ACA Replacement Would End Mandates, Add Tax on Benefits

GOP proposal opens door to taxing employer-provided health insurance

By Stephen Miller, CEBS Jun 27, 2016
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Business groups are not embracing a Republican blueprint for rolling back health care reform because of one significant drawback: It would open the door to taxing employee health benefits.

The 37-page issue brief, spearheaded by a task force appointed by House Speaker Paul Ryan, R-Wis., was released June 22. It lays out a sweeping counterapproach to health care, as compared to the 2010 Affordable Care Act (ACA).

“The GOP concept appears to presume a complete repeal of the ACA, including its individual and employer mandates and the widely vilified excise tax on high-value health coverage—the so-called Cadillac tax—that Congress recently delayed for two years, to 2020,” said Edward Fensholt, senior vice president and director of compliance services at Lockton, a national benefits brokerage and consulting firm based in Kansas City, Mo.

By eliminating the employer mandate, the proposal would also do away with the ACA’s complicated administrative burdens for employers, including the complex IRS reporting process. That would mean no more “tracking and reporting employees’ hours, and managing the hours of part-time employees to ensure they don’t trip over the 30-hour-a-week demarcation that defines full-time employees,” said Steve Wojcik, vice president, public policy at the National Business Group on Health (NBGH) in Washington, D.C, which represents large employers.

To help individuals without access to employer-based health insurance, the GOP blueprint would replace the ACA's income-based tax credits for purchasing coverage on the federal- or state-run health insurance exchanges with universal age-based tax credits, independent of income, that people could use to buy any nongroup policy available to them.

Other key elements of the House Republican Task Force on Health Care Reform’s proposal include:

• Maintain a number of the ACA’s insurance reforms, such as allowing coverage of adult children up to age 26 through a parent’s coverage and banning pre-existing condition clauses.

• Eliminate the Equal Employment Opportunity Commission's new regulations limiting financial incentives relating to workplace wellness programs.

• Allow small businesses to band together for health insurance purposes, pooling their risks and leveraging economies of scale.

• Allow people to buy policies across state lines.

• Promote medical liability reform as a strategy to reduce health care costs.

• Allow employers to use health reimbursement arrangements (HRAs) to reimburse employees’ premium costs for individual coverage, a practice barred by the ACA.

• Expand allowed annual contributions to health savings accounts (HSAs)—currently $3,350 for HSAs linked to self-only coverage in 2016—up to the out-of-pocket expense limit for high-deductible health plans—$6,550 for self-only coverge in 2016.

Tax Exclusion Targeted

Business groups generally had a favorable response to the elimination of the employer mandate and other rollback provisions, but not to one key portion of the GOP blueprint: limiting the tax exclusion employee premiums under employer-provided health care, partly to offset the loss of tax revenue from the Cadillac tax but also to hold down the rising cost of health insurance.

The GOP proposal would subject employer-paid health insurance to payroll and income taxes once the value exceeds a yet-to-be-determined dollar amount. This cap would be adjusted based on the age of covered employees and would account for geographical differences in the cost of medical insurance. Unlike the Cadillac tax, the GOP proposal would not count the value of HSA contributions against the limit.

The Society for Human Resource Management (SHRM) “opposes the proposed changes in the tax treatment of employer-provided health insurance that are included in the U.S. House Republican plan. Such a change would drive workers from employer plans and negatively affect the benefit offerings that employers so carefully create for their employees,” said Mike Aitken, SHRM’s vice president of government affairs, in a statement. “Any health care reform legislation must support employer flexibility and innovative strategies and preserve the favorable tax treatment of employer-sponsored coverage.”

“Given the pressures on the budget and the deficit, when the federal government thinks of ways to raise revenues, this is a tempting source,” said Wojcik. “To start down that road could lead to taxing benefits for the average working person, and increasing their tax liability significantly, especially if health care costs continue to grow two to three times faster than the overall growth in wages.”

The proposal addresses the employee tax exclusion for employer-paid premiums, not an employer’s ability to deduct premiums as a business expense, Wojcik said. “But if employees are being taxed for their health benefits, employers will be pressured to adjust compensation to keep them whole,” he noted.

Rather than taxing benefits in an effort to restrain spending and control costs, Wojcik favors steps such as reforming fee-for-service payments that “encourage providers to use more expensive care in more expensive settings when lower-cost alternatives of equal or better quality exist.” Making legislative changes to remove “perverse incentives” in the Medicare and Medicaid system could promote payment reform more generally, “making it easier for employer plans, working with their insurance carriers, to adopt the same kind of payment mechanisms,” he noted.

Other Provisions Supported

The task force’s proposal does contain a number of provisions that SHRM strongly supports, Aitken said, including repeal of compliance burdens on employers, elimination of the Cadillac tax, and the promotion of wellness programs and medical liability reform. Likewise, Wojcik said the NBGH supports those recommendations and expanding the flexibility of HSAs.

But as Lockton’s Fensholt pointed out, “House leaders don’t expect to start the legislative engine on their new proposal until next year, after the elections, and the prospects for enactment will of course be dimmed, if not entirely derailed, by a Hillary Clinton victory in November.”

Other GOP Alternatives to the ACA

While the House Republican Task Force’s blueprint, with the backing of Speaker Paul Ryan, is meant to be conversation-starter for future legislation, other GOP alternatives to the ACA have already been introduced.

The proposed Patient Choice, Affordability, Responsibility, and Empowerment Act, or Patient CARE Act, first introduced in 2014 and reintroduced in 2015 by Sen. Richard Burr, R-N.C., Sen. Finance Chairman Orrin Hatch, R-Utah, and House Energy and Commerce Chairman Fred Upton (R-Mich.), would also eliminate the mandates for individuals to have coverage and for employers to provide it, and expand coverage with refundable tax credits while promoting the use of health savings accounts.

In May 2016, Rep. Pete Sessions, R-Tex., and Sen. Bill Cassidy, R-La., introduced their own bill, the World's Greatest Healthcare Plan Act, which wouldn’t fully repeal the ACA but would do away with individual and employer coverage mandates, and requirements for what an insurance plan must cover. The core of the plan is a $2,500 tax credit that any citizen would be eligible to use to purchase health insurance, whether on the individual market or group markets (in contrast with the task force blueprint, which proposes a credit for the individual market but not for employer-provided insurance).

While these bills have their supporters, expect ​new legislation more reflective of the task force’s blueprint also to be introduced.


Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

Related SHRM Articles:

After ACA Repeal, Most Employers Would Keep Some Provisions, SHRM OnlineBenefits, May 2016

Hearings Ponder Future of Employer-Provided Health Care, SHRM Online Benefits, April 2016

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