Yesterday, the House of Representatives passed the American Health Care Act (AHCA) with a vote of 217-213. The bill now goes to the Senate for approval. In its current form, AHCA affects tax-advantaged health care accounts: Health Savings Accounts, Flexible Spending Accounts, and Health Reimbursement Arrangements. It also has tax implications for employers and people who receive COBRA coverage.
While the bill has wide-ranging implications, the following only discusses changes applicable to employer taxes and tax-advantaged accounts. The passed legislation did not change from the original AHCA proposal from March 2017 in regards to these two areas. Here is a brief overview of the AHCA bill:
Health Savings Accounts (HSAs)
AHCA affects HSAs in several ways, such as increasing contributions, allowing greater eligibility, reducing penalties for non-eligible expenses, and expanding a timeframe for eligible expense claims.
Currently, the maximum contributions for self-only coverage is $3,400, and family coverage is $6,750. The bill would raise contributions to $6,550 for self-only coverage, and $13,100 for family coverage.
In addition, the law would allow spouses to make catch-up contributions to the HSA account. After age 55, account holders may contribute an additional $1,000 over the annual limit.
Greater Expense Eligibility
H.R. 1628 would allow OTC medications to be reimbursable with HSA dollars by striking the following from the qualified expenses provision:
“[Qualified medical expenses] shall include an amount paid for medicine or a drug only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin.”
Effective 2017, the rate for non-eligible expenses would return to pre-Affordable Care Act percentages. For example, it reduces the current 20 percent tax on non-eligible expenses to 10 percent for HSAs and 15 percent for Archer MSAs.
HDHP Enrollment and Expense Grace Period
Any expenses incurred during the initial 60 days of HDHP coverage, but before the HSA is established, would be reimbursable with HSA dollars if the HSA is established during the initial 60 day period.
Flexible Spending Accounts (FSAs)
AHCA repeals section (i) of I.R.C. § 125. Section (i) puts a $2,500 cap on FSA contributions for qualified benefit status. After December 31, 2017, the cap on FSA contributions would no longer be in effect.
Health Reimbursement Arrangements (HRAs)
The bill repeals section (f) of I.R.C. § 106, which puts limits on reimbursements for prescription medicine and insulin.
Qualified Small Employer HRAs (QSEHRA)
There are multiple changes to QSEHRAs, which will take effect after December 31, 2017:
- The sum determined for the credit against income tax imposed for each month shall be reduced by 1/12 of the permitted benefit (but not below 0).
- No credit applies toward abortion coverage.
- Plan cannot pay for abortion using credits.
- For COBRA coverage, coverage under a QSEHRA counts towards having health coverage.
- Repeals sub-section (f) of section 106 which provides that Prescription drugs and insulin are the only reimbursable drugs.
Changes to the Tax Code
The bill pushes the 20% tax on employer-sponsored health coverage that exceeds $10,200 for individuals and $27,500 for families (annually) back five (5) years. The most recent amendment pushes it back to 2026.
Cadillac plans will not be subject to a 40% excise tax until 2025.
Employer Mandate Tax and Small Business Tax Credit
The bill would reduce the penalty to zero for failure to provide minimum essential coverage, and the reduction in penalty would retroactively apply to cover tax year 2016 to provide relief to businesses affected by the tax.
Small Business Tax Credit would be repealed starting 2020. In the interim, if the business offers a plan with elective abortion coverage, it will not qualify for the credit.
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.”
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.
DataPath, Inc. supports reform measures that promote greater healthcare choice for American employees and allows greater flexibility for employers.