- Posted by Jessica Waltman
- On December 26, 2017
On Friday, December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (H.R. 1). In addition to the financial implications for individual and corporate taxpayers, this legislation will impact health insurance coverage requirements, employee benefit options, and health care costs.
The new law will zero-out the individual mandate penalty, so that beginning in 2019 Americans could go without minimum essential coverage and not be subject to a fine. Key things to know about this:
- The individual mandate penalty change doesn’t apply to tax years 2017 or 2018 but will start in 2019. That means for tax returns filed this coming spring and next spring, Americans will still have to document that they had coverage or an individual mandate waiver, or pay a fine of $695 per adult or 2.5% of household income over tax filing thresholds, whichever is higher.
- The new tax law doesn’t change health coverage reporting requirements related to the individual mandate. It also doesn’t impact the employer mandate or its related information reporting requirements. So even with the elimination of the individual mandate penalty, applicable large employers will still have to offer compliant plans or face tax penalties, and all coverage reporting requirements for employers, self-funded plans, and health insurance carriers will remain.
- The Congressional Budget Office estimatesthat eliminating the individual mandate penalty will save the federal government $300 billion over the next ten years. They predict that during that time period 13 million people will drop their current insurance coverage and will not take advantage of either individual market premium tax credit subsidies or the tax benefits associated with employer-sponsored coverage. Standard and Poors has projected much lower coverage losses over the next ten years, in the 3-5 million range.
- What effect the elimination of the individual mandate penalty will have on group premium rates in the long-term is unclear. In the individual market, expect carriers to carefully weigh the potential increase in adverse selection into their 2019 decisions relative to covered service areas and premium rates.
- Employers may see an increase in people who elect to waive coverage because they have heard the individual mandate has been repealed, but it is important to remind employees that the penalty decrease doesn’t start until 2019. Also, applicable large employers still have to offer coverage to qualified employees, even once the individual mandate penalty reduction is in effect.
- Some states are already discussing the possibility of imposing their coverage mandates for residents. Currently, Massachusetts is the only state with an enforceable state-level individual mandate in place.
- Since the law doesn’t fully repeal the individual mandate requirement, but just reduces the associated noncompliance penalty to zero dollars, future legislative action initiated by a different Congress under a different President could put the individual mandate penalty back into place or even increase it.
The original House and Senate bills contained many provisions that would have altered employee benefit offerings, but the final tax bill significantly reduced the number of employee benefits that will be affected by tax reform. Some employee benefits will still see their tax status altered and they include:
- Commuting Benefits– The employer deduction for mass transit and parking benefits will be eliminated starting with the tax year 2018 and tax-exempt businesses will have to pay unrelated business income taxes on any parking and transit benefits they pay employees. However, mass transit and parking benefits remain tax-exempt for employees, so an employer can make them part of a section 125 plan, rather than merely providing parking passes or mass transit tickets to employees and writing off the costs. Biking benefits are treated differently, as they will become taxable income to the employee. Employers that gave employees incentives for biking to work and not using their mass transit or parking benefits will now have to make those benefits subject to both payroll and income taxes.
- Employee Achievement Awards-The new law will change the tax treatment of certain types of employee achievement award expenses beginning in the tax year 2018. Some employee achievement awards will not be taxable for either the employee or employer, but the value of gift cards, cash awards and other awards of non-tangible personal property used for achievement will be taxable
- Moving Expenses-Employer-paid moving expenses cannot be excluded from business or personal taxes for tax years 2018-2025, except in some instances for active-duty members of the military. Also, individuals will no longer be able to deduct job-related moving expenses that were not reimbursed by their employer.
- Onsite Gyms-The corporate deduction for providing onsite gyms will be repealed for the tax year 2018 on forward. However, employees will not be taxed on the value of the benefit.
- Meals-The corporate deduction for expenses related to employee meals is repealed, but employees do not have to treat meal expense reimbursements as income.
The tax reform plan includes a new two-year incentive for certain employers that provide paid medical and family leave to employees. Key points about this new tax credit:
- The new family leave provisions are structured as an employer tax credit of up to 25 percent of wages for certain employers that offer paid family medical leave.
- To qualify for the credit, a company’s leave payments to qualified employees will have to be at least 50 percent of normal wages and the employer will have to meet other conditions.
- The credit will apply to leave payments for workers making less than 60 percent of the income threshold for highly compensated workers (approximately $72,000 annually).
- The new credit will only be available for tax years 2018 and 2019.
- It will only impact employers and employees subject to the Family and Medical Leave Act.
Medical Expense Deduction
The tax legislation ultimately passed by Congress retains the individual deduction for qualified medical expenses and even makes it more accessible for two years. Here’s how it will work:
- The medical expense threshold of 10 percent of adjusted gross income will be reduced to 7.5 percent for tax years 2017 and 2018 (taxes filed in the spring of 2018 and spring of 2019) for all Americans. This was the threshold level before the passage of the Patient Protection and Affordable Care Act (ACA).
- In the tax year 2019, the threshold is scheduled to go up to 10 percent again for all Americans. Currently, there is no planned phase-out of the increase in 2019 for older Americans, as there was for the ACA.
- This change is intended to help people with high-cost medical conditions, like catastrophic or chronic conditions that require expensive drugs or medical equipment. It also affects long-term care expenses and qualified long-term care insurance premiums.
The new legislation will cut the “Orphan Drug” corporate tax credit in half. Here’s how it could impact prescription drug benefits:
- This tax credit is aimed at drug manufacturers to encourage them to develop medicines to treat rare conditions that affect fewer than 200,000 people a year.
- Developers of these medicines currently receive a tax credit for up to 50 percent of their clinical trial costs and seven years of exclusive rights to any drugs approved for sale by the Food and Drug Administration (FDA).
- Before this tax credit was initially created, there were only ten approved medications for rare diseases, but since 1983, the FDA has approved over 500 “orphan drugs,” and 70 percent of those new drugs can also be used to treat more common conditions.
- Proponents of the cut tout its $54 billion in projected saving over ten years. However, those opposed indicate that cutting the orphan drug credit could both stifle research on new medications and make the cost of prescriptions even more expensive.
If you have questions regarding the impact tax reform will have on your benefit plan, please contact your Kistler Tiffany Benefits’ Employee Benefits Consultant.
By Jessica Waltman, Special Contributor
Jessica Waltman is a health reform strategist, with more than 20 years of experience in health insurance markets and health policy. She is the former Senior Vice President, Government Affairs, for the National Association of Health Underwriters.