Proposed PPACA replacement bills contain many tax changes

By Alistair M. Nevius, J.D.

House Republicans released draft bills to repeal and replace the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, on Monday evening. Collectively known as the American Health Care Act, the bills would repeal most of PPACA’s provisions and would enact a new system that would offer tax credits to help taxpayers afford health insurance. The bills would also eliminate the individual mandate, which requires individuals to have health insurance, and the shared-responsibility requirement, which requires large employers to offer health insurance to their employees.

Although there had been speculation that the proposal would impose taxes on employer-sponsored health care plans, it does not.

The Republicans, who control both houses of Congress and the White House, have vowed to repeal and replace PPACA. However, the just-released proposal is in the early stages of the legislative process, and it is impossible to predict how many of these provisions will survive to be enacted. Nevertheless, they do show the direction Republicans want to take with the legislation.

The House Ways and Means Committee is scheduled to mark up the bills on Wednesday. The Congressional Budget Office has not yet released an estimate of the bills’ costs and revenue effects.

Health coverage tax credit

The proposal would modify the Sec. 36B premium tax credit and repeal it after 2019. The Sec. 36B(f)(2) recapture of excess advance payments of premium tax credits is repealed for tax years beginning after Dec. 31, 2017.

In place of the premium tax credit, a new Sec. 36C would allow a credit for health insurance coverage. The amount of the credit would range from $2,000 per year for individuals under age 30 to $4,000 per year for individuals age 60 and older. The credit would be reduced for taxpayers with modified adjusted gross income over $75,000 ($150,000 for married taxpayers filing joint returns). Taxpayers would be eligible for up to a total $14,000 per year in credits on up to five household members. Eligible health insurance, for purposes of the credit, would include coverage offered in the individual health insurance market and unsubsidized COBRA continuation coverage.

The IRS would be directed to set up a program to provide for advance payments of the new Sec. 36C credit.

The credit could be paid into a taxpayer’s health savings account (HSA).

Other provisions

The 3.8% net investment income tax would be repealed for tax years beginning after Dec. 31, 2017.

The Sec. 45R small business tax credit would be repealed after 2019. Any health plan that includes coverage for abortions would not qualify for the credit.

The penalty under Sec. 5000A, which requires individuals to have health insurance, would be reduced to zero for months after Dec. 31, 2015.

The penalties under Sec. 4980H, which requires applicable large employers to offer minimum essential coverage to employees, would be reduced to zero for months after Dec. 31, 2015.

The Sec. 4980I “Cadillac” 40% excise tax that applies to certain high-cost employer-sponsored health insurance plans and health plan benefits would not be repealed but would be delayed until after Dec. 31, 2024. (Its effective date was previously delayed until 2020.)

The Sec. 162(m)(6) $500,000 federal income tax deduction limitation for compensation paid by a covered health insurance provider would not apply to tax years beginning after Dec. 31, 2017.

The 10% excise tax on indoor tanning services would be repealed.

The annual fee imposed on pharmaceutical manufacturers and importers under PPACA Section 9008 would no longer be imposed after 2017.

The annual fee imposed on health insurance providers under PPACA Section 9010 would no longer be imposed after 2017.

The amount of the penalty on distributions from HSAs that are not used for qualified medical expenses would be reduced.

The Sec. 125(i) limitation on contributions to flexible spending arrangements would be repealed for tax years beginning after Dec. 31, 2017.

The Sec. 4191 medical device excise tax would be repealed, effective for sales after Dec. 31, 2017.

The income threshold for itemizing medical expense deductions under Sec. 213 would revert to 7.5% from its current 10%.

The 0.9% Medicaid surtax under Sec. 3101 would be repealed, effective for remuneration received after Dec. 31, 2017.

Insurance providers would be required to provide information returns to the IRS and to each covered individual.

The act would increase the HSA contribution limit to equal the amount of the deductible and out-of-pocket limitation.

Married taxpayers would both be allowed to make catch-up contributions to the same HSA.

Codified economic substance doctrine

The codification of the economic substance doctrine (Sec. 7701(o)), which was enacted as part of PPACA, is not affected by the proposal.

—Alistair Nevius (Alistair.Nevius@aicpa-cima.com) is the JofA’s editor-in-chief, tax.

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