American Health Care Act in Motion to Replace Affordable Care Act & What It Means for Consumer-Directed Benefits

May 5, 2017

The revamped American Health Care Act (AHCA) was passed by the House of Representatives after GOP leadership introduced amendments to the original bill to expand Congressional support. The replacement for the Affordable Care Act will loosen some of the existing limitations on consumer-driven health accounts and push out some timelines for impending legislation. As you know, our motto at Discovery Benefits is “Simplify,” which is exactly what we hope to do by outlining the key changes (along with associated effective dates) that you can expect from the AHCA if it is passed by the Senate and signed into law by the President.

American Health Care Act in motion to replace Affordable Care Act

Eliminated Mandates and Updated Cadillac Tax Timeline

  • Individual and Employer Mandate Penalties Reduced to Zero – Though not being repealed in their entirety, the AHCA would reduce the penalty to zero, retroactively applying as of December 31, 2015, removing the “teeth” behind the mandate. It is unclear how this would affect the required Code § 6056 reporting for large employers.
  • Delay of Cadillac Tax – The effective date of the 40% excise or “Cadillac” tax most recently slated to take effect in 2020 will be pushed back to January 1, 2026.

Flexible Spending Account (FSA) and Health Savings Account (HSA) Regulation Changes

  • Elimination of Health FSA Contribution Limits – Up to this point, the maximum anyone could contribute to a Health FSA for 2017 was $2,600. With the passage of the AHCA, there will no longer be a required contribution limit for the Health FSA. Employers will be free to set their own limits within their plan document. This will be retroactively effective as of December 31, 2016.
  • Increased HSA Contribution Limits – Effective immediately, HSA contribution limits for 2017 will be increased to equal the maximum annual deductibles plus out-of-pocket expenses under a high-deductible plan. The new limits will be:
    • $6,550 for individual coverage under a high-deductible health plan (HDHP)
    • $13,100 for family coverage under a HDHP
  • Allowance of Spousal HSA Catch-Up Contributions – While accountholders over age 55 were previously able to make catch-up contributions to their own health savings account, the AHCA will expand these permissions to allow both spouses to make a catch-up contribution to one HSA beginning in 2017.
  • Repeal of the Tax on Over-the-Counter Medications – While the ACA only considered over-the-counter medications eligible for reimbursement from a tax-advantaged savings account (FSA or HSA) with a prescription, the AHCA eliminates the prescription requirement for over-the-counter medications, adding these medications to the list of qualified eligible medical expenses that may be reimbursed.
  • Reduction of the Tax Penalty for Non-Medical HSA Distributions – The AHCA will reduce the penalty for HSA distributions for non-qualified expenses from 20% to 10%.
  • Addition of Special Rule for HSA Distributions Prior to Account Establishment – Beginning in 2018, the AHCA will implement a rule that will allow an individual to make a withdrawal from the HSA for a qualified expense prior to the account being established, as long as the health savings account is established within 60 days from beginning coverage under a high-deductible health plan.

With fewer limitations on consumer-driven health plans under the AHCA, tax-advantaged accounts like HSAs, FSAs and HRAs will be all the more valuable in saving your employees on qualified healthcare expenses.

Note: The IRS also just announced inflation-adjusted HSA contribution limits for 2018. These limits will be $3,450 for an individual with self-only coverage under a high-deductible health plan (HDHP) and $6,850 for family coverage under an HDHP. This would be a $50 increase for individuals and a $100 increase for families from the current 2017 limits. For 2018, HDHP coverage has been defined as a plan that has an annual deductible of at least $1,350 for self-coverage or $2,700 for family coverage.

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This blog was originally published in May 2017. It was updated for accuracy in March 2018.

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