Considerations in Repealing or Repairing the Affordable Care Act

by Annette Nellen, CPA, CGMA, Esq.

Almost since enactment in March 2010, partisanship “inside the Beltway” has included both cheers for the Affordable Care Act (ACA) and calls for its outright repeal. As a key element of President Obama’s agenda, repeal was not an option despite numerous Republican-sponsored bills during his two terms. With the stars aligned by Republican control of the White House and Congress starting in January 2017, repeal is expected. Yet, repeal of a law under which millions of individuals obtain health insurance and numerous provisions tie to a calendar year already underway, for some lawmakers, “repeal” changed to “repair.” Also, as more individuals realized that “Obamacare” and the “Affordable Care Act” are the same, the number of voters interested in repeal likely changed.

This article focuses on areas for consideration in understanding the repeal/repair process such as how it might change the underlying principles of the ACA and existing tax rules and revenues. An exhibit lists the tax provisions of the ACA to help readers track what is changed by any new legislation.

The ACA: Principles and Basics

As noted in its title, the Affordable Care Act intended to provide health insurance coverage to more individuals. A key element of the plan was to preserve the provision of coverage by employers. For example, a small business health insurance credit (§45R) became effective in 2010 to encourage employers to start offering coverage to workers. An employer mandate required certain large employers to offer minimum essential coverage to their full-time employees and their dependents up to age 26 to avoid exposure to significant penalties (§4980H with full-time generally meaning those working at least 30 hours per week).

To help individuals without government- or employer-provided coverage, a refundable tax credit was added for eligible individuals purchasing insurance on a government sponsored “exchange” (§36B). To help reduce the cost of coverage, an individual mandate (§5000A) required individuals to have coverage or pay a monthly penalty unless one of several exemptions was met.

To make the system work so far as ensuring that taxpayer do what was imposed upon them, a reporting system requires exchanges, insurance providers and applicable large employers to issue an appropriate Form 1095 to the insured (or full-time employee).

To help address various costs such as newly subsidized coverage, various taxes were created, such as the net investment income tax (NIIT, §1411).

While tax practitioners naturally focus on the numerous new tax rules, the primary content of the ACA addresses health care and insurance. Some of the numerous rules in this area include requirements to insure people with pre-existing conditions, restrict lifetime coverage limits, making it more difficult for a policy to be cancelled, requiring more preventative care coverage, and requiring coverage of ten “essential health benefit categories” including prescription drugs and hospitalization.

Tax Considerations in the ACA Repeal or Repair Process

Listed below are various tax issues relevant to the process and reality of repealing or repairing the ACA.

1. The ACA generates significant revenues, particularly from the NIIT. Data from the IRS for 2014 indicates that the NIIT and additional Medicare tax generated more revenue than the individual AMT. Can these taxes be repealed without increasing the national debt?

2. The NIIT is only paid by individuals in the top 10% of income earners. Repeal of this tax would represent a significant tax cut for these individuals ranging from about $24,000 for those in the top 1% of earners to approximately $7 million for the top 400 income earners. Will this be an issue for some legislators and members of the public? What is the effect on possible future tax reform (for example, if the NIIT is repealed, might a version of it be reinstated due to its revenue potential to help offset lower tax rates elsewhere)?

3. ACA repeal would include the exclusion for employer-provided health care for dependents up to age 26. If an employer continues to offer such coverage, it will be taxable to the employee unless the child meets the definition of a dependent.

4. Will repeal include the Qualified Small Employer Health Reimbursement Arrangement (IRC §9831(d)) added to the law in December 2016 (P.L. 114-255 (12/13/16))? This would result in wasted expenditures and employee confusion and frustration for small employers that started such plans effective January 1, 2017.

5. What will be the effective date for provisions that are repealed or replaced? Will efforts be made to limit costs to individuals and employers? For example, if the Premium Tax Credit is repealed, will individuals receiving this in advance for 2017 have to pay all or part of it back?

6. Will the effective date for provisions changed factor in fairness among taxpayers? For example, will individuals and “applicable large employers” (ALE) who did not take action in 2016 and 2017 to avoid penalties under IRC §5000A and §4980H, respectively, be relieved from penalty? If yes, will compliant taxpayers be provided any relief for the added costs they incurred in being compliant? If yes, how willing will people be to follow new mandates knowing that they could be repealed by future legislation?

7. When will we know the effective date of any repeal or repair? Until legislation is enacted that changes the mandate provisions, for example, individuals will still need to have coverage and ALEs will continue to have to offer coverage. In addition, ALEs and insurance providers need to maintain systems to issue Forms 1095-B and 1095-C due to the increased costs of not maintaining regular recordkeeping systems required to meet these reporting obligations.

8. Generally, insurance plans cover a calendar year. When will any new rules be effective? How will these dates coordinate with any changes to existing ACA rules?

9. If the NIIT is repealed, will individuals who regrouped their passive activities (per Reg. §1.469-11(b)(3)(iv)) be required to return to the original grouping? If yes, will guidance be provided regarding how to address issues of amended returns, loss adjustments such as due to disposition of an activity, and other issues?

10. Will legislation be enacted before some temporary regulations reach their three-year expiration date under §7805(e)? For example, TD 9683 on the PTC was issued July 24, 2014 (and expires in 2017, apparently with some provisions not yet finalized).

Looking forward

The ACA represents significant tax and non-tax provisions. Taxpayers and practitioners have devoted a great deal of time to learn about and comply with the ACA. Will repeal or replace involve yet more time, such as due to the need to change insurance plans or implement new recordkeeping or deal with transition rules and issues? Will the issues listed above be considered? We’ll see.