On Monday, March 6, House Republicans published the American Health Care Act (AHCA), a proposal to repeal and replace multiple provisions in the Affordable Care Act (ACA). Among the parts that remain the same are that people with pre-existing conditions cannot be denied coverage and dependents under age 26 can stay on their parents’ healthcare plan.
As part of the tax revisions, the AHCA outlines numerous changes to tax-advantaged benefit plans like Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), and expanded the scope of qualified medical expenses. In addition, the effective date for the Cadillac Tax was revised as well.
Health Savings Accounts (HSAs)
The AHCA will affect HSAs in multiple ways. Proposed changes include an increase in contributions, a reduction in penalties for non-eligible expenses, and a timeframe expansion for eligible expenses.
In 2017, the maximum contributions are $3,400 for self-only coverage and $6,750 for family coverage. AHCA raises contribution limits for HSAs in 2018.
Beginning next year, the proposal raises the basic limit on HSA contributions to equal the maximum on the sum of the annual deductible and out-of-pocket expenses under a high deductible health plan. The basic limits would be at least $6,550 for self-only coverage and $13,100 for family coverage, nearly double the current contribution limits.
Taxes on Non-Qualified Expenses
Current HSA regulations permit people to use their pre-tax dollars to cover eligible medical expenses. For account holders under age 65, there is a 20 percent penalty tax on distributions used for non-qualified expenses. At age 65, distributions for non-qualified expenses are taxed as regular income.
AHCA lowers the taxes on distributions used for expenses other than qualified medical expenses. Starting in 2018, the rate returns to pre-ACA percentages.
HDHP Enrollment and Expense Grace Period
People who enroll in a high deductible health plan and enroll in an HSA within the first 60 days would experience a grace period. During the 60 day timeframe, if the individual has an eligible medical expense prior to the establishment of the HSA, the account owner could submit a claim for that expense. Currently, account owners may only claim expenses incurred after the HSA is established.
Catch Up Contributions
Currently, the HSA catch up contribution rule allows account holders age 55 and older to make an additional $1,000 contribution over the annual limit. Section 17 of the AHCA would permit spouses the ability to also make catch up contributions.
Flexible Savings Accounts (FSAs)
Similar to HSAs, health FSAs have a maximum contribution limit; in 2017, the maximum is $2,600*. The AHCA proposes a repeal of contribution limits for FSAs starting after December 31, 2017.
*The summary provided by the Ways and Means Committee states that the limit is $2,500, indexed for the cost of living.
As part of ACA, employer-sponsored health coverage that exceeds $10,200 for individuals and $27,500 for families (annually) is subject to a 40 percent tax beginning in 2020. The AHCA pushes the effective date to January 1, 2025.
Eligible Medical Expenses
For people with an FSA, HSA or Health Reimbursement Arrangement (HRA), they could use their tax-advantaged accounts to pay for certain eligible medical expenses, which includes prescription medications. However, the ACA does not allow over-the-counter (OTC) medications as a qualified medical expense. AHCA proposes to allow OTC medications as qualified medical expenses.
COBRA Tax Credit
For people who have lost their job or other qualifying event, they may receive an “advanceable, refundable tax credit for the purchase of state-approved, major medical health insurance and unsubsidized COBRA coverage.” Eligibility rules stipulate that individuals may not have access to government health insurance or an offer from an employer. They must also be in the United States legally and not be incarcerated. The tax credits are tied to inflation.
Tax credits are determined by age:
- Under age 30: $2,000
- Between 30-39: $2,500
- Between 40-49: $3,000
- Between 50-59: $3,500
- Over age 60: $4,000
Families are capped at $14,000. Credits are available to those making up to $75,000 ($150,000 joint). The credit decreases by $100 for every $1,000 in income higher than those thresholds.
What does this mean for consumers?
If the AHCA is approved by Congress in its current form, people with HSAs and FSAs could have the opportunity to claim additional tax savings due to the increase or repeal of contribution limits. They may also have greater freedom in how to spend their pre-tax dollars, whether it be on OTC medications or on non-qualified medical expenses (due to the reduction from 20 percent to 10 percent penalty before age 65). For those on COBRA, the cost of healthcare may be reduced due to the refundable tax credit for unsubsidized premiums.
Businesses who offer high cost health plans will see a delay in the “Cadillac tax” implementation, which could translate to more people having access to high cost health plans.
DataPath is closely watching the development of this bill and how it affects both individuals and businesses. Read the summary from the Ways and Means Committee Chairman Kevin Brady.