Healthcare reform

Republican Study Committee Proposes Significant HSA Changes

The Republican Study Committee (RSC), limited to current Republican members of the U.S. House of Representatives, has released a comprehensive proposal to address perceived weaknesses in Americans’ access to quality, affordable healthcare. A component related to tax-advantaged savings proposes statutory changes intended to expand the use of health savings accounts (HSAs), including significantly liberalizing their provisions.

The RSC’s proposed changes include the following.

  • Permit HSAs to pay health insurance premiums
  • Permit HSAs to pay costs of participation in health sharing ministry, direct primary care (“concierge”), and other nontraditional health insuring arrangements
  • Allow persons whose health insurance is not a high deductible health plan (HDHP) to make HSA contributions
  • Allow persons with no health insurance to make HSA contributions
  • Increase the annual individual HSA contribution limit to $9,000 (currently $3,500)
  • Increase the annual family HSA contribution limit to $18,000 (currently $7,000)
  • Allow annual catch-up contributions ($1,000 for those age 55 or older) to be made to a non-catch-up-eligible spouse’s HSA, if desired
  • Permit persons receiving currently-disqualifying Medicare benefits to make HSA contributions
  • Expand HSA-eligible health services and products beyond those currently allowed to include all Food and Drug Administration-approved over-the-counter/nonprescription medicines (not to include homeopathic or dietary products, or fitness equipment)
  • Allow military Tricare, Indian Health Service, or other veterans’ benefits recipients to contribute to an HSA
  • Permit those with health flexible spending arrangements (FSAs) to make HSA contributions
  • Allow FSA or health reimbursement arrangement (HRA) balances to be converted to HSA assets
  • Allow annual rollover of unused FSA balances to an HSA, at an employer’s discretion
  • Protect HSA accounts in bankruptcy proceedings
  • Prohibit HSAs from being linked to insurance coverage that provides abortion services, and treat abortion services as non-eligible expenses for HSA purposes

The RSC’s proposal is presented as an alternative to one or more Democratic presidential candidates’ support for a “Medicare-for-all” type program, in which the federal government would play a central role in the delivery of health care benefits. The Medicare-for-all approach—support for which is not shared by all Democratic candidates—is not an official Party position for reform of the U.S. healthcare system.


Washington Pulse: New Guidance Simplifies Affordability Determination for ICHRAs

The IRS has issued proposed regulations that provide additional guidance to employers intending to offer an Individual Coverage HRA (ICHRA) for 2020 and beyond. The guidance confirms and clarifies the safe harbor provisions that were initially outlined in IRS Notice 2018-88. The proposed regulations are meant to 1) help employers determine whether their ICHRA is affordable, and 2) clarify the ICHRA nondiscrimination testing requirements.

 

Affordability

There are several reasons why an ICHRA may appeal to employers. For example, an ICHRA allows an employer to contribute a set amount to employees while reducing the employer’s risk of incurring unknown costs that may arise with traditional group health insurance plans.

A unique feature of the ICHRA is that it is flexible: there are no minimum or maximum contribution limits, so an employer can contribute any amount it chooses. But there are some restrictions. For example, an applicable large employer (ALE) that offers ICHRAs to its full-time employees must ensure that it is offering an “affordable” ICHRA. If the ICHRA is not affordable, then the employer must make a shared responsibility payment under Internal Revenue Code Section (IRC Sec.) 4980H(b). The payment is determined on a month-by-month basis. The monthly penalty amount is 1/12 of $3,860 for each full-time employee who receives a premium tax credit (PTC).

An ALE is defined as an employer who had an average of 50 or more full-time employees (including full-time equivalent employees) during the preceding calendar year. If an ALE offers an ICHRA to part-time employees only, the ALE will not be subject to the IRC Sec. 4980H(b) penalty if the ICHRA is not affordable. (The ALE must still offer affordable health coverage to its full-time employees or it could owe a penalty under IRC Sec. 4980H(a) or (b).) If the employer is not classified as an ALE, it will not be subject to the IRC Sec. 4980H(b) penalty, regardless of whether the ICHRA is considered affordable for employees.

An ICHRA is considered affordable for full-time employees if the monthly premium for single coverage under the lowest-cost silver plan offered on the Exchange in their rating area (where the employee lives) minus the monthly allowance is less than 9.78 percent of their household income. (On average, silver plans pay 70 percent of the costs for benefits that the plan covers.)

Determining affordability on this basis is difficult for employers: they may not know an employee’s household income and may not know where the employee currently lives. As a result, the IRS has provided safe harbors to ease the calculation for employers.

 

Safe Harbors

Instead of using individual employee calculations, employers may use the safe harbors when determining ICHRA affordability. Employers are not required to use all of the safe harbors when determining affordability. For example, employers could use the look-back month safe harbor and the affordability safe harbor, but disregard the location safe harbor when calculating affordability. Employers may also use the safe harbors when calculating affordability for all employees, or just when calculating affordability for a reasonable category of employees (as specified in the ICHRA final regulations). Employers must, however, always apply the safe harbors on a uniform and consistent basis for all the employees in a category.

Look-back month safe harbor

Although the ICHRA may appeal to some employers, there are a few drawbacks—including not knowing how much to contribute to an ICHRA. The Exchange generally does not determine premium costs until shortly before open enrollment begins on November 1 of each year. Employers must usually make benefit decisions well before this date. To help employers determine how much they will have to contribute before the beginning of the plan year, the IRS has developed the look-back safe harbor.

To determine the ICHRA’s affordability for the current year, this safe harbor allows a calendar-year ICHRA to use the cost of the lowest-cost silver plan offered on the Exchange in the employee’s rating area during January of the prior year (known as the look-back month). Employers maintaining noncalendar-year ICHRAs may also use this safe harbor, but the look-back month will be January of the current year.

Affordability safe harbor

When determining ICHRA affordability, employers must also take into account the employee’s household income. Prior guidance on affordability calculations has recognized that employers will not have this information—and have permitted an employer to use either a safe harbor based on the employee’s Form W-2 income, the employee’s rate of pay, or the federal poverty line.

When looking at the affordability safe harbors, remember that ICHRAs are funded solely by employer contributions. The term “HRA employee contributions” refers to what employees must pay for their insurance premiums in addition to what the employer must provide as an ICHRA contribution.

Form W-2 wages safe harbor: Under the Form W-2 wages safe harbor, the ICHRA is deemed affordable if the required HRA contribution for the employee does not exceed 9.78 percent (subject to cost-of-living adjustments) of that employee’s W-2 wages for the calendar year. This safe harbor allows an employer to use the employee’s wages entered in Box 1 of Form W-2.

The proposed regulations state that employers should not add back any W-2 reductions under IRC Sec. 36B (e.g., 401(k) or IRC Sec. 125 cafeteria plan contributions). When determining affordability, employers may not use Form W-2 wages from a prior year. They must use the current calendar year Form W-2 wages when determining affordability. This will require the employer to project the W-2 wages for each employee at the beginning of the current calendar year. If this proves to be to administratively difficult for the employer, the employer can use either the rate-of-pay or the poverty-line safe harbor described below.

Rate-of-Pay safe harbor: Under the rate-of-pay safe harbor, the ICHRA is deemed affordable for a calendar month if the required HRA contribution for the employee does not exceed 9.78 percent (subject to cost-of-living adjustments) of an amount equal to 130 hours multiplied by the lesser of 1) the employee’s hourly rate of pay as of the first day of the coverage period (generally the first day of the plan year), or 2) the employee’s lowest hourly rate of pay during the calendar month.

Example: If an employee earns $15 per hour, the employer should perform the following calculation.

$15 x 130 hours = $1,950

$1,950 x .0978 = $190.71

In this example, for the ICHRA to be deemed affordable, the required HRA contribution for the employee must be less than $190.71.

If the employee is paid on a salary basis, the ICHRA is still deemed affordable if the employee’s required HRA contribution for the calendar month does not exceed 9.78 percent of the employee’s monthly salary.

Federal poverty-line safe harbor: Under the federal poverty-line safe harbor, an applicable large employer member’s offer of ICHRA coverage to an employee is treated as affordable if the employee’s required ICHRA contribution for the calendar month does not exceed 9.78 percent of a monthly amount. This amount equals 1/12 of the federal poverty line for a single individual for the applicable calendar year.

Location safe harbor

When determining an ICHRA’s affordability, an employer must use the lowest-cost silver plan in the employee’s rating area. This requires the employer to know where the individual lives.

The IRS initially proposed a location-based safe harbor in Notice 2018-88, which allowed employers to use the employee’s primary work location for the area of residence. The IRS received numerous suggestions on how to simplify the calculation for employers while ensuring that employees would not be disadvantaged if premium costs varied widely in a small geographical area that was composed of different rating areas.

The proposed regulations conclude that the employer may generally use the primary site of employment where the employee will be reasonably expected to perform services on the first day of the plan year. The proposed regulations also address issues related to employees that change worksites midyear, who regularly work from home or in other remote locations, or who work only remotely.

 

Nondiscrimination Testing

The proposed regulations also provide more information on nondiscrimination testing.

The guidance found under IRC Sec. 105(h) prohibits discrimination in relation to benefits, in both plan design and plan operation.  To be nondiscriminatory in design, employers must provide uniform contributions to all participants, and amounts cannot vary based on age or length of service. If the plan fails this nondiscrimination requirement, the excess reimbursements become taxable to the highly compensated individuals (HCIs).

The ICHRA rules, however, provide certain exceptions to this nondiscrimination requirement. Contributions may increase based on the number of dependents covered and based on the participant’s age—as long as the oldest participants do not receive an amount greater than three times what the youngest participants receive. An ICHRA that follows these exceptions within each class of employees (as specified in the ICHRA final regulations) will not fail to meet the requirement to provide nondiscriminatory benefits as a matter of plan design.

Even if an ICHRA follows these exceptions, it may still be considered discriminatory in operation. If an ICHRA is discriminatory in operation and too many HCIs use the maximum ICHRA benefit, the excess reimbursements will become taxable to the HCIs.

Employers that have a large number of older employees who are HCIs may be concerned about failing nondiscrimination testing in relation to plan operations. Limiting ICHRA reimbursements may be a practical solution to testing concerns. This is because HRAs that reimburse only for premium costs (and are not permitted to reimburse for other 213(d) medical expenses) are excluded from the testing requirements of IRC Sec. 105(h).

 

The Take Away

The proposed regulations are consistent with the President’s goal of expanding HRAs in order to give employers and employees more options when purchasing health insurance. This guidance should simplify determining an ICHRA’s affordability and help employers avoid the shared responsibility payment. In light of the new proposed regulations, it is clear that the IRS is expecting employers of all sizes—including ALEs—to use the new ICHRA.

Ascensus will closely monitor any new developments regarding this guidance. Visit ascensus.com for future updates.

 

Click here for a printable version of this edition of the Washington Pulse.


IRS Proposed Regulations to Provide Additional HRA Guidance

Recently published in the Federal Register are IRS proposed regulations to help clarify the application of the employer-shared responsibility provisions and certain nondiscrimination rules pertaining to health reimbursement arrangements (HRAs) and other account-based group health plans that are integrated with individual health coverage or Medicare. The proposed regulations provide certain safe harbors with respect to the individual coverage HRA provisions. The IRS hopes these proposed regulations will spur adoption of individual coverage HRAs by employers.

The IRS proposes adding a location-based safe harbor to Internal Revenue Code Section (IRC Sec.) 4980H, Employer Shared Responsibility Provisions, which can be relied upon when determining affordability to its full-time employees (and their dependents) by an applicable large employer (ALE), who is defined as having an average of 50 or more full-time employees during the preceding calendar year. Under this safe harbor, an ALE would be allowed to use the lowest cost silver plan for self-only coverage offered through the Exchange in the rating area in which the employee’s primary site of employment is located, instead of the lowest cost silver plan in the rating area in which the employee resides. This safe harbor will help alleviate employer burden that could result from requiring that affordability be based on each employee’s place of residence, as employees may change residence locations from time to time, and maintaining up-to-date records may be difficult.

For purposes of this location safe harbor, the proposed regulations provide that an employee’s primary site of employment generally is the location at which the employer reasonably expects the employee to perform services on the first day of the plan year (or on the first day the individual coverage HRA may take effect, for an employee who is not eligible for the individual coverage HRA on the first day of the plan year). The employee’s primary site of employment is treated as changing if the location at which the employee performs services changes and the employer expects the change to be permanent.

The proposed regulations do not provide an age-based safe harbor under IRC Sec. 4980H for the age used to determine the premium of an employee’s affordability plan. Rather, the affordability needs to be based on each employee’s age. The IRS acknowledges that this can be burdensome to employers and is seeking comments on the administrative issues this may raise, as well as on safe harbors that would ease these burdens.

The proposed regulations also provide a safe harbor for the requirement to provide nondiscriminatory benefits under Treasury Regulation 1.105-11(c)(3)(i). This safe harbor states that an individual coverage HRA will not be treated as failing the aforementioned nondiscrimination requirements solely due to the benefits varying based on age—so long as the individual coverage HRA satisfies the age variation exemption under the same terms requirement (Treasury Regulation 54.9802-4(c)(3)(iii)(B)). However, this safe harbor does not automatically satisfy the prohibition on nondiscriminatory plan operation as a whole.

 

The proposed regulations under IRC Sec. 4980H are proposed to apply for periods beginning after December 31, 2019, and the proposed regulations under IRC Sec. 105(h) are proposed to apply for plan years after December 31, 2019.

The Treasury Department and the IRS are seeking public comments on these proposed regulations, which need to be submitted by December 29, 2019. Proposed regulations by the IRS generally may be relied upon by taxpayers in their proposed form.

Watch Ascensus.com for any further information about this guidance.


House Passes Legislation to Repeal Cadillac Tax

The U.S. House of Representatives has overwhelmingly passed the Middle Class Health Benefits Tax Repeal Act of 2019 (H.R. 748), which eliminates the so-called “Cadillac tax” element of the Patient Protection and Affordable Care Act—often referred to simply as the Affordable Care Act, or ACA.

The Cadillac tax was intended to fund certain benefits provided by ACA, and—as some economists claimed it could—exert downward pressure on rising healthcare costs. Application of this tax—40 percent on the value of healthcare benefits exceeding specified thresholds—has been delayed twice by Congress.

The Cadillac tax was to apply to what were claimed to be the most generous and expensive employer-provided healthcare plans. Opponents contended, however, that, in operation, it would have been levied on employer-provided health plans offered to many middle-class workers, and adversely affect employer incentives to offer health benefits. Notably, health benefits included in the calculation to determine application of the Cadillac tax included employer-provided health savings account (HSA) and health reimbursement arrangement (HRA) benefits.

While the 419-6 vote in the House is an indication of broad bipartisan support for repeal of the Cadillac tax, it is unclear at this time when—or whether—the legislation will be taken up in the U.S. Senate in the limited time remaining in the 2019 session of Congress. Repeal cannot occur without the Senate and House passing identical legislation, enacted with President Trump’s signature.


Washington Pulse: Joint Effort Leads to New Health Reimbursement Arrangement Guidance

The U.S. Departments of Health and Human Services, Treasury, and Labor have jointly issued final regulations that create two new types of HRAs—the Individual Coverage HRA (ICHRA) and the Excepted Benefit HRA (EBHRA). The final regulations, which are applicable to plan years on or after January 1, 2020, are meant to give employers and employees more options when purchasing health insurance and covering out-of-pocket expenses. This guidance was issued in response to the President’s Executive Order, released in October 2017.

 

Certain HRA Definitions and Rules Apply

HRAs are defined as employer-funded accounts used by employees to help pay for out-of-pocket medical expenses. HRAs can cover employees as well as their spouses and dependents. Employees cannot simply take an HRA distribution on their own. They must substantiate their claims and submit the claims to their employer. The employer must then determine if the substantiation is sufficient for reimbursement.

HRAs are generally subject to COBRA and ERISA—including the plan document, summary plan description, and Form 5500 reporting requirements.

 

General ICHRA Requirements

The ICHRA is unique because the Affordable Care Act (ACA) previously prevented integrating HRAs with individual health insurance. The regulations now permit this integration—allowing employees to purchase individual health insurance on their own and to receive ICHRA reimbursements to help pay for the premiums (including Medicare and Medicare supplemental premiums) and any other qualified medical expenses under IRC Sec. 213(d).

While the ICHRA may be subject to ERISA, the regulations provide a safe harbor that exempts individual health insurance from the complex ERISA rules applicable to employer-sponsored plans—as long as the employer takes certain administrative steps. The regulations specify the employer cannot force the purchase of any individual health insurance, endorse a particular insurance carrier or plan, or receive any compensation in connection with an employee’s selection.  The employer must also provide an annual notice to employees that the individual health insurance is not subject to ERISA.

Here is a brief summary of the most significant ICHRA requirements:

  • Before receiving an ICHRA reimbursement, employees must provide proof of enrollment in an individually purchased health insurance plan (whether purchased on the Exchange or not). The final regulations identify Medicare and student health insurance as eligible individual health insurance.
  • The employer generally cannot offer a traditional group health plan and an ICHRA to the same class of employees. Classes that employees can be divided into are limited, but include full-time, part-time, seasonal, or geographic locations. Certain minimum class-size requirements may apply, with minimums ranging from 10-20 employees depending on employer size.
  • The employer must offer the same ICHRA terms to all employees in a class; but the employer may vary the amounts it contributes to employees within each class based on the employee’s age, the number of dependents who will be covered, or because of late enrollment during the plan year.
  • The employer will not violate the “same terms” requirement by offering an HSA-compatible ICHRA or a traditional ICHRA to the same class of employees.
  • The employer may determine the plan design. This includes the contribution amount, the maximum reimbursement per month, and the eligible expenses. The employer may choose to reimburse premiums only, IRC Sec. 213(d) expenses only, or both.
  • Employees must be allowed to opt out of the ICHRA before each plan year and also upon termination from employment (if remaining amounts are not forfeited).
  • The ICHRA will be subject to COBRA if the loss of ICHRA coverage is due to a qualifying event. An employee’s failure to maintain individual health insurance is not a qualifying event.

 

Factors to Consider Before Offering an ICHRA

Employers should consider a number of factors—some of the biggest takeaways are described below.

 

ICHRA Affordability Requirement

Employers that are subject to the ACA mandate (employers with 50 or more full-time employees) must provide minimum essential coverage (MEC) that is available to at least 95 percent of their employees and is affordable. Employers offering an ICHRA do not need to be concerned with the MEC requirements: employees must certify that the individual health insurance they purchase meets those requirements.

Employers offering an ICHRA do need to consider whether the ICHRA is affordable. An employer that is subject to ACA and sponsors an ICHRA that is not deemed affordable for enough employees could be subject to penalties. Determining affordability for individual employees could be burdensome to an employer because it would require a calculation based on each employee’s household income compared to the lowest cost silver plan in the employee’s rating area.

The IRS issued proposed safe harbors in Notice 2018-88 in order to provide guidelines applicable to ICHRA affordability determinations. The final regulations also specify that more guidance will be provided, which should make the affordability determination even more straightforward for employers.

 

ICHRA Notice and Substantiation Requirements

Because of the ICHRA individual coverage requirement, employers and employees are subject to the following notice and coverage substantiation requirements. These notice requirements do not apply to other HRAs.

  • Employees must annually verify that they have coverage under individual health insurance at the time of open enrollment. Employees can meet this requirement by completing a “model attestation” provided by the Department of Labor (DOL).
  • Employers must require coverage substantiation from the employee with each request for reimbursement. To meet this requirement, employees can complete a second model attestation provided by the DOL.
  • Employers generally must provide a notice to eligible employees 90 days before the beginning of the plan year (generally by October 2 of each year). Among other things, the notice must
    • include information on the ICHRA,
    • explain that the employee’s individual health insurance is not subject to ERISA, and
    • explain the interaction between the ICHRA and the premium tax credit (PTC).

This notice is important for employees because they will use the information to help determine if they should 1) enroll in the ICHRA, or 2) decline to participate in the ICHRA in order to take advantage of the PTC. (Employees who enroll in the ICHRA are not eligible for the PTC.)

Employers may use the DOL’s model notice to meet this requirement.

 

When an ICHRA Might Make Sense

Adopting ICHRAs may make sense both for large employers looking for more affordable healthcare options and for small employers who normally couldn’t afford to provide healthcare coverage. Two examples are described below.

Large Employer Example: ABC Company operations concentrate in State X, but it also maintains smaller operations in State Y and State Z. ABC Company provides group health plan coverage to its employees living in State X. ABC Company’s small number of employees in State Y and State Z makes it difficult to obtain group insurance coverage in those regions. ABC Company decides to maintain the group health plan for its State X-based employees, and to offer a new ICHRA to its employees in State Y and State Z, which have a different rating area than State X. As a result, the newly created ICHRA benefits the employees in State Y and State Z and allows ABC Company to extend health coverage to all its employees regardless of location.

Small Employer Example: XYZ Company has determined that it cannot afford to provide a group health plan to its 10 employees. Instead, XYZ has decided to offer an ICHRA to all employees. This will help each employee defray some of the cost of purchasing individual health insurance obtained from an Exchange.

 

General EBHRA Requirements

The new “Excepted Benefit HRA (EBHRA)” needs some clarification because of its name. Created by the regulations, the EBHRA is different from HRAs that reimburse only for excepted benefits. Employees may use the new EBHRA to pay for all medical expenses, even ones that are not excepted benefits—including amounts owed as a result of the cost sharing provisions of individual health insurance or group health insurance. EBHRAs must comply with these main requirements.

  • The employer must offer group health insurance, but an employee does not have to enroll in the group plan. The employer must have a waiver of coverage on file for each employee that is enrolled in the EBHRA.
  • The EBHRA is subject to an annual contribution limit ($1,800 for plan year 2020). For plan years beginning after December 31, 2020, the annual contribution limit may be indexed for cost-of-living adjustments. Employees may carry over unused EBHRA amounts to the following plan year: these amounts will not count toward the annual contribution limit.
  • EBHRAs generally cannot reimburse premiums for health insurance (an exception applies for COBRA or other coverage continuation premiums). Employees may receive EBHRA reimbursements for all other IRC Sec. 213(d) medical expenses—including premiums for excepted benefits like vision or dental insurance and short-term limited duration insurance.
  • Employers must offer an EBHRA on the same basis to all “similarly situated individuals”; the employer can treat separate groups of employees differently, but they must be grouped based on bona fide employment-based classifications and not on factors like medical history or health status.
  • An EBHRA is subject to COBRA if it provides an annual benefit of more than $500.

 

Next Steps

Employers that decide to offer an ICHRA or EBHRA should ensure that their human resources departments (and other affected associates) are trained on the new HRA requirements—including requirements for providing ICHRA notices and obtaining additional substantiation. They should also be prepared to answer employee questions.

Those seeking additional information on the final regulations may review a DOL news release and a set of FAQs. Ascensus will closely monitor any new developments regarding this guidance. Visit ascensus.com for future updates.

 

Click here for a printable version.

 


Washington Pulse: House Version of Repeal-and-Replace Health Bill Would Make Significant Changes to HSAs

On May 4, 2017, the House of Representatives passed—by a margin of 217 to 213—the American Health Care Act of 2017 (AHCA). Its purpose is to repeal and replace the Affordable Care Act (ACA), often referred to as Obamacare. This was the second attempt by House Republican leadership to pass repeal-and-replace legislation, the first bill having been abandoned when it became clear that there was not enough support for it to be passed.

Among the many AHCA provisions, some of which would affect taxes, coverage requirements, employer and individual mandates, etc., are provisions that would alter health savings accounts (HSAs). Americans are increasingly using these individual savings accounts, coupled with certain high-deductible health plans (HDHPs), to pay for health care expenses. In fact, the trend in American health care—both employer-sponsored and individually purchased—is toward these “defined contribution” savings arrangements and away from what have been informally referred to as low-deductible/comprehensive health plans.

The AHCA would significantly relax contribution and certain other HSA requirements. Most notably, the AHCA would

  • increase annual HSA contribution limits to equal the maximum HDHP out-of-pocket payment amounts (currently $6,550 for single and $13,100 for family coverage);
  • treat an HSA as having been established on the date HDHP coverage begins if the HSA is established within 60 days of such date. This change would permit medical expenses incurred on the date insurance coverage begins to be considered qualified expenses;
  • restore the 10 percent additional penalty tax on HSA distributions that are not used for qualified medical expenses (the ACA increased the additional penalty tax to 20 percent);
  • allow spouses that are both eligible to make catch-up contributions to choose which of their HSAs will receive the additional contributions; and
  • allow over-the-counter (i.e., nonprescription) medications to be considered HSA-eligible expenses.

Another health-related, but non-HSA, provision would affect IRAs and employer-sponsored retirement plans. It would restore the 7.5 percent of adjusted gross income (AGI) threshold for the federal medical expense deduction (the ACA increased this threshold to 10 percent). This would, in turn, reduce the threshold from 10 percent to 7.5 percent of AGI for the unreimbursed medical expense exception to the 10 percent early distribution penalty tax.

The AHCA is expected to face challenges in the Senate. The HSA provisions are not considered controversial, but other provisions in the House bill—including those dealing with coverage of pre-existing health conditions, rolling back state expansions of Medicaid, etc.—are expected to be among provisions that many senators, including some in the Republican majority, may not support. If the Senate passes a health care bill different from the House bill, a conference committee process will be needed to reach a single uniform bill, followed by a new vote by both House and Senate, the outcome of which is uncertain at this time.

The HSA and early distribution provisions described above would generally become effective in 2018 if the AHCA were enacted as currently written.

Ascensus will continue to monitor this rapidly developing process and provide additional information as it becomes available.

 


House Passes Obamacare Replacement Bill

The U.S. House of Representatives narrowly passed H.R. 1628, the American Health Care Act of 2017, legislation introduced under the administration and Republican congressional leadership’s Affordable Care Act (ACA) repeal-and-replace initiative. H.R. 1628 repeals most of the ACA tax provisions, includes certain refundable tax credits, rolls back state Medicaid expansions under the ACA, and was introduced under what are known as “reconciliation rules.” This means that the legislation could pass in the Senate with a filibuster-proof simple majority. But some Democratic opponents to the legislation believe that certain provisions of the bill do not qualify for this filibuster-proof protection. Such reconciliation bills are generally subject to a future expiration date, and if so would have to be affirmed before such date in future legislation by a future Congress. Changes to H.R. 1628 could be made in the Senate, in which case, it would likely require action by a House-Senate conference committee to resolve differences, with voting on such unified legislation by both the House and Senate.


Proposed Senate Bill a Potential Component in Replacing Obamacare

Senators Bill Cassidy (R-LA) and Susan Collins (R-ME) have proposed the Patient Freedom Act of 2017, legislation intended to be a component in the replacement of the Affordable Care Act (ACA), also known as Obamacare. Under one of three options contained in this proposal, health savings accounts (HSAs) paired with a high deductible health plan (HDHP) and what is described as a ”basic pharmacy plan” would be combined with refundable tax credits or subsidy payments deposited on a taxpayer’s behalf into a “Roth HSA.” Under current law there is no “Roth HSA,” only HSAs to which tax-deductible contributions can be made by employers and taxpayers, and the distributions from which are tax free—including earnings—if used for qualified medical expenses. Cassidy further describes the HSA/HDHP/basic pharmacy plan as providing catastrophic coverage.

 

Under the Cassidy-Collins proposal, each state could either 1) retain the provisions of ACA, with some limitations on subsidies, 2) implement the above-described HSA/HDHP program with federal grants to states or refundable tax credits—in either case to fund taxpayer HSAs, or 3) design an alternative program without federal assistance. ACA provisions described as being retained include its prohibitions on excluding persons for pre-existing conditions or having annual and lifetime payment limits, its guaranteed insurability requirement, and the ability to insure young adults up to age 26. Several ACA mandates would be repealed, however, including those for individual coverage and employer coverage.

 

Additional details on this newly-described plan are anticipated. As of yet, no comparable plan has been proposed or is under consideration in the House of Representatives. While it is unclear how ACA repeal advocates will respond to the Cassidy-Collins proposal, it has been widely expected that some form of HSA expansion or enhancement would accompany ACA repeal efforts.