Affordable Care Act and Health Care Legislative Proposals (Part 2)

By Professor Annette Nellen*
San Jose State University Graduate Tax Program

View Part 1

    1. e. H.R. 3590, Halt Tax Increases on the Middle Class and Seniors Act, would change the medical deduction threshold back to 7.5% of AGI for all taxpayers. The threshold for AMT purposes would remain at 10%. On 6/15/16 by voice vote following a mark-up session, the House Ways and Means Committee ordered this bill to be reported.The Joint Committee on Taxation estimates that this change would cost about $4 billion per year by 2024 and cost $33 billion over ten years (2017-2026). [JCX-61-15; 6/14/16]
    2. f. H.R. 3762 included provisions to repeal the tax pieces of the ACA including the economic substance doctrine and tanning excise tax. The bill was passed in the House on 10/23/15 (240-189) and in the Senate on 12/3/15 (52/47). The President vetoed it on 1/8/16 (veto message included in Congressional Record of 1/8/16, page H211) and Congress failed to override the veto on 2/2/16.
    3. g. H.R. 4723, Protecting Taxpayers by Recovering Improper Obamacare Subsidy Overpayments Act, repeals the Premium Tax Credit (PTC) provision of §36B(f)(2) that limits the amount of PTC that has to be repaid when an insured receives too much PTC in advance (based on their household income). The current version and proposed change still requires all of the PTC to be repaid if one’s household income exceeds 400% of the federal poverty line.House Report 114-475 states that this change is needed due to fiscal concerns and the need to reduce “improper payments resulting from waste, fraud, and abuse.” The bill is estimated to generate $61.6 billion over ten years. The dissenting viewpoint included that the change might scare some people away from seeking a PTC.Also see Joint Committee on Taxation report – Description of An Amendment In The Nature Of A Substitute To The Provisions Of H.R. 4723, The “Protecting Taxpayers By Recovering Improper Obamacare Subsidy Overpayments Act” (JCX-12-16 (3/15/16)).Observation: The dissenting view in the House report makes no mention of the reality that if one’s income exceeds 400% of the FPL, even if it was estimated earlier in the year that it would not, the entire PTC has to be repaid. Per the dissenting view:The Joint Committee on Taxation estimates that H.R. 4723 will result in 220,000 to 250,000 Americans losing health coverage. This is because they would rather forgo coverage than be faced with a large year-end tax bill.”Most likely, individuals do not know that if they receive too much PTC in advance but their household income for the year remains at or below 400% of the FPL that they may not have to repay all of what they would otherwise be required to? Thus, it is questionable if this change would cause people to forego buying insurance on the Exchange. In contrast, it is more likely that individuals will forego health insurance due to the risk of having to repay all of the advance PTC should their income go up later in the year such that is exceeds 400% of the FPL? This seems to be the bigger issue (that unexpected income increases later in the year cause one’s household income to exceed 400% of the FPL requiring that all of the advance PTC be repaid).
    4. h. H.R. 4217 would amend the definition of household income for the PTC (§36B(d)(2)) to not include any income from converting an IRA to a Roth IRA.
    5. i. R. 5284, World’s Greatest Healthcare Plan Act of 2016, is a 117-page proposal that modifies some, but not all of the ACA provisions and adds several new provisions. For example, H.R. 5284 prospectively repeals the individual mandate (§5000A) and the employer mandate (§4980H). It provides options to states that per the introduction to the bill will provide “greater flexibility” regarding health care options. The bill also promotes health savings accounts (HSAs).Per a press release (5/23/16) of co-sponsors Congressman Pete Sessions (R-TX) and Senator Cassidy (R-LA), the bill “would not repeal or replace the ACA — people can keep their current coverage if they choose to — but would be an alternative option. It would scrap the employer and the individual mandates, and instead provide tax benefits to every U.S. citizen of $2,500, plus a $1,500 tax benefit for every dependent minor, as long as the minors are also U.S. citizens. A family of four would receive a total of $8,000.”
    6. j. H.R. 5445 would “improve” the rules regarding health savings accounts such as by increasing the contribution limits. On 6/15/16 by voice vote following a mark-up session, the House Ways and Means Committee ordered this bill to be reported. See the Joint Committee on Taxation description at JCX-53-16 (6/14/16).
    7. k. H.R. 5447, Small Business Health Care Relief Act, would modify rules for employer-provided group health plans. On 6/15/16 by voice vote following a mark-up session, the House Ways and Means Committee ordered this bill to be reported. It was passed in the House by voice vote on 6/21/16.Per the Joint Committee on Taxation (JCX-47-16; 6/14/16) [footnotes omitted]:“Under the proposal, a “qualified small employer health reimbursement arrangement” (referred to herein as a QSEHRA) is generally not a group health plan under the Code, ERISA or PHSA and thus is not subject to the group health plan requirements. A QSEHRA is defined as an arrangement that (1) is provided on the same terms to all eligible employees of an eligible employer; (2) is funded solely by the eligible employer and no salary reduction contributions may be made under the arrangement; (3) provides, after an employee provides proof of minimum essential coverage, for the payment or reimbursement of medical expenses of the employee and family members; and (4) the amount of payments and reimbursements under the arrangement for a year cannot exceed specified dollar limits. In the case of an individual not covered by the arrangement for all 12 months of a year, the dollar amounts are prorated to reflect the number of months of coverage.”…“Because a QSEHRA is not a group health plan, coverage under a QSEHRA is not minimum essential coverage and does not satisfy the requirement that an individual have minimum essential coverage. Under the proposal, if an employee’s medical care expenses are paid or reimbursed under a QSEHRA and the employee does not have minimum essential coverage for the month in which the medical care was provided, the amount of the payment or reimbursement for those expenses is includible in the employee’s income.”
    8. l. H.R. 5452, Native American Health Savings Improvement Act, amends §223 to provide that an individual “receiving hospital care or medical services under a medical care program of the Indian Health Service or a tribal organization does not disqualify an individual from being eligible for a health savings account” (CRS summary). This was passed in the House on 6/21/16 by voice vote. Also see JCT description, (JCX-51-16; 6/14/16).
    9. m. H.R. 5458, Veterans TRICARE Choice Act, adds coverage under TRICARE to the list of disregarded coverage at §223(c)(1)(B). On 6/15/16 by voice vote following a mark-up session, the House Ways and Means Committee ordered this bill to be reported. As reported by sponsors, Congressmen Stewart (R-UT) and Tulsi (D-HI), this proposal gives veterans the ability to opt to “pause” their TRICARE benefits so that they can participate in an HSA program (Congressman Stewart press release of 2/11/15). Also see JCT description at JCX-49-16; 6/14/16.
    10. n. House Republican’s “A Better Way” Health Care Blueprint – In June 2016, the House Republicans issued plans for 2017 and beyond in six areas.
      • Poverty
      • National security
      • The economy
      • The Constitution
      • Health care
      • Tax reform

Tax changes included in the health care report include:

      1. a. Repeal Obamacare (ACA).
      2. b. Provide a refundable tax credit to help individuals purchase insurance.
      3. c. Preserve the exclusion for employer sponsored health insurance but cap the benefit. The report notes that per the Congressional Budget Office, the exclusion increases premiums by about 10 to 15%. The report also notes that the exclusion holds down wages as it encourages people to take compensation in the form of health insurance rather than regular wages. The report also notes that the cost of this exclusion (in foregone income and payroll taxes) is about $266 billion for fiscal year 2016 making it the “third largest health expenditure, after Medicare and Medicaid.” No level is stated for the proposed cap. The report does state: “our plan proposes to cap the exclusion at a level that would ensure job-based coverage continues unchanged for the vast majority of health insurance plans.” (report page 15)

Per FAQs about the plan:

“Q: How is this tax credit to support making coverage portable any different from Obamacare’s?

A: Our plan implements a flat, simple form of assistance that would grow the economy and ensure it always pays to work:

      • • Credits are not income-tested. As a result of Obamacare’s poor design and incentives, many Americans have fallen into a coverage gap between their state’s Medicaid eligibility criteria and those for the Obamacare subsidies. Likewise, many middle-class families find themselves with little or no assistance to purchase increasingly expensive health insurance. Our plan would provide assistance to them.
      • • Credits are available to be used on any state-approved plan, instead of being tied to the broken Obamacare exchanges.
      • • Credits are flat. Because they are not tied to premium costs, they will act as a check to insurers. Instead of a system that chases ever increasing health care costs with ever increasing subsidies, our plan provides a fixed amount that can be used in more places and on more choices.

Q: Are you destroying employer-based health insurance by putting a cap on the job-based exclusion?

A: No, just the opposite. Our policy is designed to protect the job-based market while still taking steps to make the tax code fairer and lower health care costs.

Q: How is this plan better than the Cadillac tax?

A: The Cadillac tax is a crude, complex, and flawed policy. And it—like the rest of the President’s health care law—must be repealed and replaced. Our plan provides relief for lower-income workers relative to current law, takes into account regional variations, and exempts employees’ HSA contributions from counting toward the cap.”

*Annette Nellen, Esq., CPA, CGMA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA, and California State Bar. She is the vice chair of the AICPA Tax Executive Committee and a member of the AICPA Tax Reform Task Force. She has several reports on tax policy and reform and a blog. She co-instructs with Gary McBride, the CalCPA annual federal and California tax updates on individuals and businesses and estates that are offered throughout the state in December and January.

Affordable Care Act and Health Care Legislative Proposals (Part 1)

By Professor Annette Nellen*
San Jose State University Graduate Tax Program

So far in 2016, there have been over ten legislative proposals to modify certain tax provisions of the ACA. Some proposals call for expansion of Health Savings Accounts. And as in past years, legislation to repeal the ACA was passed. This time by both House and Senate. That bill (H.R. 3762) was vetoed by President Obama and Congress was unable to override that veto.

Summarized below are the tax-related bills introduced dealing with the ACA and health care. A few have been passed by the House and for several, there were hearings for which the Joint Committee on Taxation provided background on the bill and revenue estimates. Given the shortened congressional calendar for this election year, it is uncertain whether the full Congress will take on any of these bills and if yes, whether they will be signed into law. Regardless, these bills do indicate the thinking of many in Congress regarding taxes and health care laws. Links to the bills and reports are included below.

Also, as part of the House Republican “A Better Way” effort, a report on health care reform was issued in June 2016. A summary is included here with links to the full report.

  1. a. H.R. 210, Student Worker Exemption Act, would exclude full-time students who work for the university to be counted as a full-time employee for shared responsibility obligations of that institution. On 6/15/16 by voice vote following a mark-up session, the House Ways and Means Committee ordered this bill to be reported.The Joint Committee on Taxation estimates that the cost of this change is less than $500,000 per year (JCX-59-16; 6/14/16). Also see JCT description at JCX-58-16; 6/14/16.
  2. b. H.R. 1270, Restoring Access to Medication and Improving Health Savings Act, “repeals provisions of the Internal Revenue Code, added by the Patient Protection and Affordable Care Act, that limit payments for medications from health savings accounts, medical savings accounts, and health flexible spending arrangements to only prescription drugs or insulin (thus allowing distributions from such accounts for over-the-counter drugs)” (CRS summary). The Joint Committee on Taxation estimates the bill will be almost revenue neutral (raising $2.1 billion over ten years), due to the projected revenue generated from recovering improper Obamacare subsidies (JCX-62-16; 7/6/16).H.R. 1270 passed in the House on 7/6/16 (243-164). Congressman Levin (D-MI) issued a statement objecting to the expanded HSA provision as being inequitable (7/6/16 press release). Per CBO and JCT, the expanded HSA provision is estimated to cost $20.5 billion over ten years).
  3. c. H.R. 2911, Small Business Healthcare Relief Act, would modify various provisions to enable small employers (fewer than 50 employees) to offer HRAs. Per the Congressional Research Service (CRS) summary:“This bill amends the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (ERISA) to allow an employer with fewer than 50 employees that does not offer group health insurance coverage to establish a health reimbursement arrangement. Under the arrangement, funds contributed by an employer are excluded from the employer’s taxable income and are used to pay or reimburse employees for medical care expenses, including premiums for individual health insurance coverage or Medicare supplemental insurance.Such a reimbursement arrangement: (1) must not pay premiums for an employee covered by a family member’s coverage, (2) must be offered to all eligible employees on the same terms and may only vary based on the number of individuals covered, and (3) is not required to provide continuation coverage.Employer contributions to a reimbursement arrangement are not included in an employee’s gross income if the employee was covered by the reimbursement arrangement for more than nine months of the year. Employees covered for less than nine months have a percentage of employer contributions included in their gross income, with exceptions.An employee offered affordable individual health insurance coverage under a reimbursement arrangement is not eligible for a premium assistance tax credit.Employers must report contributions to a reimbursement arrangement on their employees’ W-2.This bill amends the Public Health Service Act to exempt reimbursement arrangements from requirements for health insurance coverage. Insurance offered under a reimbursement arrangement remains subject to the requirements.”
  4. d. H.R. 3080, Tribal Employment and Jobs Protection Act, removes “tribal employers” from the definition of “applicable large employer” for purposes of the employer mandate (§4980H). On 6/15/16 by voice vote following a mark-up session, the House Ways and Means Committee ordered this bill to be reported. Also see JCT report (JCX-56-16; 6/14/16).

*Annette Nellen, Esq., CPA, CGMA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA, and California State Bar. She is the vice chair of the AICPA Tax Executive Committee and a member of the AICPA Tax Reform Task Force. She has several reports on tax policy and reform and a blog. She co-instructs with Gary McBride, the CalCPA annual federal and California tax updates on individuals and businesses and estates that are offered throughout the state in December and January.

What is a Health Insurance Captive?

A health insurance captive is an insurance arrangement that is owned and controlled by its insureds.  Mutual insurance companies, Multiple Employer Trusts and Multiple Employer Welfare Arrangements, also have a similar structure.  While a captive can certainly be established and owned by one employer, and many single large employers do own and operate captives, this article will concentrate on the small and mid-size employer captive market.

With a captive the insureds are at risk and therefore can benefit from the underwriting performance and investment income generated by the captive.  They are typically set-up for companies that are too small to self-insure on their own.  By combining a number of employers together they achieve the critical mass to self-insure as a group.  The carrot is that employers will (somehow) achieve a lower cost of providing health benefit plans to their employees than they could through other traditional market options.

Many “captive specialists” have hit the market in recent years promoting health captives as a way for small employers to beat the Affordable Care Act.  These captive consultants do the necessary legal and administrative work to establish a captive on behalf of a potential pool of like-kind employers and then make money through consulting, broker or administration fees for the captive.

Looking under the hood- in a captive, each individual employer is in essence operating a self-funded plan.  Employers take on additional responsibilities and administrative responsibilities in running a self-funded plan, even if the captive is taking on significant portion of the administrative burden.

The captive structure is typically:

  • The employee receives a regular, ACA compliant health benefit plan
  • The employer established a self-funded plan.
    • The captive usually has stock documents for its insureds. The employer has specific and aggregate stop loss insurance purchased through the captive.  The employer pays that actual claims costs for their employees, plus: the administration costs of the captive (which include its reinsurance costs); the stop loss insurance costs; and in the first year or any year the captive has a need, additional capital contribution to the captive (typically 10% or more the first year).
  • The captive purchases reinsurance at levels determined by the size and risk of the captives pool of employers/employees

This structure can of course work, but the gamble is that the captive will have enough critical mass to be able to achieve its promise of outperforming the fully insured market.

California has recently enacted regulations to discourage small employers from sidestepping the ACA small employer pool by using self-funded plans and therefore captives.  The law regulates the minimum amount of the specific and aggregate stop loss small employers (fewer than 100 employees) may purchase, ensuring, in most instances a risk too great for a small employer to assume.  Specific deductibles cannot be below $40,000. Aggregate stop loss minimums are on a formula that requires a risk of at least an additional 20%, or more depending on the specifics of a group.

Upside and downside of a health captive:

The upside is potential cost savings from a number of health plan operating and performance categories.  The most important piece is that claims cost of the captive, in aggregate, outperform the fully insured market in the short and long.  This upside comes with an extremely high risk and is outside of the control of the captives members. Any number of expensive chronic conditions or catastrophic claims can put the captives’ members in a financial disadvantage.  In addition to claims performance, captives usually state that they operate at a lower administrative cost than the fully insured market.  This must be analyzed carefully because the captive has management costs, employer and the captive’s reinsurance costs, and the administrative costs of operating a health plans which have become very complex.  Provider contracts, prescription drug vendors, customer service, appeals, premium billing, large case management, fraud management and many other functions all need to be managed the same as a fully insured carrier.  There are also internal administrative costs and liability to the captives employers that are not incurred with a fully insured plan.  And an employer can have substantial cost to leave a captive or if it is not performing or runs into financial issues.

Captives usually look good from the marketing materials and the mangers who sell them are well versed at handling the risk objections.  For most small employers, particularly in California, the captive arrangement is a financial risk too great and an administrative burden that it does not have expertise in handling.

As mentioned in the first paragraph, a captive and a MEWA Trust like CalCPA Health are similar in that the aggregate a number of smaller employers together.  But the MEWA model provides the participating employers a fully insured health plan, in essence, so it does not subject them to the financial risk and administrative burdens of a captive.