The US House of Representatives Republican leadership has released its tax reform proposal, The Tax Cuts and Jobs Act (H.R. 1). The majority of the 429-page bill centers on simplifying the tax code, with emphasis on individual and business income tax. However, there are several provisions included in this bill that directly impact the CDH industry – and several other important provisions that are of note because they are not included. We examine those provisions below.
CDH products eliminated
- Transit and parking benefits. This has the potential to eliminate the employer incentive to offer transit and parking benefits to employees. After December 31, 2017, employers will not be able to deduct any pre-tax transit and parking amounts. However, employees could still receive a tax benefit if these accounts are funded through payroll.
- Dependent care FSAs. In the original bill, beginning in tax years after December 31, 2017, dependent care FSAs and the exclusion for employer-provided onsite daycare will no longer be available. UPDATE: However, in the Ways and Means Committee Chairman's markup of the bill, wording was added that delays the effective date for this provision to 2023.
- Archer MSA contributions. Even though HSAs offer more benefits than Archer MSAs, a small number of Archer MSAs continue to be maintained and this provision would eliminate the tax deduction allowed for contributions to them.
CDH industry relief from Affordable Care Act (ACA) restrictions not included
- HSA expansion. Unlike most Republican tax proposals that included expansion of HSAs, most common the provisions in the Hatch/Paulsen HSA Bill (S.403), this bill does not include any such provisions. The bicameral GOP bill (H.R.4200/ S. 2052) does include a short-term increase of the HSA contribution limits to the out-of-pocket maximum.
- Cadillac tax and other ACA-imposed restrictions on CDH accounts. This bill does not include any delay or repeal of the excise tax on high cost health plans (Cadillac tax), the annual cap on FSA contributions, the prescription requirement for over-the-counter medicines, or the increase in the penalty for unqualified HSA distributions.
Good news for the CDH industry
- Employer-provided healthcare benefits remain intact. Previously discussed and leaked versions of the GOP tax plan included a cap on tax exclusion for employer-provided healthcare. This proposal does not impose a cap.
- Tax deferral for employee contributions to retirement savings is not reduced. House leadership had indicated they were open to reducing the tax deferral for employee contributions to 401(k), 403(b) and 457 plans, but the current proposal does not make any such changes. President Trump previously tweeted that the tax advantage offered by these retirement savings plans would not be reduced.
- CDH accounts continue to be able to reimburse eligible medical expenses. Although this bill does eliminate the itemized deduction for medical expenses (section 213 of the Internal Revenue Code), it moves section 213(d), which provides the definition of a qualified medical expense for CDH accounts, to section 105(f). Therefore, HSAs, FSAs, and HRAs may continue to reimburse eligible medical expenses on a tax-favored basis.
Congressional leadership and the President have maintained they would like to pass tax reform before the end of the year. While there are provisions that could harm the CDH industry, this bill is far from the final tax reform legislation that may eventually be sent to the President. First, the House Ways and Means Committee will mark up this bill. That mark-up session is currently scheduled for Monday, November 6th. The bill is likely to undergo revisions during that process.
It will be further revised once it reaches the House floor and is amended prior to final House passage. The Senate will also pass its own version of tax reform and the two bills will need to be identical before being sent to the President for his signature. In short, the industry has ample opportunity before the end of the year to advance changes to this current bill so that the CDH industry’s priorities are represented in the final tax reform legislation.
Alegeus, in partnership with industry associations, including the Employers Council on Flexible Compensation (ECFC) and the American Bankers Association's HSA Council, will continue to inform Congress on the important benefits dependent care FSAs and transit/parking accounts provided to hard-working middle-class Americans. The industry will also educate Congress on how HSA expansion and relief from ACA-imposed restrictions could benefit healthcare and retirement savings by empowering Americans to save more and providing common-sense reforms to make saving even easier.
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