AHCA is shaping up to have just as big of an impact on our taxes, if not more, than on the way we care for our health
by Leon C. LaBrecque, JD, CPA, CFP™, CFAMr. LaBrecque is a regular contributor to this magazine. He is Managing Partner and CEO, LJPR Financial Advisors, and Director, Michigan Association of CPAs. Visit ljpr.com
The long-awaited GOP legislative response to “Obamacare” has finally arrived.
Originally on March 6, 2017, House Energy and Ways And Means Committees introduced the American Health Care Act (AHCA) as a replacement to the Affordable Care Act (“Obamacare”). On March 20, 2017, the AHCA was revised through negotiations to address a number of concerns. The revised bill is subject to further revision by the House Rules Committee before full vote on the House floor.
Already the public is noticing that it’s not the complete replacement many were anticipating. The new bill does not repeal ACA, but modifies it. Many of its key parts are retained, like the ban on the denial of coverage due to pre-existing conditions, the lifetime benefits cap and the authority to keep adult children on their parent’s insurance up to age 26.
What consumers should pay attention to most is that the AHCA’s new provisions relate little to actual health care. Instead, the bill rolls back mandates brought down by “Obamacare.” This means significant tax changes will take place if the new bill is passed, begging the question: Is the AHCA a health care bill, or a tax bill?
”Obamacare” has been expensive with high costs in the form of subsidies and mandates. Many of these were offset by taxes (revenue), primarily on insurers and on high income individuals. The new AHCA proposal repeals 9 out 10 major tax features of ACA, keeping the ‘Cadillac tax’ on coverage that costs over $10,200 for a single person or $27,500 for a family, and repealing others. It is worth noting that under ”Obamacare” the Cadillac tax was not effective until 2020, and as of March 20th implementation has been delayed until 2026.
Some of the most important tax features of the new bill:
- The Net Investment Income Tax (NIIT): The 3.8 percent NIIT on high–income individuals would be repealed as of December 31, 2016 in the March 20th amendment, one year earlier than originally proposed. The NIIT applies to single (and head of household) taxpayers with modified adjusted gross income over $200,000 and married filing joint taxpayers with modified adjusted gross income over $250,000. It is a tax on net investment income, which includes interest, dividends, capital gains, rent and royalty income, and other passive investment activities. According to the Census Bureau, in 2014, about 5 percent of households had income over $206,568. The Tax Policy Center did a study in 2013 that indicated that the upper 0.1% of taxpayers would pay 88 percent of the NIIT (estimated then at $123 billion of revenue from 2013-2019).
- The 0.9 percent additional Medicare surtax on high-income individuals would be repealed as of 2018. This has the same definition of ‘high income’ as the NIIT, except here the tax is imposed on earned income, such as wages and self-employment income. Again, this applies to high-income taxpayers with high earned-income.
- With the new bill, those who itemize deductions could write off medical expenses that exceed 5.8 percent of adjusted gross income (AGI), starting in 2018. This is a change from the ACA’s 10 percent threshold, and a further roll back from the March 6 version proposed at 7.5 percent. The lower AGI percentage allows those who itemize, and who have large out-of-pocket medical expenses, to deduct more.
- The limits on Health Savings Account (HSA) contributions would be increased to $6,550 for individuals and $13,100 for a family. This could be a major planning opportunity. If a person has a High Deductible Health Plan (HDHP), it can be paired with a Health Savings Account. Effective immediately, an HDHP would have a minimum deductible of $1,300 for a single and $2,600 for a family, and a maximum deductible of $6,550 for a single and $13,100 for a family. The AHCA would increase the Health Savings Account amounts to the maximum deductible limits. HSA contributions are deductible from wages or self-employment income and are tax-free if withdrawn for qualifying medical expenses. You can accumulate HSA contributions and invest them (tax-free). You can also retain medical receipts and use them at a subsequent date for tax-free withdrawals. To show how this can be put to use, you could maximize your HSA contribution every year, but pay all of your out-of-pocket expenses with after-tax dollars. You would accumulate the HSA on a tax-deductible contribution and tax-free withdrawal. Many HSAs allow investing in regular investment beyond a certain balance. Assuming you just used the new maximum for 10 years and made 7 percent, you would have put in $131,000 of tax-deductible contributions but accumulated almost $181,000 of tax-free health care savings. You could use the HSA to reimburse yourself for all accumulated medical expenses, plus use it to reimburse Medicare B and D and Medigap insurance premiums.
With all of these tax-related changes on the table, AHCA is shaping up to have just as big of an impact on our taxes, if not more, than on the way we care for our health. That said, the health implications for many could be great.
The Congressional Budget Office (CBO) has not yet scored the revised bill but has indicated that 24 million more people will be uninsured under the AHCA version introduced March 6th. The GOP drafters deny this statistic and point to how far off the CBO was originally when the ACA was passed in 2010. The GOP acknowledges that the AHCA is not intended to increase coverage, but to increase choice.
The income-based subsidies of “Obamacare” are replaced by an age-rated tax credit under the AHCA (more tax implications). These credits are one of the material changes in the revised bill and have been sweetened by $75 billion to benefit older insureds. The AHCA also allows insurers to charge up to five times as much for older insureds, compared to three times in the ACA. According to the CBO report, the cost to older, low income insureds may be substantially higher.
Medicaid expansion gets hit significantly and is adjusted again by the March 20th revision to move to a block-grant system that favors some states that expanded under the ACA. According to the CBO report, $880 billion is saved by cutting Medicaid health entitlements to the poor, elderly and disabled over a decade. Medicaid expansion would continue through 2019 and then wind down. The CBO estimates that Medicaid spending would be 25 percent lower by 2026 than under current law. This shifts the burden on the individual states and will have state governments making hard decisions on who to keep on their Medicaid rolls.
The AHCA also eliminates the penalties for employer and individual mandates (tax cut!). This means that employers are still obligated to cover employees, but there is no penalty (tax) for failure to do so. The CBO estimates that employers will drop coverage of 7 million individuals over a decade. It also means individuals are mandated to have coverage, but again, no penalties (taxes) to not do so. The idea here is provide choice to employers and individuals.
However, it also means that many individuals, given the choice, may decide not to enroll in a health care plan until they need to. To help prevent this, the AHCA has a 30 percent surcharge on premiums for people without continuous coverage – ouch!
Just a bill…and a budget reconciliation at that
We want to caution that this is only a plan, and will be marked up and submitted for amendments. The Committees then send it to the Budget Committee to complete it and send it to the House for a floor vote. After that, the House Bill will need to go to the Senate for more debate and possible changes. In others words, this is the start, not the finish. But, it is an indication that the planning environment is changing.
Consumers should also note that the AHCA is a budget reconciliation bill, meaning it can’t be filibustered and amendments will be limited, making the process expedited with a simple majority vote rather than a 60 percent majority vote. Reconciliation bills are often used to push legislation that is controversial and/or includes tax and budget measures. There can be only one reconciliation bill in a budget season, and they expire in 10 years (think Bush Tax Cuts). If it passes under budget reconciliation, we’ll be back talking about this in 2028.