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Senate Unveils Draft of Better Care Reconciliation Act of 2017; Retains Much of House Healthcare Bill

(Parker Tax Publishing June 2017)

On Thursday, June 22, a month and a half after the House passed The American Health Care Act of 2017 (AHCA), the Senate released its version of a healthcare bill entitled Better Care Reconciliation Act of 2017 (BCRA). While the Senate hinted that they would rewrite the House bill, many of the provisions stayed the same or were watered down. Like the House bill, the BCRA repeals all of the Affordable Care Act's ("Obamacare") taxes except for the excise tax on high cost employer-sponsored health coverage, which would be delayed until 2025. H.R. 1628, Senate Draft (6-22-2017).

With respect to one of the most contentious issues facing Congress in the healthcare debate - the Medicaid expansion provided for under Obamacare - the Senate bill phases out the expansion, but at a slower rate than the House bill. However, both bills make substantial cuts to the Medicaid program over time.

Like the House's healthcare bill, the Senate's bill eliminates the employer mandate and the individual mandate. Under the employer mandate, a penalty is imposed on certain large employers that do not offer health insurance coverage, offer health insurance coverage that is unaffordable, or offer health insurance coverage that consists of a plan under which the plan's share of the total allowed cost of benefits is less than 60 percent. Under the individual mandate, a penalty is imposed on individuals who do not maintain minimum essential healthcare coverage. These two mandates are a cornerstone of the Affordable Care Act, along with taxes imposed on wealthier individuals, which have also been eliminated under both the House and Senate bills.

Observation: Unlike the House bill, which replaces the individual mandate with a 30 percent health insurance premium surcharge on individuals who allow their coverage to lapse, the Senate bill does not provide any incentives for individuals to maintain continuous coverage. Several reports have indicated that the Senate will deal with this omission by adding to its bill a provision requiring individuals to wait six months to obtain new health insurance after a coverage lapse.

Tax Provisions

The BCRA makes the following tax changes:

(1) Repeals the individual mandate, effective January 1, 2016.

(2) Repeals the employer mandate, effective January 1, 2016.

(3) Repeals the 3.8 percent net investment income tax (NIIT) in Code Sec. 1411, effective for tax years beginning on or after January 1, 2017.

(4) Repeals the 0.9 percent additional Medicare tax, effective for remuneration received on or after January 1, 2023.

(5) Reduces the income threshold for determining medical expense deductions under Code Sec. 213 from 10 percent to 7.5 percent, effective January 1, 2017. The House bill had reduced the threshold to 5.8 percent.

(6) While the House bill would replace the premium assistance tax credit in Code Sec. 36B with a new, age-based credit, ranging from $2,000 to $4,000, the Senate bill instead provides for assistance similar to Obamacare but based on age, income, and cost of coverage. Taxpayers with gross incomes exceeding 350 percent of the poverty line would be ineligible for the credit under the Senate bill (the cutoff is 400 percent under Obamacare). The Senate bill also makes changes to the definition of aliens who are eligible for the credit.

(7) Repeals the limitation on recapture of excess advance payments of the premium assistance tax credit, beginning in 2018. Under current law, liability for certain low-income households was limited to an applicable dollar amount.

(8) Repeals the small business tax credit under Code Sec. 45R, which provides a credit to certain employers who provide health care to employees, effective for tax years beginning after 2019. The bill also modifies the credit to prohibit it from being used for health plans that include coverage for abortions (other than any abortion necessary to save the life of the mother or any abortion with respect to a pregnancy that is the result of an act of rape or incest) for tax years beginning on or after January 1, 2018.

(9) Delays the implementation of the excise tax on high cost employer-sponsored health coverage (commonly referred to as "the Cadillac tax") until 2025. Under current law, the tax goes into effect in 2020.

(10) Repeals the increase in the tax on distributions from health savings accounts (HSAs) and Archer medical savings accounts (MSAs) that are not used for qualified medical expenses. The Bill reduces the tax on HSA distributions from 20 percent to 10 percent and reduces the tax on Archer MSA distribution's from 20 percent to 15 percent, effective for distributions made on or after January 1, 2017.

(11) Repeals limitations on contributions to flexible spending accounts, effective January 1, 2017.

(12) Repeals the medical device excise tax in Code Sec. 4191, effective for sales after on or after January 1, 2018.

(13) Repeals the elimination of the deduction for expenses allocable to a Medicare Part D subsidy, effective for tax years beginning on or after January 1, 2017.

(14) Repeals the tax on prescription medications effective January 1, 2018.

(15) Repeals the tanning tax, effective for services performed after September 30, 2017.

Non-Tax Provisions

The following is a summary of some of the BCRA's other key provisions:

(1) Allows children to stay on their parents' healthcare plans until age 26 (same as Obamacare).

(2) Continues use of state healthcare exchanges.

(3) Allows states to change what qualifies as essential health benefits and define their own "essential health benefits" standards.

(4) Relaxes the current-law requirement that prevents insurers from charging older people premiums that are more than three times larger than the premiums charged to younger people. Unless a state sets a different limit, the legislation would allow insurers to charge older people five times more than younger ones, beginning in 2018.

(5) Implements a one-year freeze on Medicaid funding for Planned Parenthood.

(6) Phases out Obamacare's expanded funding of Medicaid over three years, beginning in 2021 (one year later than the House bill).

CBO Estimates and Reaction to Senate's Bill

The Congressional Budget Office (CBO) has not yet scored the Senate's healthcare plan. An estimate is expected this week, to be followed by rulings from the Senate Parliamentarian on whether key aspects of the bill can move forward under reconciliation (streamlined procedures allowing legislation to pass the Senate with a simple majority instead of a 60 vote supermajority).

Several senators have come out against the plan, either because it doesn't do go far enough in repealing Obamacare, or because it goes too far. Senators Ted Cruz (R-Tex), Ron Johnson (R-Wisc), Mike Lee (R-Utah), and Rand Paul (R-Ky) released a joint statement in which they said they were not yet ready to support the Senate healthcare plan. They expressed pessimism that the bill as drafted would lower health care costs while also repealing Obamacare. Appearing on ABC News' "This Week with George Stephanopoulos", Paul said of his party's health care plan, "They've promised too much. They say they're going to fix health care and premiums are going to down ... There's no way the Republican bill brings down premiums."

On Friday, Senator Dean Heller (R-Nev) gave a press conference in which he sharply criticized the plan's curtailment of Obamacare's Medicaid expansion, and said that he couldn't support the bill in its present form. Senators Lisa Murkowski (R-Alaska), Susan Collins (R-Maine), Bill Cassidy (R-La), and Ben Sasse (R-Neb) have also declared themselves undecided or leaning against the present version of the bill.

Senate leadership finds itself facing the same daunting challenge that confronted their counterparts in the House earlier this year - having to adjust their healthcare plan in a way that brings both moderate and hard right Republicans into the fold. With unified Democratic opposition, Senate Republicans can afford to lose just two votes from their own caucus.

Senate Majority Leader Mitch McConnell (R-Ky) has stated that he hopes to bring the measure to a vote this week, ahead of Congress's Fourth of July recess. Majority Whip John Cornyn (R-Tex) said on Sunday that he considers that timeframe "optimistic."

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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