Senate Tax Bill Altered to Kill the ACA's Individual Mandate

Senate Tax Bill Altered to Kill the ACA's Individual Mandate

Senators add an employer credit for paid family and medical leave, and drop 401(k) 'catch-up' change

Stephen Miller, CEBS By Stephen Miller, CEBS November 16, 2017

Update: Congress Passes Tax Cuts and Jobs Act

On Dec. 20, 2017, Congress passed the Tax Cuts and Jobs Act. See these SHRM Online articles:

Congress Passes Tax Bill Altering Employee Benefits 

Tax Bill Will Alter Executive Pay and Bonus Decisions 

What the Individual Mandate Repeal Means for Employers

Senate Republicans made major revisions to their proposal for tax reform, originally released on Nov. 9, when the bill was revised by the Senate Finance Committee during the week of Nov. 13. 

Unlike the House version, the Senate bill, as amended, would effectively repeal the Affordable Care Act's (ACA's) individual mandate, which requires most Americans to have health insurance or pay a penalty tax.

"Technically, it would reduce the individual mandate penalty to zero rather than fully repeal the law, but this will have the same practical effect," said Brian Gilmore, lead benefits counsel at ABD Insurance and Financial Services in San Mateo, Calif. The repeal would be effective as of 2019.

Under current law, unless exempt, people must obtain health insurance or pay a penalty tax. Penalties are the greater of two amounts:

  • A fixed charge ($695 in 2016) for every uninsured adult in the household plus half that amount for each uninsured child, or
  • An assessment equal to 2.5 percent of the household's income above the filing threshold for its income tax filing status.

Penalties are subject to caps of up to 2.5 percent of household income or $2,085 per person, and are prorated if an individual was covered for part of the year.

The Senate bill would not affect the ACA's employer mandate, which requires "applicable large employers" with 50 or more full-time equivalent employees to provide their full-time employees with ACA-compliant health coverage or pay a penalty tax. It thus leaves unchanged employers' annual reporting obligations under the ACA.

Absent the Individual Mandate

Scuttling the individual mandate penalties would allow workers to opt out of participating in an employer-sponsored plan—or any other health coverage—to avoid paying plan premiums, explained Damian Myers, a benefits attorney with Proskauer in Washington, D.C. Such a move may not be wise, but it would no longer trigger penalties.

Currently, despite the individual mandate, "most employers allow employees, through cafeteria plans, to choose to enroll in health coverage and pay premiums on a pretax basis or not enroll and keep the cash compensation," such as if the employee is covered by a spouse's health plan, Myers explained. Some employers provide additional compensation—such as opt-out bonuses—to employees who choose not to enroll.

"The reality is that in the absence of a tax penalty for people who do not maintain coverage, some will simply choose not to have coverage, especially when it would result in additional cash compensation," Myers said.

"Repeal of the ACA individual mandate will likely have a direct and indirect impact on employer-sponsored plans," said Chatrane Birbal, senior advisor, government relations, at the Society for Human Resource Management. Without the mandate in place, "millions of people in the ACA exchanges could face rising health insurance costs if healthier individuals leave the marketplaces. This may result in cost shifting to employers and other private-sector payers as well as the federal government."

Some fear that employers and employees could also experience increased premiums for 2019 and future years as insurers raise rates to recoup losses, she noted. 

But Scott Behrens, senior benefits attorney with Lockton Compliance Services in Kansas City, Mo., said that elimination of the individual mandate is unlikely to have a significant impact on employers. "The Congressional Budget Office analysis does suggest that some employers may see fewer health plan enrollees if the individual mandate is repealed," he noted. "That may be the case, but the ACA employer mandate will remain, which means large employers will still need to offer coverage meeting minimum standards to avoid penalties."

[SHRM members-only toolkit: Complying with and Leveraging the Affordable Care Act]

401(k) Catch-up Unchanged

Like the House tax bill, the Senate version now keeps pretax retirement contributions to 401(k) and similar plans intact. Originally, the Senate bill proposed barring "catch up" contributions, even if made after-tax, if plan participants age 50 and older also earned $500,000 or more annually. That provision, however, was dropped during the bill's mark-up.

Retirement savings advocates had been critical of the original change. "Capping the ability to make catch-up contributions undermines the incentives of business owners to adopt and support retirement plans," warned Brian Graff, CEO of the American Retirement Association in Arlington, Va. "It's a dangerous precedent—after all, what's to stop lawmakers from deciding to impose a limit of $250,000 or $125,000?"

Earlier in the week, there were reports that Sen. Orrin Hatch, R-Utah, chairman of the Senate Finance Committee, was considering adding to the bill a "mini-Rothification" proposal that would have required all 401(k) catch-up contributions to be made as after-tax Roth contributions, while increasing the size of catch-up contributions from $6,000 to $9,000. This idea "was not added to the modified mark-up document, which is a likely sign that the idea is being dropped entirely," Graff said.

A Paid Leave Credit for Employers

Senate Republicans added an employer credit for paid family and medical leave to the bill. This proposal would allow eligible employers to claim a general business credit equal to 12.5 percent of the amount of wages paid to qualifying employees during any period in which such employees are on leave under the Family and Medical Leave Act (FMLA) if the rate of payment under the program is 50 percent of the wages normally paid to an employee.

The credit is increased by 0.25 percentage points (but not above 25 percent) for each percentage point by which the rate of payment exceeds 50 percent.

The proposal "is similar to a bill that was introduced earlier this year, and the idea of an FMLA credit has previously been floated," said Kathleen Coulombe, senior advisor for government relations at the Society for Human Resource Management.

"Instead of mandates, the proposal would offer a general business credit calculated as a percentage of the wages paid to qualifying employees who are on family and medical leave," reports the Omaha World-Herald. "If a worker is being paid 50 percent of their normal wages, for example, the credit would be 12.5 percent. That percentage would rise with the rate of pay, up to a maximum of 25 percent." 

Deferred Compensation Tax Breaks

The committee's mark-up of the bill initially added to the original legislation a provision that would dramatically limit nonqualified deferred compensation (NQDC), which had been in the original House tax bill before it was dropped by the House Ways and Means Committee. But by Nov. 15 the NQDC provision was gone from the revised mark-up of the bill.

Both the House and Senate proposals now leave the current law regarding the taxation of stock options and restricted stock units (RSUs) largely intact, "stepping away from the initial proposals to tax such awards at vesting," according to an alert from law firm Wilson Sonsini Goodrich & Rosati in Palo Alto, Calif. 

"The proposals also include new additional (but limited) relief for the taxation of private company stock options and RSUs to be deferred if certain conditions are met, which will be welcome news for some private companies," the firm observed.

Surviving the mark-up process were revisions to Internal Revenue Code Section 162(m) limits on executive pay,  Those changes delete the exception for performance-based and commission-based compensation from the $1 million compensation deduction limitation for top executives at public companies, and impose a 20 percent penalty on income above $1 million paid to top executives at nonprofit organizations.

"The exemption for performance-based compensation turned out to be a far bigger loophole than had been imagined" when Section 162(m) was enacted in 1993, said John Lowell, a partner with October Three Consulting in Atlanta. "Many companies saw this as a license to offer base pay of $1 million to their CEO while offering incentive pay—some only very loosely incentive-based—without limits while taking current deductions."

Education Deduction Spared

The Senate bill still leaves untouched many education tax credits and tax exemptions eliminated in the House GOP tax bill. It would keep the Internal Revenue Code section 127 exemption that allows employers to provide up to $5,250 annually in education assistance to employees tax-free, maintain the student loan interest rate deduction and the medical expense deduction, and preserve the adoption tax credit.

However, "like the House's tax bill, the Senate's proposal makes moving expense reimbursements taxable and eliminates an employer's ability to deduct expenses for numerous fringe benefits, including transit benefits," Behrens said.

Tax Rates and Standard Deduction

The Senate bill, like its House counterpart, permanently reduces the corporate tax rate to 20 percent. But while the House bill reduces the current number of individual tax rates from seven to four and keeps the top bracket at 39.6 percent, the Senate bill would lower the top individual tax rate to 38.5 percent but keep the current number of individual tax brackets at seven. Also, as modified, it would nearly double the standard deduction.

However, the increase in the standard deduction and changes to individual tax rates would "sunset," or revert to current rates, after 10 years unless Congress takes further action. That way, the bill's long-term effect on the deficit is reduced, allowing it to meet Senate budget rules.

"The House will pass its bill, the Senate will pass its bill and then we will get together and reconcile the differences, which is the legislative process," House Speaker Paul Ryan, R-Wis., told reporters last week before the House voted to approve its measure.

Related SHRM Article:

House GOP Tax Bill Spares 401(k)s but Kills Other Benefit DeductionsSHRM Online Benefits, November 2017

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