'Cadillac Tax' Remains in GOP Health Care Repeal, Replacement Bill

Bill keeps employers' tax exclusion; ends coverage mandate; affects HSAs, FSAs and retiree drug benefits

Stephen Miller, CEBS By Stephen Miller, CEBS March 7, 2017
Cadillac Tax Remains in GOP Health Care Repeal, Replacement Bill

Update: House Passes Republicans' ACA Replacement Bill

The U.S. House of Representatives passed the American Health Care Act on May 4, 2017. For full coverage of the bill and what comes next, see House Passes GOP Health Care Bill; Now What?

Long-awaited proposed legislation to repeal and replace the Affordable Care Act (ACA), backed by the House Republican leadership, would not cap the tax exclusion on employer-provided health care but would leave in place the "Cadillac tax" on high-value workplace health plans.

The American Health Care Act (AHCA) made public on March 6 would repeal key portions of the ACA through the budget reconciliation process, which requires only a simple majority to pass in the Senate. The House Ways and Means Committee and the Energy and Commerce Committee began reviewing their respective portions of the measure on March 8.

[On March 9, the House Ways and Means Committee approved the AHCA provisions it had reviewed by a party line vote of 23-16, and the Energy and Commerce Committee did so as well, by a vote of 31-23. The House Budget Committee is expected during the week of March 13 to package together the language approved by the two committees. The legislation could be considered by the full House as early as the week of March 20.]

The AHCA "delivers relief from Obamacare's taxes and mandates and advances policies proposed by President Trump to enhance and expand health savings accounts and provide tax credits to help Americans access quality, affordable health care," according to a statement by Ways and Means Committee Chairman Rep. Kevin Brady, R-Texas.

If enacted, the AHCA would end the ACA's penalties imposed on businesses with 50 or more full-time (or part-time equivalent) employees that don't offer minimum essential health coverage to their full-time workers. (To learn more, see the SHRM Online article Will the GOP's ACA Replacement End the Employer Mandate and Required Reporting?)

But significantly, and unlike the preliminary draft that began circulating last week, the proposed legislation would not cap the tax exclusion for employer-provided health plans. "The earlier Republican proposal to tax employer-provided health insurance over the 90th percentile of premiums is no longer a feature of the bill," said Amy Gordon and Susan Nash, partners at law firm McDermott Will & Emery in Chicago. "This is a victory for employers who vigorously opposed any taxation of employer-provided health care benefits."

Instead of a limit on the tax exclusion for health benefits, the AHCA would be funded by allowing the ACA's taxes to remain in place until the start of 2018, and would then allow the Cadillac tax—the controversial 40 percent excise tax on high-cost employer-provided health coverage—to take effect on Jan. 1, 2025, instead of being repealed. Congress already had voted to delay the tax until 2020.

Opposition to Cadillac Tax Continues

"The Society for Human Resource Management is pleased that the American Health Care Act recognizes the importance of preserving the system of employer-provided health care benefits on which 177 million American employees and their families rely," said Chatrane Birbal, SHRM's senior advisor for government relations. "SHRM has long-advocated for full repeal of the Cadillac excise tax and applauds the delay of the tax until 2025."

Bill Amended to Delay Cadillac Tax Until 2026

During deliberations by the House, the American Health Care Act was amended in committee to further delay the Cadillac tax on high-value employer health plans, from 2025 to 2026 (the tax had previously been delayed by Congress until 2020). The 40 percent excise tax, levied on the value of group health plans above certain dollar thresholds, is opposed by employer groups that advocate its complete repeal—including the Society for Human Resource Management—and could be revisited if the bill is passed by the House and moves to the Senate.

But while a delay in the implementation of the ACA excise tax "will provide much needed relief to employers and employees, SHRM will continue to support and encourage Congress to fully repeal the excise tax," Birbal said. "Furthermore, SHRM will continue to urge Congress to avoid any future changes to the tax treatment of employer-sponsored health coverage that would result in raising taxes on employers or employees or that would increase the cost of health care for employees and their families."

On employer-provided health benefits, "We are grateful the bill does not impose a new tax on this stable, affordable source of coverage," said Brian Marcotte, president and CEO of the National Business Group on Health (NBGH), representing employers. While praising the bill's delay of the Cadillac tax, he, too, called for its permanent repeal. "We also welcome the changes that allow individuals to save more to pay for their health care expenses through health savings accounts," Marcotte said.

Added Steve Wojcik, NBGH's vice president, public policy, "We believe Congress should continue to support payment and delivery reforms and other measures to eliminate supply-side drivers of unnecessary health spending and to reduce growth in health expenditures rather than taxing employers and employees on their health benefits."

"It's sort of pick your poison as to which one is worse—a cap on the exclusion for employer-sponsored coverage or the Cadillac tax," said Garrett Fenton, an employee benefits attorney with Miller & Chevalier in Washington, D.C.

"It's a political minefield that they're trying to navigate right now, to figure out a way to get some sort of ACA replacement in place," Fenton said, "and then doing it in a way that will keep the conservative Republicans on board because it won't increase the deficit. But finding a way to pay for it without having too much blowback from the public is a very tough thing to do."

On the House GOP leadership's decision to put forth a bill that keeps the Cadillac tax, "It's too early to call this backpedaling," said James Gelfand, senior vice president of health policy at the ERISA Industry Committee in Washington, D.C., a group that represents large U.S. employers. He noted that when the 114th Congress passed a measure to repeal the ACA's taxes and penalties using the reconciliation process—a bill that was vetoed by President Barack Obama—it had passed the House with the Cadillac tax in place but the Senate then added in full Cadillac tax repeal. "We are committed to ensuring that this happens again," Gelfand said.

[SHRM members-only toolkit: Managing Health Care Costs]

Tax Credits Replace Subsidies

According to a fact sheet released with the draft AHCA bill, the legislation would provide tax credits to people who don't get coverage through their job, replacing the subsidies the ACA gives to those with lower incomes to help them afford insurance policies. The refundable tax credits (those who are unemployed or otherwise don't owe income taxes would receive a direct payment instead of a deduction) would be tied to age, with people under 30 eligible for a credit of $2,000 per year, increasing steadily to $4,000 for those over 60.

Individuals enrolled in group health plans would not eligible for the tax credit unless they are enrolled in COBRA coverage that is not subsidized by the employer.

The size of a tax credit would grow with the size of a family, but would be capped at $14,000. The tax credits would start to shrink for individuals making more than $75,000 or households making more than $150,000. For every $1,000 in income over $75,000, the tax credit would be reduced by $100.

"Any coverage more robust than flexible spending accounts (FSAs), onsite clinics, or dental or vision plans would disqualify the individual from credits," remarked Edward Fensholt, senior vice president and director of compliance services at Lockton, a benefits brokerage and consultancy based in Kansas City, Mo., in an alert from the firm. Most health reimbursement arrangements (HRAs) would be disqualifying for credits, although small employers providing a stand-alone qualified small employer health reimbursement arrangement (QSEHRA) to reimburse individual market premiums would not. "However, the employer contribution would be an offset to any tax credits," Fensholt explained.

Expanded HSAs, Uncapped FSAs

Promoting cost-conscious consumer-directed health care spending is a key aim of the American Health Care Act. It would, for example, expand health savings accounts (HSAs) intended to help people save money for health costs, nearly doubling the amount of money that individuals can contribute.

Annual contribution limits, currently set at $3,400 for HSAs linked to high-deductible health plans for self-only coverage and $6,750 for those linked to family coverage, would nearly double to equal the maximum out-of-pocket expenses permitted under a high-deductible health plan. Thus, the basic limit would be at least $6,550 in the case of an HSA linked to self-only coverage and $13,100 in the case of family coverage beginning in 2018.

The bill would also:

  • Broaden how HSA funds may be used, allowing for the purchase of over-the-counter medications, for instance.
  • Allow both spouses to make catch-up contributions to a single HSA.
  • Reduce the penalty tax on HSA distributions for nonqualifying expenses from 20 percent to 10 percent of the distribution.

With regard to flexible spending accounts, the act would repeal the ACA's limits on the amount an employee may contribute to a health FSA for taxable years beginning in 2018. The ACA limited employees' annual FSA contributions, currently capped at $2,600 and indexed for inflation going forward.

Restored Deduction for Retiree Drug Subsidy

The Retiree Drug Subsidy program is offered by the federal Centers for Medicare & Medicaid Services to reimburse health plan sponsors for a portion of their eligible expenses for retiree prescription drug benefits, as an incentive for employers to offer retiree drug coverage. The ACA eliminated employers’ ability to deduct the value of this subsidy. The AHCA would repeal this ACA change and reinstate the business-expense deduction for retiree prescription drug costs without reduction by the amount of any federal subsidy, effective for taxable years beginning after Dec. 31, 2017.

Other Provisions

The AHCA would keep in place a number of the ACA's marketplace reforms and consumer protections, but repeal or alter other requirements. For instance, it would:

  • Keep the prohibition against health insurers denying coverage or charging more money to patients based on pre-existing conditions but allow individual market plans to charge higher premiums based on age.

  • Keep the requirement that dependents be allowed to stay on their parents' plan until they are 26.

  • Keep the caps on annual and lifetime out-of-pocket expenditures.

  • Keep the prohibition on waiting periods in excess of 90 days.

  • Keep first-dollar coverage of preventive health services.

  • Keep the ban against discrimination on the basis of race, nationality, disability, age or sex.

  • Repeal penalties on individuals who don't have health coverage but allow insurers to impose a 30 percent price increase on people who go uninsured for more than two months and then buy coverage. Individuals aging out of dependent coverage must prove that they enrolled during the first open enrollment period after which dependent coverage ceased to avoid this penalty.

  • Repeal most of the ACA's other taxes (excluding the Cadillac tax) starting in 2018.

  • Repeal the Small Business Tax Credit available to employers with fewer than 25 full-time equivalent employees that pay an average wage of less than $50,000 a year (indexed), and that pay at least half of their employee health insurance premiums on plans purchased through the ACA’s Small Business Health Options Program, beginning after Dec. 31, 2019.

  • Repeal by Dec. 31, 2019, the state option to extend Medicaid coverage to adults with income above 133 percent of the federal poverty line. Beginning in 2020, the state could only enroll newly eligible individuals into Medicaid at the state’s traditional federal medical assistance percentage. Also beginning in 2020, the federal government would transition to a system in which Medicaid would become a block grant program with a per capita cap for each state.

Related SHRM Articles:

Will the GOP's ACA Replacement End the Employer Mandate and Required Reporting?, SHRM Online Benefits, March 2017

Summary of Key Workplace Issues in the American Health Care Act, SHRM Government Affairs, March 2017

IRS to Accept Tax Returns Lacking Health Care Status; Employer Reporting Unchanged, SHRM Online Benefits, February 2017

SHRM Health Care Reform Resource Page

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