When the Affordable Care Act (ACA or Act) was passed into law in 2010, it included a 40% excise tax on high cost employer provided health coverage originally set to take effect in 2013. Subsequent amendments to the Act postponed the implementation of several of the Act’s components, including the 40% excise tax, (now commonly referred to as the Cadillac tax), which was postponed to 2018. While even now that may seem like a long way off, employers who provide health coverage to their employees should be thinking about it now, as the decisions they make between now and 2018 will affect whether their health plans might be subject to the tax and what their liability will be. Unlike some provisions of the ACA, there are no exemptions for grandfathered or small employer plans, (in fact, even self-employed persons are subject to the tax), so nearly everyone needs to pay attention and know how they may be affected.
Cadillac Tax Basics
The Cadillac tax was inserted into the ACA as a means of curbing healthcare spending by reducing demand for high cost plans, reducing the tax preferred status of employer sponsored plans, and acting as a revenue producer to offset other provisions of the Act. In simple terms, it imposes a 40% tax on the cost of coverage in excess of an established threshold, (presently at $10,200 for individual coverage and $27,500 for family coverage, however to be revised for 2018 if health care costs have risen more than 55% between 2010 and 2018, then afterwards revised annually based on CPI inflation). There are higher thresholds for retirees and employees in high-risk professions, (e.g. law enforcement and construction), and for employers whose workforce age and gender demographics vary significantly from the national average, both of which may result in higher premiums without necessarily providing Cadillac-level benefits.
Employers will be responsible for calculating the monthly excess amount for each covered employee and either paying it themselves in the case of self-insured plans, or reporting it to each of their insurers for payment by them. (The actual timing and mechanism for reporting and paying the excise tax to the IRS have not yet been established.)
What types of coverage are subject to the excise tax? In addition to the obvious inclusion of an employee’s medical coverage, other plans required be considered in the calculation are:
- Account based plans, including Flexible Spending Plans (FSA), Health Savings Accounts (HSA), and Health Reimbursement Accounts (HRA);
- Pre-tax coverage for specific disease and illness plans;
- Hospital or other fixed indemnity plans;
- Wellness programs that are part of a group health plan;
- Executive Physical Programs;
- Onsite medical clinics providing more than minimal first aid type care; and
- Coverage for former employees, including retirees and COBRA participants, as well as surviving spouses or other “primary insured individuals”.
Coverage that may be excluded from the calculation includes:
- Most US-issued expatriate plans;
- Accident-only, disability and worker’s compensation plans;
- Long term care plans;
- Standalone dental and vision plans;
- Employee Assistance plans that qualify as an excepted benefit; and
- Employee after-tax contributions to an HSA.
What an Employer Can do Now
So what do employers want to be thinking about now in 2015? The first step would be to determine which of their plans need to be included in the excise tax calculations, and then running estimates based on their current employee participation. Whether or not it appears that the existing employee benefit plan creates a liability for the excise tax, an employer will be better prepared to answer the question of what strategy (or combination of strategies) they want to employ going forward. Will they accept an additional tax as a reasonable (and non-deductible) business expense for remaining competitive in their recruitment marketplace? Are the necessary recordkeeping mechanisms in place to be able to accurately calculate the excise tax liability? Do they want to avoid the excise tax under any and all circumstances, and consequently what adjustments may need to be made to existing benefit plans to accomplish that goal, and (hopefully) without significantly affecting employee satisfaction? Where can enhancements to benefit plans be made that avoid increasing excise tax liability? Are there union contracts in place or upcoming negotiations that concern employee benefit plans in 2018 and beyond? Should some or all of the cost increases attributable to the excise tax be passed through to the employee? Thinking about these questions now will give employers adequate time to prepare and to phase in any benefit plan changes they might want to make, rather than waiting for a hammer to fall in 2018.
As for themselves, the IRS will be using some of the time between now and 2018 to resolve numerous questions raised by the language in the excise tax provision. For example, for plans other than those that are insured or HSAs, the language in the Act states that the “person that administers the plan benefits” is responsible for paying the tax. This could mean either a Third Party Administrator (TPA) or an employer if they have the final decision-making authority regarding plan administration. (Employers will definitely want to be discussing this with their plan providers ahead of time so it’s clear who will be responsible for paying the tax.) The provision also allows an insurer or TPA to bill the employer for any excise taxes paid by them, creating the potential for higher income taxes for the insurer, (the excise tax being a non-deductible expense), which they may also pass back to the employer. The IRS is considering how this might best be accounted for in a provider’s return. (Fortunately, any portion of the cost of coverage attributable to the excise tax itself need not be taken into consideration during its calculation.)
Other unresolved issues surround the timing and calculations for self-insured and account-based plans, and the added complexity when an employer has a combination of insured, self-insured, and account-based plans. The IRS is considering whether or not to make multiple methods available, such as with the COBRA premium calculation approach that allows for either an actuarial or past cost based method.
In preparation for administering the excise tax the IRS, in conjunction with the Treasury Department, has issued two bulletins this year, (IRS Notices 2015-16 and 2015-52), providing clarifications to some issues already raised as well as requesting further comments from interested parties, after which proposed, then final, regulations will be released. The deadline for comments on IRS Notice 2015-52 is October 1, 2015. Instructions for submitting comments are provided in the Notice. Stay tuned for further developments.