As everyone in America knows by now, President Trump and Republicans in Congress have vowed to repeal and replace the Affordable Care Act (ACA). In its place, they plan to introduce a more market-based system of health coverage.
One question many people have: How will the replacement plan help individuals without employer-provided insurance buy health coverage on the open market? A “Policy Brief” released on February 16 by U.S. House Speaker Paul Ryan (R-WI) provides some details on how Republicans hope to get this done. The main features are:
What Are Refundable and Advanceable Tax Credits?
A refundable tax credit involves a taxpayer receiving a payment from the federal government even if the credit amount exceeds the amount the individual owes in taxes.
An advanceable tax credit provides financial help in advance of filing a tax return. The Republicans’ Policy Brief states that “advanceability is a key feature” of its tax credit proposal “because many Americans need help paying their monthly premiums. They cannot afford to wait until they file their taxes the following year to get assistance.
- An advanceable and refundable tax credit, and
- Expanded health savings accounts (HSAs).
This article explains some of the details in the document Ryan released titled, “Obamacare Repeal and Replace: Policy Brief and Resources.”
Current Premium Tax Credit
Under current law, lower-income individuals who aren’t eligible for other qualifying health coverage or “affordable” employer-sponsored insurance plans, which provide “minimum value,” are allowed to claim a refundable premium tax credit to subsidize the purchase of certain health insurance plans through a state-established American Health Benefit Exchange or through federally-facilitated Exchanges. This credit is also known as a health care affordability tax credit or premium assistance credit.
The credit generally is payable in advance directly to the insurer on the individual’s behalf, with the taxpayer reconciling the actual credit that he or she is due on a timely filed return. Alternatively, individuals can elect to purchase health insurance out-of-pocket and apply to the IRS for the credit at the end of the tax year. There are a number of complex steps involved in computing the credit.
Proposed Universal Health Care Tax Credit
According to the Policy Brief, the Republican plan would create a new, advanceable, refundable tax credit, under a new tax code section to assist with the purchase of health insurance on the individual insurance market.
The credit would be available to all qualified individuals regardless of income, with older people receiving a higher credit amount than younger individuals, to reflect the higher cost of insurance as people age. A qualified individual would be a citizen or qualified alien who isn’t eligible for coverage through other sources, specifically through an employer or government program.
Taxpayers also would be able to receive credits for their dependents — including children up to the age of 26. (Incarcerated individuals wouldn’t be eligible for the credit.)
The credit could be used to purchase an eligible plan approved by a state and sold in the individual insurance market, including catastrophic coverage. However, the credit wouldn’t be available for plans that cover abortion.
In addition, if an employer doesn’t subsidize health care continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), an individual could use the credit to help pay unsubsidized COBRA premiums while he or she is between jobs.
If the individual doesn’t use the full value of the credit, he or she could deposit the excess amount into an HSA (see information below for more about HSAs).
ACA Penalties Would Be Repealed
The ACA penalty taxes for the individual mandate and the employer mandate would be repealed immediately. To provide relief during a transition period, Americans who are eligible for the ACA subsidy would be able to use their credit for expanded options, including currently prohibited catastrophic plans. Additionally, the ACA subsidies would be adjusted slightly to provide additional assistance for younger eligible individuals and reduce the over-subsidization that older people are receiving. Restrictions on federal funding for abortions would be included for the transition period.
HSA Rules Today
In general, eligible individuals may, subject to statutory limits, make “above-the-line” deductible contributions to an HSA. Other people (for example, family members) may also contribute on behalf of eligible individuals, and employers can, too. Eligible individuals are those who are covered under a high deductible health plan (HDHP) and aren’t covered under any other health plan that isn’t a HDHP, unless the other coverage is certain permitted insurance (for example, worker’s compensation).
For 2016 and 2017, an HDHP is a health plan with an annual deductible that isn’t less than:
- $1,300 for individual coverage and
- $2,600 for family coverage.
Maximum out-of-pocket expenses under the plan for 2016 and 2017 can’t exceed:
- $6,550 for individual coverage and
- $13,100 for family coverage.
The maximum annual HSA deductible contribution is:
- $3,350 for 2016 (for family coverage, $6,750) and
- $3,400 for 2017 (for family coverage, it remains $6,750).
The maximum HSA contribution is increased by an additional catch-up contribution amount (computed on a monthly basis) for individuals age 55 or older as of the last day of the calendar year who aren’t enrolled in Medicare. The catch-up contribution amount is $1,000.
Distributions from an HSA that are used exclusively to pay the qualified medical expenses of an eligible individual (account holder) or his or her spouse or dependents are excludable from gross income.
What Are “Qualified Medical Expenses?”
Qualified medical expenses are unreimbursed expenses for medical care as defined under the medical expense deduction rules. Medicine or drugs are qualified expenses only if they’re prescribed (whether or not over-the-counter) or if they are insulin. Qualified medical expenses, which must be incurred after the HSA is established, don’t include insurance premiums other than premiums for qualified long-term care insurance, COBRA and coverage while the eligible individual is receiving unemployment compensation.
Distributions not used for qualified medical expenses are subject to tax, and also are subject to an additional 20% for distributions reported on Form IRS 8853 unless they’re made after the individual attains age 65, dies or becomes disabled.
Proposed HSA Changes
The Policy Brief says Republicans want more people to be able to utilize HSAs, and expand how they and their families can use them. Specific proposals would:
- Allow HSA distributions to be used for “over-the-counter” health care items.
- Increase the maximum HSA contribution limit to equal the maximum out of pocket amounts allowed by law.
- Allow both spouses to make catch-up contributions to the same HSA. Specifically, if both spouses are eligible for catch-up contributions and either has family coverage, the annual contribution limit that could be divided between them would include both catch-up contribution amounts. For example, they could agree that their combined catch-up amount would be allocated to one spouse to be contributed to that spouse’s HSA. In other cases, as under present law, a spouse’s catch-up contribution amount wouldn’t be eligible for division between the spouses. It would have to be made to the HSA of that spouse.
- Provide that, if an HSA is established during the 60-day period beginning on the date that an individual’s coverage under a high deductible health plan begins, then the HSA would be treated as having been established on the date that such coverage begins for purposes of determining if an expense incurred is a qualified medical expense. Thus, if a taxpayer establishes an HSA within 60 days of the date that his or her coverage under a high deductible health plan begins, any distribution from an HSA used as a payment for a medical expense incurred during that 60-day period after the high deductible health plan coverage began would be excludible from gross income as a payment used for a qualified medical expense — even though the expense was incurred before the date the HSA was established.
The Republicans’ repeal-and-replace plans for the ACA still appear to be a work in progress. For example, under the Patient Freedom Act of 2017, a bill introduced by Senator Bill Cassidy (R-LA) and Senator Susan Collins (R-Maine) in January, contributions to expanded HSAs would be nondeductible. They would be set up as Roth HSAs.
However, the Policy Brief provides some clues as to what the future may hold. Stay tuned.