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2017 Year-End Tax Guide

 

Affordable Care Act Update for 2017

Affordable Care Act Update for 2017
 

As of this writing, the Republican plan to "repeal and replace" the Affordable Care Act through the reconciliation process is officially dead. The ACA remains the law of the land, and all individuals and businesses must be prepared to deal with its rules for 2017. Despite the focus on efforts to eliminate the law, there have been judicial and administrative actions, some of which may impact the viability of the law. Where we go in 2018 and later is anyone's guess.

JUDICIAL ACTION

The House Republicans brought a suit against the Obama administration in 2014. (The case, originally entitled House v Burwell, was later renamed House v Price). In this case, the House of Representatives challenged the right of the administration make payments of cost-sharing subsidies to insurance companies. These are amounts (different from the ACA premium tax credits and subsidies) which assist low-income taxpayers afford a better policy on an exchange by paying for out-of-pocket costs. A federal judge in the District of Columbia circuit held that since these amounts were not appropriated by the House, the payments constitute a violation of the U.S. Constitution's separation of powers. This decision was appealed by the Obama Administration, during which time the payments were continued.

In February 2017, the House requested a delay in the appeal, partly on the basis that the law would probably be changed or abolished. At that time, their belief was this would make a determination by the appeals court moot.

The cost-sharing subsidies impact a significant number of persons insured under the ACA. Failure to make these payments to insurers could cause a destabilization in the insurance markets and additional insurers to leave the exchanges. This can effectively cause the ACA to collapse under its own weight.

It should be noted that many of the proposed Republican plans, which kept the ACA framework in place for a period of time, called for continued payment of these subsidies through 2019.

ADMINISTRATIVE ACTION

Affordable Plans. Many rules under the ACA revolve around the concept of "affordability." Changes in elements affecting this definition can cause employers to rethink their cost-sharing programs.

Under the ACA, an Applicable Large Employer (ALE) may be subject to penalties if it does not offer "affordable" coverage providing minimum value to its full-time employees. Two different penalties may apply:

  • If an ALE: a) does not provide minimum essential coverage to its full-time employees or offers coverage to fewer than 95% of its full-time employees; b) at least one full-time employee purchases health insurance on an exchange; and c) the full-time employee receives a premium tax credit (which will be referred to as the "No Coverage Penalty").
  • If an ALE: a) offers minimum essential coverage to full-time employees but the coverage does not provide "minimum value" or is not "affordable"; b) at least one full- time employee purchases health insurance on an exchange; and c) the full-time employee receives a premium tax credit (which will be referred to as the "Bad Coverage" Penalty").

The No Coverage Penalty has increased to $2,260 (the $2,000 statutory amount adjusted for inflation). This penalty was $2,160 in 2016. This penalty calculation is based on the number of all full-time employees of the employer in excess of 30, regardless of the number of employees who actually enroll in exchange coverage.

The Bad Coverage Penalty is increased to $3,390 per full-time employee who actually receives a subsidy. However, the penalty can be no more than that which would apply under the No Coverage Penalty.

Under the law, "affordability" for an employee is not based on the coverage actually selected but on the employee's share of the cost of the lowest cost "self-only" coverage. For 2015 and 2016, the offered coverage was considered affordable if this was no more than 9.5% and 9.66%, respectively, of household income. Household income means the modified adjusted gross income of the employee and members of the employee's family (including spouse and dependents) who are required to file an income tax return. The ACA understands that employers are not likely to know the household incomes of their employees and creates three safe harbors which an employer can use instead of household income: W- 2 wages, the federal poverty level, or an amount based on the employee's rate of pay multiplied by 130 hours.

Changes in some of these safe harbors may permit an employer to reevaluate its contribution structure, which may be considered affordable under the new rules.

  • For 2017 plan years, the affordability rate is 9.69% and will be lowered to 9.56% for 2018 plan years.
  • The federal poverty level has also increased for 2017 and 2018.

This may cause higher employee contributions to be considered "affordable" under the safe harbors.

Elimination of Transition Rules. Certain limited transition rules applied for certain fiscal year plans in 2016. These transition rules do not apply in 2017; consequently a larger number of employers will be subject to the ACA penalty rules.

INDIVIDUAL MANDATE

A key to the operation of the ACA is that as many people as possible must pay into the exchanges.Participation is incentivized, in part, through the Self Responsibility Payment (i.e., the Individual Mandate). The penalty increase between 2016 and 2017 is relatively small, as it was intended to match inflation. The amount of the penalty depends upon the size of an individual's family. The base penalty for a family cannot exceed three times the penalty for a single filer. The penalty is the greater of the flat fee or the percentage of income.

Schedule of Individual Mandate Penalties:

Year Penalty (Single) Penalty (Family) Maximum
2014 $95 or 1% of income $285 or 1% of income $9,800
2015 $325 or 2% of income $975 or 2% of income $12,500
2016 $695 or 2.5% of income $2,085 or 2.5% of income $13,000
2017 $695 or 2.5% of income $2,085 or 2.5 of income $13,100

Some argue that a problem with the penalty structure is that the penalty may not be significant enough to sufficiently cause people to purchase health insurance (particularly when compared to the penalties in a state, such as Massachusetts , for example, upon which the ACA was modeled).

PRESIDENTIAL ACTION

Early in his administration, President Trump issued an executive order authorizing federal agencies to reduce the financial burdens on companies for compliance with certain rules, including "Obamacare." The IRS issued a notice that it would no longer automatically refuse to accept an individual income tax return which did not indicate whether the taxpayer had health insurance for the entire year. Some interpreted this act as indicating that IRS might not enforce the individual mandate, possibly for the 2016 tax year.

The service was quick to issue a subsequent statement that filers remain responsible for any applicable ACA penalty. Additionally, failure to provide information as to coverage could cause the service to contact the taxpayer with questions. Since the ACA is the operative law, taxpayers remain responsible for compliance with and payment of its taxes.

However, there is some discretion in the Treasury to determine how the law should be enforced. This was demonstrated by the Obama Administration in delayed enforcement in the law's early years.

LEGISLATIVE ACTION

The Republicans in the House and the Senate have made several attempts to eliminate the ACA. The problem is that after seven years of votes and promises to repeal the law, there is clearly no consensus as to its replacement.

Some common themes in the various Republican bills are:

  • Elimination of the Obamacare taxes (including the 3.8% net investment income tax and the .9% Medicare surtax, the medical device tax, and the Cadillac tax). However the Graham-Cassidy bill left most of these taxes in the law.
  • Reduction in Medicaid funding and limits on expansion. Greater flexibility was given to the states in dispersing funds, generally through block grants.
  • Expansion of waivers. While pre-existing condition protections are retained in the law, states would be given a greater ability to obtain waivers from this provision. The Graham-Cassidy bill conditioned waivers on showing that the state would provide affordable and accessible coverage – but this was not defined.
  • Reduction of essential benefits to effectively permit "skinny plans."
  • Elimination of the Individual Mandate and the Employer Mandate – retroactive to 2016.
  • Increase to contributions to health savings accounts.
  • Elimination of cost sharing subsidies and premium tax credits, generally after 2019.

Despite the failure to repeal the law in 2017, it should be expected that the Republicans in Congress and the President will look to significantly change the law in 2018. While bipartisanship is a desired goal, it is difficult to see how the parties will come to an agreement on this issue – particularly when the starting point for the Democrats appears to be the retention of the ACA.



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