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[Updated] Senate Amends Tax Reform Plan to Include Repeal of ACA Individual Mandate

The Senate has made significant adjustments to its initial tax reform proposal, most notably reducing the Affordable Care Act's individual mandate tax penalty to $0. Take a look at the amendments made.

Update: On Nov. 16, the Senate Finance Committee voted along party lines (14-12) to advance its tax reform proposal out of committee. The Republican Senate leaders intend to bring the legislation up to the full Senate after the Thanksgiving break.

On Nov. 28, the Senate Budget Committee voted along party lines (12-11) to advance its tax reform proposal out of committee. This clears the way for the full Senate to take up the legislation this week. 

It’s expected that changes will be made to the current version of the legislation to appease some senators who are wavering on backing the bill in its current form. However, any item changed that adds to the deficit will make it more difficult for Republicans, as they have very little wiggle room before they reach the $1.5 trillion amount that can be added to the deficit in the next ten years. Any amount in excess of the threshold will require the Republicans to come up with a change to offset the excess. This exercise is politically difficult since generally you have to decide which constituency loses. The Republicans can only lose two senators if the Democrats stay united against the legislation. Keep in mind, even if the Senate passes its version of the tax overhaul, it still differs from the bill the House passed. The two chambers would need to reconcile their differences and pass the same version of the bill.

  • The Senate this week made significant adjustments to its initial tax reform proposal, released on Nov. 9.
  • Key changes: Making nearly all alterations to tax provisions for individuals temporary, and reducing the Affordable Care Act's individual mandate tax penalty to $0.
  • This latest tax reform iteration modified a number of provisions, added several, and removed three from previous Senate Finance Committee proposals.
  • The Senate and House must keep working to reconcile their respective versions of tax reform.

Changes intended to drive bill's passage

In an effort to appease important political factions and stay within the narrow confines of the budget rules, the Senate this week made significant adjustments to its initial tax reform proposal, released on Nov. 9. Most notably:

  • Making nearly all changes to tax provisions for individuals temporary — set to sunset after 2025, while making chief corporate tax changes permanent; and
  • Negating the Affordable Care Act's (ACA's) individual mandate tax penalty by reducing it to $0. The IRS assesses individuals a penalty who don't demonstrate they have qualified health insurance coverage or qualify for an exemption on their tax returns.

Both items help add back to the deficit. Removing the ACA's individual mandate was meant to appeal to conservative lawmakers potentially wavering in their commitment to the Senate's original tax reform proposal.

Lawmakers also added a tax credit for employers that provide paid leave to workers under the Family and Medical Leave Act (FMLA). Additionally, the updated version made minor tweaks to tax rates and threshold amounts.

Highlights of changes to Senate's original proposal

Modified provisions:

  • Sunset all individual tax provisions after 2025, returning the tax code to the current version for individuals in 2026, absent further legislative action. Lawmakers did this to meet budget reconciliation guidelines, which require a tax bill to achieve deficit neutrality outside the 10-year budget window and stay under the $1.5 trillion deficit within that window.
  • Make the corporate tax rate permanent. As a result of Senate budget rules lawmakers expressed the intent to maintain at least deficit neutrality after 2028 outside the budget window, in order to make these cuts permanent.
  • Change tax bracket rates and income thresholds. The new proposed tax rates are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 38.5 percent.
  • Increase the previous proposed child tax credit to $2,000.
  • Ease the requirements to apply a 17.4 percent deduction for qualified business income on pass-through entities for individual taxpayers.

Added provisions:

  • Reduce the ACA individual mandate to $0 by 2019. The individual mandate is also known as the act's individual shared responsibility provision. Although the Senate's tax proposal does not repeal the provision, negating the penalty amount would essentially have that effect. Under the individual mandate, the IRS requires self-insured employers and insurers to report individuals covered by their plan or face penalties.

    The Congressional Budget Office (CBO) has estimated that negating the individual mandate penalty would save $338 billion over 10 years, but more than 13 million people would lose health insurance by 2027. Premiums in the individual market would surge an average of 10 percent a year. The reduction in coverage and large premium increases were, in general, why some moderate Republican senators said they could not support previous ACA repeal-and-replace efforts. Their sentiments have been somewhat muted the past few days as the Senate moved to include this amendment.
  • Allow a tax credit for certain employers that provide paid family and medical leave (FMLA) to their employees. The credit ranges from 12.5 percent to 25 percent of wages paid. The amount of the credit incrementally increases from 12.5 percent as the employer's payment under this arrangement exceeds 50 percent of normal wages paid. The credit is only available for wages paid in 2018 and 2019.
  • Prohibit the deduction for meals provided at the convenience of the employer.
  • Disallow business deductions for settlements and costs of settlements that relate to sexual harassment or sexual abuse, if the settlement is subject to a nondisclosure agreement.
  • Repeal the special rule that allows recharacterization of individual retirement account (IRA) contributions between Roth and traditional IRAs.

Provisions removed from previous Senate Finance Committee proposals:

  • Change the exclusion of nonqualified deferred compensation plans to prohibit the income exclusion under these plans except in specific circumstances. This provision was previously removed in the House bill. Current law on nonqualified deferred compensation would remain applicable.
  • Change worker classification and reporting requirements. The previous proposal would have developed an elective safe harbor to treat workers as independent contractors. Additionally, it would have changed the reporting requirements for 1099 contractors from $600 in payments to $1,000 in payments. Current law on worker classification and reporting requirements for contractors still applies.
  • Prohibit catch-up contributions to retirement plans for individuals who make more than $500,000 in wages.

Senate, House must reconcile their tax proposals

Federal lawmakers remain in the fluid stage of developing a national tax overhaul bill. Much work lies ahead before they potentially reach agreement on a final version to send to President Trump. Provisions can be removed, added back, or modified as the debate continues. We have provided a snapshot of the current state of the Senate Finance Committee proposal. Note that some of these changes further deviate from the current version of the House proposal.

The House and Senate have more work to do to reconcile their respective versions, and the CBO will need to keep scoring the changes. This exercise in policy, politics, and math exemplifies the challenges of our democracy and the U.S. legislative process. Employers, pay close attention to issues that may affect your business and employees. No one can yet predict the outcome of tax reform.

An earlier version of this article was published on Nov. 16, 2017.

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Laurie Savage is a compliance professional and subject matter expert on the Affordable Care Act (ACA) for Paychex Inc. specializing in Health Care Reform.
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