Proposed Health Bill Axes Many ACA Tax Provisions

Affordable Care Act
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Ken Berry
Columnist
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If Obamacare is “repealed and replaced,” as President Trump and the Republican-led Congress have vowed, it will affect more than just our nation’s health insurance system.

The Affordable Care Act (ACA) includes a number of tax provisions – 21 to be exact, according to the Tax Foundation. Under the House GOP health insurance bill proposed in Congress – the American Health Care Act – the Tax Foundation says 14 of the ACA’s tax provisions would be repealed.

Which tax provisions are on the chopping block? A few, such as surcharges on tanning salons and medical devices, are somewhat esoteric or industry-specific. But here are several high-profile items that would be eliminated by the proposed legislation.

Individual mandate for health insurance. It can be argued whether the penalty imposed on individuals who fail to obtain health insurance is a “tax” or not. In any event, the penalty is generally equal to the higher of an amount based on 2.5 percent of household income or $695 per adult ($347.50 per child under 18), up to a maximum of $2,085.

Although repealing this provision is a cornerstone of the current plan, detractors have protested that millions of Americans would lose health insurance coverage as a result.

Mandate for employer-provided health insurance. Similarly, businesses with more than 50 full-time employees are currently required to offer at least minimum health insurance to eligible workers – or pay a penalty. The penalty is generally equal to $2,260 divided by 12 for each month an employer fails to provide coverage, multiplied by the number of eligible employees (minus the first 30 employees). This requirement would be wiped off the books.

Premium tax credits. If a low-income taxpayer qualifies, he or she can use premium credits to offset the cost of acquiring health insurance. More than half of the taxpayers enrolled through the Obamacare exchanges benefit from this tax break. Republican leaders in Congress want to replace these credits with a different form of subsidies, beginning in 2020. The initial proposal relies on refundable credits based on age and income. 

Net investment income tax. This 3.8 percent tax affects certain high-income investors. It applies to the lesser of a person’s net investment income (NII) – which includes capital gains, dividends, interest, and most other investment earnings – or the modified adjusted gross income (MAGI) above $200,000 for single filers and $250,000 of MAGI for joint filers. The proposed legislation repeals the NII tax.

Additional payroll tax. Employers are now required to tack on an extra 0.9 percent payroll tax on wages and salaries above $200,000 for single filers and $250,000 for joint filers. Just like the NII tax, this surcharge would be wiped out completely.

Spending accounts. Several ACA provisions place restraints on spending of funds in tax-favored accounts, like flexible spending accounts, Archer medical savings accounts, and health savings accounts (HSAs). All these restraints would be lifted under the proposed plan. The bill also includes certain enhancements for HSAs.

Medical expense deduction. Under the ACA, the deduction threshold for medical expenses was raised from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI, except for individuals age 65 or older through 2016. The bill would restore the lower 7.5 percent threshold for all taxpayers, beginning in 2018.

Which tax provisions would be retained? Again, some of the items are esoteric, but one major holdover is the “Cadillac tax” for top-of-the-line health insurance plans. Under this provision, employers are taxed on premiums exceeding $10,200 for individual policies and $27,500 for family plans.

The Cadillac tax was originally scheduled to take effect in 2018, but it was postponed to 2020. Now, the proposed legislation would delay the effective date until 2025.

Of course, there will be plenty of twists and turns before a final piece of legislation reaches President Trump’s desk, if at all. We will continue to monitor the progress of this bill as it works its way through Congress.

Related article:

‘Cadillac Tax’: What Your Clients Need to Know Now

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