Seven ACA changes you can bank on
As the Trump administration and congressional Republicans consider replacing the Patient Protection and Affordable Care Act, a number of tax implications and potential changes can be expected to the health benefits millions of Americans get from their employers.
A great deal of uncertainty remains about what exactly will replace Obamacare. And anxiety is running high among the more than 20 million Americans who gained health insurance under the legislation since 2010. It’s unclear whether what comes next will be better or worse.
However, from a taxation and benefits perspective, a number of things are almost certain to happen.
- Forget the individual mandate tax penalty
President Donald Trump’s executive order on Jan. 20 started the repeal of the ACA by instructing government agencies to waive any potential “tax (or) penalty, or regulatory burden on individuals” as a result of the act. In response to the order, the Internal Revenue Service issued guidance saying individuals don’t have to provide proof of health insurance on their 2016 tax return.
That requirement, in effect since the 2015 tax year, told the IRS which individuals did not have insurance and could be charged a penalty. Previously, tax returns filed without indicating whether the taxpayer was covered were rejected—the new position of the IRS is to accept returns regardless of whether this line is completed. The executive order means anyone without insurance can choose not to flag that to the IRS and, due to the agency’s constrained resources, they are unlikely to face paying any penalty. “Anxiety is running high among the more than 20 million Americans who gained health insurance under the legislation since 2010.”
- Cafeteria plan accounts and HRAs will return
Before the ACA became law in 2010, Cafeteria Plans—governed by IRS Section 125—were popular among small employers wanting to give employees before-tax dollars to a designated benefits account, often to help with health insurance costs. Many small employers without healthcare plans contribute to each employee’s Cafeteria Plan to cover some health insurance costs— $2,000 per employee, for example. The ACA outlawed using such plans for health-related benefits, so employers ditched them or made payments as taxable cash bonuses. Replacing the ACA will revive in the popularity of Cafeteria Plans, especially among small employers seeking a tax-efficient way to partly defray employees’ health insurance costs.
Similarly, many small employers offered Health Reimbursement Arrangements to provide employees with tax-free dollars to reimburse medical or insurance costs. Based on IRS and U.S. Department of Labor guidance, many of these plans were deemed in violation of the ACA. While Congress provided limited relief to small employers in legislation passed in 2016, a repeal of the ACA could mean a more widespread resurgence of HRAs.
- The Cadillac tax will perish
The ACA included a high cost tax plan known as the Cadillac tax, a 40 percent tax on the cost of high-end, employer-sponsored health coverage. The tax applied to individual coverage costing $10,800 or $29,100 for a family. However, since those numbers were indexed to inflation rather than the faster-rising medical insurance inflation rate, a growing number of Americans are expected to be subject to the tax beginning in 2020, making it so unpopular that both Trump and former Democrat presidential nominee Hillary Clinton campaigned to get rid of it. The tax was a particular headache for employee benefits departments, which had to constantly amend health insurance benefits to avoid crossing the tax threshold. Any change to the ACA will undoubtedly end the Cadillac tax.
- The revival of mini-meds
The ACA’s prohibition on annual and lifetime limits prevented employers from offering stand-alone mini-med plans, known for lost costs, very high deductibles and capped benefits. Additionally the ACA’s Medical Loss Ratio provision demanded that health insurers for individuals and small groups, and insurers of large groups, spend at least 80 percent and 85 percent, respectively, of their premium income on providing medical care and improving quality. That left 15 percent to 20 percent for costs and profit. As a result, many mini-med health plans were shuttered. These plans were popular among firms with lots of low wage hourly workers with large staff turnover, pushing administrative costs above the ACA’s ratios. Once the ACA is repealed, there will be a resurgence of companies offering mini-med plans.
- The return of employer flexibility
Under the ACA, employers of more than 50 people had to offer affordable insurance or face penalties — $2,000 per employee annually for employers that failed to offer coverage and had at least one employee receiving a subsidy on an ACA exchange, or $3,000 per employee receiving a subsidy on an ACA exchange for employers that offered unaffordable coverage. Employers typically reacted in one of two ways: by increasing the amount they contributed to employee insurance costs and reducing wages to offset that higher cost, or making hourly workers part-time employees so they did not qualify for insurance. After the repeal of ACA, firms will have more flexibility to compensate employees as they want.
- Less paperwork
Starting in 2015, companies required to provide health insurance had to file forms 1094-C and 1095-C with the IRS and with individuals. Employers using different vendors for payroll and benefits services had to hire a third-party vendor to take care of the added paperwork. These forms will still have to be completed for the 2016 tax year in the coming weeks, but a repeal of the ACA could remove that burden for future years.
- HSAs will become more widely used
Republicans are pushing for more use of health savings accounts to pay for out-of-pocket health expenses. Before the ACA, these accounts were seen as the future of healthcare, allowing individuals to put money aside for healthcare costs—savings that could roll over and accumulate. Any repeal of the ACA should make those accounts more popular, especially since some leading Republicans want to establish federally -funded HSAs to help low-income families pay for health insurance. The increased use of HSAs will likely bring an increase in plans with higher deductibles and lower costs, with employers (and possibly the government) contributing to HSAs to defray higher out-of-pocket costs. In theory, that could result in employers paying less for insurance with no meaningful diminishment of benefits for the individual.
In summary, these seven changes may help lower the overall cost of health insurance for the average American, which, after all, is the reason most people want insurance reform in the first place. A recent Kaiser Family Foundation poll tells us that 67 percent of people think lowering the cost of healthcare is the most important aspect of any reform.
So what ACA provisions do we expect to be retained in any replacement? Based on comments from President Trump and leading Republicans, we expect that some of the ACA’s more popular features, including prohibitions on pre-existing condition exclusions or annual and lifetime limits and coverage for adult children, will be accommodated in any replacement plan.