You of course know that the brief government shutdown ended via a short-term continuing funding resolution. Included therein is a further postponement of the so-called “Cadillac Tax” on high-value health plans. This provision, which had bi-partisan support, postpones the tax from its already-delayed effective date of 2020 until 2022.
Specifically, what is the Cadillac Tax?
Originally intended to commence in 2018, a 40% non-deductible excise tax would be levied on the cost of employer-provided health coverage in excess of a threshold amount. “Cost” is both employer and employee shares; HRA contributions; both employer and employee pre-tax FSA contributions; and employer HSA contributions. The taxable period is calendar year.
What is the threshold?
Under the code section, the unadjusted threshold is $10,200 for single-only coverage; $27,500 for other-than single coverage. Thus the tax is 40% on the excess on a month-by-month basis. Example: Dora’s single-only coverage is $840 for January – June. Due to a rate increase on renewal, the cost of her coverage goes to $950 for July through December. The monthly threshold is 1/12th of $10,200, or $850. Thus there is no excess for the first six months of the year. However, there is an excess for the last six months of $100 a month. Therefore the employer if self-funded or insurance carrier if fully insured would owe a §4980I excise tax of $240 for the calendar year ($950-850 x .40 x 6 months). However for “pre-65” employees (those age 55 and older who are not eligible for Medicare) and high-risk occupations (as defined on the following page), the statutory thresholds are $11,850 and $30,950.
The Threshold will be adjusted for Inflation
The initial threshold amounts will be subject to three inflationary adjustments –
- The threshold will be adjusted based on the actual premium increases between 2010 and the effective date for the federal employees’ Blue Cross PPO option – the Federal Employees Health Benefits plan; but only to the extent that plan’s increases exceed 55%. This is a one-time only adjustment. For example, if the FEHB premium growth from 2010 to 2022 is 105%, the Cadillac threshold will be increased by 50% (105%-55%).
- For 2022, the threshold will be adjusted based on the C.P.I + 1%.
- After 2022, C.P.I. only
Is there any differential between dependent coverage categories?
No, there are only the two classes – single only and other-than single. “Other than” encompasses all other premium categories, such as employee + spouse; spouse and children; etc.
Who will be liable for the tax?
Insurance companies for full-insured plans; employers or TPA’s for fully or partially self-funded plans based on their COBRA premium actuarial computation. A prior notice speaks to this still being up in the air for self-funded plans. §4980I actually says the tax is the responsibility of “…the person that administers the plan benefits” but offers no definition. IRS says that they will not take “person” literally, but they are considering two possibilities to determine who in end will be the responsible party. Under one possible approach the entity performing day-to-day functions, such as processing claims and responding to inquiries and such would be responsible. The second approach would be to tag the entity with ultimate authority to determine what the administration and claims policies and procedures would be. With that said in a nutshell, one cannot say for sure at this point whether the employer or TPA would be the responsible party. It would appear responsibility might vary from plan to plan depending on circumstances and the final definitions.
Are grandfathered plans exempt?
Are small employers subject to the tax?
Yes, there is no exemption for small businesses as there is in other sections of PPACA.
There would be Allowances for Groups with higher-risk Populations
First, the threshold amount may be increased by an age or gender adjustment for groups with older employee populations and with heavy female content. This aspect is an example of how complex this tax rule will be. IRS states in both of its prior notices that it must develop actuarial guidelines to test such high-cost populations and is asking the public for ideas on how to do so. Further, these adjustments must be re-determined annually, so it is entirely possible that the threshold will actually be less from one year over another. Secondly, the threshold can be adjusted upward for high-risk professions. Some such professions initially identified by IRS in the notices include –
Law enforcement Power line workers Agricultural Paramedics
Fire protection Mining Long shore workers
Fishing Forestry Construction
If an employee populace is “predominantly” (yet to be defined) occupied by a high-risk profession, IRS current thinking is that the higher threshold could be used for all employees, even those not considered high-risk. If not predominant, you would have a mix of thresholds within one plan.
Can the employer or TPA pass this cost along in rate making?
No. In its earlier notice, IRS has determined that if the responsible party passes along the excise tax in its rate making, it will be deemed to be reimbursed the amount of the tax from participants and thus must include the tax in its taxable income for the year.
Specifically, what types of Coverage are included?
A prior IRS notice talks extensively about the types of things that could be considered “applicable coverage” subject to the Cadillac Tax. At this point it appears IRS is considering all these categories to be included in totaling up the cost of coverage –
- An employer-sponsored group health plan whether fully insured or self-funded…employee and employer cost in total. Self-funded plans will use the COBRA-calculated premium; although one IRS notice indicates IRS may not be completely comfortable with COBRA premium calculation and might look at another method.
- Employer contributions to HSA plans
- Employer and employee contributions to FSA’s
- Employer or pre-tax employee contributions to Archer medical savings accounts
- Executive physical plans
- On-site medical clinics that provide more than a “de minimis” level of medical care
- Retiree coverage
- Multi-employer plan coverage
- Specific disease or indemnity plans, but only if the premium is excluded from the employee’s taxes
Thus, the “cost” can extend beyond the major medical premium itself when one considers that HSA’s and cafeteria plans and such get pulled into the calculation. Resultantly, an employer with these options cannot rest on the cost of the major medical plan itself as a measure of avoiding the Cadillac Tax. Note that IRS indicates that regulations will apply the tax to coverage in which the employee is actually enrolled. You see, §4980I says the tax is based on “…coverage made available…” to the employee, and practitioners had worried this would be translated to mean the highest cost plan the employee could have enrolled in.
Concluding, the Cadillac Tax was obviously a vision shared by ACA authors intended to prevent silver-spoon plans for top-tier executives that are not otherwise available to rank-and-file employees. Immediately upon passage of PPACA, a howl of protest ensued. Such dissent, however, did not come from the business community but rather from the major labor unions. It was this circumstance that caused the Obama administration to postpone the effective date of the tax until 2018. Congress further delayed until 2020. Now, we have a suspension until 2022. The Cadillac Tax was one of the funding elements of PPACA, yet there appears to be broad bi-partisan support to be rid of it, permanently. Hopefully, repeal will come to fruition, as this will be horribly choppy waters for employers to navigate.
What type of coverage is not subjected to the Cadillac Tax?
- Stand-alone dental
- Stand-alone vision
- Long-term care
- Indemnity and specified disease paid after-tax
- Military plans
- Maybe employee assistance programs
- Workers comp
- Employee assistance programs
Concluding thoughts: Trust us when we say that this summary is the tip of the technical iceberg. Our point is that the Cadillac Tax regulations will be complex, as evidenced by two IRS notices already this year. The Service is clearly indicating that they are not seeking simple ground when developing the rules but rather their effort will be to codify every possible nuance.
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