Revised estimates will be utilized by the Senate in scoring H.R. 1628. Current health insurance coverage under the ACA would be amended.

Observations on H.R. 1628 Passed May 4, 2017: The American Health Care Act of 2017 Passed by the U.S. House of Representatives

As widely observed, on May 4, 2017 the U.S. House Representatives by a vote of 217-to-213 approved H.R. 1628, legislation that if enacted by the Senate, would repeal or delay taxes enacted by the Patient Protection and Affordable Care Act (the “ACA”). As the legislation now proceeds to the Senate, significant modifications are expected. However, if the legislation would be signed into law as drafted, among other repeal provisions, it would

  1. eliminate the 3.8% tax on the net investment income (“NII”) of individuals, estates, and trusts with incomes above specified amounts;
  2. repeal the increase in the income threshold used to determine whether an individual may claim an itemized deduction for unreimbursed medical expenses;
  3. allow taxpayers to claim an itemized deduction for unreimbursed expenses medical expenses that exceed 7.5% (10% under current law) of adjusted gross income; and
  4. repeal the additional Medicare tax that is currently imposed on certain employees and self-employed individuals with wages or self-employment income above specified thresholds.

What is the legislation’s potential effect on estimated federal spending, revenue, and deficits and current health insurance coverages and premiums?  

Estimated Spending and Revenue Effects

Not widely cited is the joint Congressional Budget Office (“CBO”) and the staff of the Joint Committee on Taxation (“JCT”) estimate of the direct spending and revenue effects of H.R. 1628 as posted on the website of the House Committee on Rules on March 22, 2017. This estimate reflected smaller savings over the next 10 years than the estimate the CBO previously issued for House Ways and Means Committee and the House Committee on Energy and Commerce, although the estimated effects on health insurance coverage and on premiums for health insurance are similar to those estimated for by Committees. Therefore, while there is no certainty of spending and revenue outcomes with the May 4 version of H.R. 1628, there is even greater uncertainty of the bill’s content and passage in the Senate. 

The Estimated Effects on Federal Deficits

Despite the uncertainty of H.R. 1628, there are estimates as to the impact of the legislation on federal deficits according to the March 2017 CBO and JCT estimate. The Senate will undoubtedly consider these estimates and the call on May 4 for revised estimates, in advance of any Senate action. As presently forecasted, however, enacting H.R. 1628 would reduce federal deficits by $150 billion over the 2017-2026 period; this reduction is the net result of a $1,150 billion reduction in spending, partly offset by a reduction in tax revenues. The provisions dealing with health insurance coverage would reduce deficits by $883 billion; the noncoverage provisions would increase deficits by $733 billion, mostly by reducing revenues.

The Effects on Health Insurance Coverage

In March 2017, the CBO and JCT estimated that in 2018 14 million more people would be uninsured under H.R 1628 than under current law. The increase in the number of uninsured people relative to the number under current law would reach 21 million in 2020 and 24 million in 2026. In 2026, an estimated 52 million people under age 65 would be uninsured, compared with 28 million who would lack insurance that year under current law.

Effects on Premiums

H.R. 1628, with the proposed amendments, would tend to increase average premiums in the nongroup market before 2020 and lower average premiums thereafter, relative to projections under current law. In 2018 and 2019, according to CBO and JCT’s March 2017 estimates, average premiums for single policyholders in the nongroup market would be 15% to 20% higher under the legislation than under current law. By 2026, average premiums for single policyholders in the nongroup market would be roughly 10% lower than under current law.

Post May 9, 2017: Uncertainty Surrounding Emerging Legislation and Related Estimates

The ways in which federal agencies, states, insurers, employers, individuals, doctors, hospitals, and other affected parties would respond to the changes made by H.R. 1628 are difficult to predict, and the estimates in March cited by the CBO and JCT are uncertain. However, the CBO and JCT have endeavored to develop revised estimates that are in the middle of the distribution of potential outcomes. Revised estimates presently being prepared will certainly be utilized by the Senate in the revised scoring of H.R. 1628, and any responsive legislation the Senate proposes.

The final House bill included several tax policy changes within a Manager’s Amendment that was reportedly developed with President Trump’s input and introduced jointly by House Ways and Means Committee Chairman Kevin Brady, R-TX, and House Energy and Commerce Committee Chairman Greg Walden, R-OR.

ACA Taxes

Pursuant to the Managers’ Amendment as adopted by the AHCA, the repeal of many ACA-related taxes is accelerated to begin in 2017, a year earlier than originally proposed when HR 1628 was first introduced. Under the AHCA, as approved by the House, the tax provisions that are proposed to be repealed retroactive to January 1, 2017, include, among others:

  • the 3.8% NII tax;
  • the higher 10% adjusted gross income (“AGI”) threshold for the medical expense deduction (and, in its place, the amendment would reduce the qualifying AGI threshold from 10% to 5.8%);
  • the excise tax on qualified medical devices;
  • the tax on prescription and over-the-counter medications;
  • the tax on certain health insurers;
  • the current, higher limitations on flexible spending account contributions and health savings accounts; and
  • the elimination of the deduction for expenses allocable to the Medicare Part D subsidy.

Under the ACA, a hospital insurance (“HI”) surtax based on income at a rate equal to 0.9% of an employee’s wages or a self-employed individual’s self-employment income was imposed. The AHCA would repeal the additional 0.9% Medicare tax beginning in 2023.

The updated AHCA would also accelerate repeal of the tanning tax from the bill’s original 2018 date to June 30, 2017, a mid-year point to reflect to quarterly collection of this tax. Also accelerated beginning in 2017 would be the repeal of the current ACA-imposed limitations on flexible spending account contributions and health savings accounts, and the repeal of the elimination of a deduction for expenses allocable to the Medicare Part D subsidy.

Additionally, the implementation of the ACA’s “Cadillac” excise tax on high-cost, employer-sponsored coverage would be delayed under the Manager’s Amendment by one additional year, to 2026, from the bill’s original implementation date of 2025.

Further, under the AHCA, the individual and employer mandates would be effectively repealed by changing the associated penalties to $0. The effective date for repeal of both mandates would reach back to all months after December 31, 2015, thus providing retroactive relief from any penalties imposed in 2016 as well as forward to 2017 and later years.

EisnerAmper LLP’s Tax Legislation Monitoring Group will continue to analyze proposed 2017 tax legislation, including the incorporation of proposed 2016 tax legislation provisions, and release ongoing analysis as legislation continues to evolve. For more information, please contact your tax professional.

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Timothy Speiss is the Partner-in-Charge of EisnerAmper's Personal Wealth Advisors Group and Vice President of EisnerAmper Wealth Planning LLC. He chairs our Asia Practice and is a member of the firm’s community service group, EisnerAmper Cares.

Kristen De Noia is a Tax Manager with tax compliance and planning experience focusing on personal and fiduciary income taxation, gift taxation and trusts and estates including high net worth families and closely held business owners.