Bill Sec. 205)
  • ...The employer mandate under Code Sec. 4980H—by reducing the penalty amounts to zero, effective for months beginning after Dec. 31, 2015. (Bill Sec. 206)
  • ...The premium tax credit under Code Sec. 36B would be repealed for tax years beginning after Dec. 31, 2019, and would be modified for prior years by, among other things, removing the repayment limits for excess advance payments, and modifying the applicable percentage tables in Code Sec. 36B(b)(3) (which essentially determine a taxpayer's eligibility for the premium tax credit based on the percentage of income that the cost of health insurance premiums represents, for taxpayers with household incomes of 100% to 400% of the federal poverty line) to also take into account the taxpayer's age. (Bill Secs. 201 - 203)
  • ...The 3.8% net investment income tax (NIIT) under Code Sec. 1411, effective for tax years beginning after Dec. 31, 2016. (Bill Sec. 218)
  • ...The 0.9% additional Medicare tax under Code Sec. 3101(b)(2), effective with respect to remuneration received after, and tax years beginning after Dec. 31, 2016. (The draft has a notation stating “[confirm this date]” at the end of the effective date provision.) (Bill Sec. 216)
  • ...The higher floor for medical expense deductions under Code Sec. 213(a), effective for tax years beginning after Dec. 31, 2016. The 7.5% floor that was previously in place would be restored. (Bill Sec. 215)
  • ...The small employer health insurance credit under Code Sec. 45R, effective for amounts paid or incurred in tax years after Dec. 31, 2019. (Bill Sec. 204)
  • ...The limitation on health FSA contributions, for tax years beginning after Dec. 31, 2016. (Bill Sec. 210)
  • ...The so-called “Cadillac” tax on high cost employer-sponsored health plans under Code Sec. 4980I, effective for tax years beginning after Dec. 31, 2019. (Bill Sec. 207)
  • ...The exclusion from “qualified medical expenses” of over-the-counter medications, for Health Savings Account (HSA), Archer Medical Savings Account (MSA), Health Flexible Spending Arrangement (FSA), and Health Reimbursement Arrangement (HRA) purposes, effective for amounts paid, and expenses incurred, with respect to tax years beginning after Dec. 31, 2016. (Bill Sec. 208)
  • ...The increased additional tax on HSAs and Archer MSAs for distributions not used for qualified medical expenses, effective for distributions made after Dec. 31, 2016. (Bill Sec. 209) The percentages would be reduced from 20% to 10% and 15%, respectively.
  • ...The annual fee imposed on branded prescription drug sales, for calendar years beginning after Dec. 31, 2016 (Bill Sec. 211)
  • ...The medical device excise tax under Code Sec. 4191, for sales after Dec. 31, 2017. (Bill Sec. 212)
  • ...The annual fee on health insurance providers, for sales after Dec. 31, 2016. (Bill Sec. 213)

RIA observation: This fee is currently suspended for the 2017 calendar year.

...The elimination of a deduction for expenses allocable to Medicare Part D subsidy under Code Sec. 139A, effective for tax years beginning after Dec. 31, 2016. (Bill Sec. 214)

...The 10% tanning tax under Code Sec. 5000B, effective for services performed after Dec. 31, 2016. (Bill Sec. 217)

...The disallowance under Code Sec. 162(m)(6) of any deduction for “applicable individual remuneration” in excess of $500,000 paid to an applicable individual by certain health insurers, for tax years beginning after Dec. 31, 2016. (Bill Sec. 219)

...A number of provisions relating to the economic substance rules, effective for transactions entered into, and to underpayments, understatements, or refunds and credits attributable to transactions entered into, after Dec. 31, 2016, including:

    (i)  the codification of the economic substance doctrine under Code Sec. 7701(o),

    (ii)  the Code Sec. 6662(b)(6) penalty for transactions lacking economic substance,

    (iii)  the Code Sec. 6662(i) increased penalty for nondisclosed noneconomic substance transactions, and

    (iv)  the Code Sec. 6664(c)(2) and Code Sec. 6664(d)(2) exclusions from the reasonable cause and good faith exceptions to the accuracy-related and fraud penalties for transactions lacking economic substance. (Bill Sec. 220)

 

Replacement.
The bill would create a new Code Sec. 36C refundable tax credit for health insurance coverage. The credit would generally equal the lesser of the sum of the applicable monthly credit amounts (below) or the amount paid by the taxpayer for “eligible health insurance” for the taxpayer and qualifying family members. It would be subject to a $14,000 aggregate annual dollar limitation with respect to the taxpayer and the taxpayer's qualifying family members, and monthly credit amounts would be taken into account only with respect to the five oldest qualifying individuals of the family.

The monthly credit amount with respect to any individual for any “eligible coverage month” (in general, a month when the individual is covered by eligible health insurance and is not eligible for “other specified coverage,” such as coverage under a group health plan or under certain governmental programs) during any tax year would be 1/12 of:

    (A)  $2,000 for an individual who has not attained age 30 as of the beginning of the tax year;

    (B)  $2,500 for an individual age 30 - 39;

    (C)  $3,000 for an individual age 40 - 49;

    (D)  $3,500 for an individual age 50 - 59; and

    (E)  $4,000 for an individual age 60 and older.

The above amounts, which are available to qualified individuals regardless of their income levels, would be subject to annual inflation adjustments.

The bill also provided special rules for, among other things, coordinating the credit with the medical expense deduction under Code Sec. 213, and calculating the credit where the taxpayer (or any qualifying family member) has a “qualified small employer health reimbursement arrangement” under Code Sec. 9831(d)(2) (see Weekly Alert ¶  14  12/15/2016 and ¶ 22 for more details on small employer HRAs). (Bill Sec. 221(a)

The bill would also create a new Code Sec. 7529, which would direct a number of Agency heads to consult and establish a program for making payments to providers of eligible health insurance for taxpayers eligible for the new Code Sec. 36C credit. It would also create a new Code Sec. 7530, which would provide a mechanism under which “excess” credit amounts (generally, the amount, if any, by which the credit amount exceeds the amount paid for coverage) can, at the taxpayer's request, be contributed to a designated HSA of the taxpayer. (Bill Sec. 221(b)) Reporting requirements relating to the health insurance coverage credit would be provided by new Code Sec. 6050X, and penalties for failure to meet the requirements would be added to Code Sec. 6724(d). (Bill Sec. 221(c))

The above provisions pertaining to the new health insurance coverage credit would apply to tax years beginning after Dec. 31, 2019.

In addition, the bill would add a new subsection, Code Sec. 106(h), which would require the inclusion in income of “excess coverage” under employer-provided health coverage. Essentially, a taxpayer would be required to include in gross income the amount for any month by which his or her “specified employer-provided health coverage” for that month exceeds 1/12 of the “annual limitation,” which is an amount determined by IRS to be equal to the 90th percentile of annual premiums for self-only, or other-than-self-only, coverage in 2019 (and adjusted for inflation thereafter). (Bill Sec. 222) Specific rules for computing the total amount of coverage, such as the treatment of health FSAs, as well as exceptions, are provided.

A similar provision would be added to limit the deduction of health insurance costs by self-employed individuals to the 90th percentile amount. (Code Sec. 162(l)(2)) (Bill Sec. 222)

The above provisions would be effective for tax years beginning after Dec. 31, 2019.

The bill would also:

    . . . increase the maximum HSA contribution limit to the sum of the amount of the deductible and out-of-pocket limitation, effective for tax years beginning after Dec. 31, 2017; (Bill Sec. 223)

    . . . allow both spouses to make “catch-up contributions” to the same HSA, effective for tax years beginning after Dec. 31, 2017; (Bill Sec. 225)

    . . . provide a special rule under which, if an HSA is established within 60 days of the date that certain medical expenses are incurred, it will be treated as having been in place for purposes of determining if the expense is a “qualifying medical expense.” (Bill Sec. 226)

RIA observation: There is a good deal of common ground between the proposals in the bill and those in the recently circulated GOP “Policy Brief” (see Weekly Alert ¶  14  2/23/2017).