On Dec. 22, 2017 President Trump signed the Tax Cuts and Jobs Act (TCJA) of 2017 into law. It is the most significant overhaul of the U.S. tax system in more than 30 years.
The legislation makes several significant changes to previous tax law, including:
- Reducing the corporate and personal income tax rates
- Increasing the standard deduction for a single filer and married couples while eliminating some personal exemptions
- Limiting deductions for state and local income taxes and property taxes
- Limiting the deduction for mortgage interest, among other provisions.
But there were also several key health care elements included in the TCJA.
Here’s a brief overview of how these provisions and some of the other congressional activity regarding the Affordable Care Act (ACA) may affect your organization.
The Individual and Employer Mandates
The TCJA revises the ACA penalty for individuals who don’t have health insurance, also known as the Individual Mandate. Effective 2019, the penalty will be set at $0.
The Congressional Budget Office (CBO) initially projected that removing the Individual Mandate penalty would increase the number of uninsured people by 13 million by 2027 and reduce the federal deficit by $338 billion by 2027.
The ACA also requires that employers with 50+ full-time employees provide adequate, affordable health coverage to at least 95% of their full-time employees and their children (up to age 26) or face a fine. If a full-time employee is offered coverage that does not meet these requirements and obtains a premium tax credit through the ACA exchange, then his/her employer will be fined for each affected full-time employee.
While these employer provisions remain under the Tax Cuts and Jobs Act, the CBO projects 2-3 million fewer people will enroll in employer coverage by 2027. If this holds true and fewer employees eligible for the premium tax credits seek health coverage through the exchange, then employers may incur fewer penalties.
The Medical Expense Deduction
Currently, taxpayers can deduct out-of-pocket medical expenses exceeding 10% of their adjusted gross income.
In 2017 and 2018, the threshold decreases to 7.5% before it returns to 10% in 2019; however, with the standard deduction for individuals and married couples doubling, fewer people are expected to use this deduction.
The Orphan Drug Tax Credit
The tax credit drug companies receive for qualified clinical trials decreases from 50% to 25% under the new tax bill.
What About Affordable Care Act Taxes?
The U.S. House Ways and Means Committee have introduced a number of bills that would suspend or postpone some Affordable Care Act (ACA) taxes. However, work continues on a long-term spending bill, which could serve as a potential vehicle for passing these ACA-related tax bills together.
Here’s a quick summary of how each ACA feature would be impacted by the proposed changes:
Excise or “Cadillac,” Tax – H.R. 4616
The Cadillac tax is a 40% excise tax on high-cost employer-sponsored health plans. The new legislation would postpone the Cadillac tax for 1 year.
Health Insurance Tax (HIT) – H.R. 4619
The HIT varies from insurer to insurer and is based on their prior year’s net annual premiums. The HIT was stopped for 2017, but resumes this year. If the new bills are passed, the HIT would be suspended for 2 more years.
Employer Mandate – H.R. 4616
Under the proposed legislation, the Employer Mandate—the requirement that employers with 50+ full-time employees provide adequate, affordable health coverage to at least 95% of their full-time employees and their children (up to age 26)—would be retroactively repealed from 2015 on and would be suspended through 2018.
Medical Device Tax – H.R. 4617
The 2.3% medical device tax, which was applied to the sale of eligible medical devices starting in 2013, would be suspended for 5 years under the new bills.
Over-The-Counter Medications Tax – H.R. 4618
Under the ACA, people could only use Health Savings Account (HSA) and Flexible Spending Arrangement (FSA) funds for over-the-counter medications if they had a prescription. Proposed rules would suspend the prescription requirement through 2019.