Tag Archives: Cadillac Tax

“Cadillac Tax” on Health Plans Delayed Until 2020

Contributed by Kelly Haab-Tallitsch

Employers are receiving a temporary reprieve from the controversial “Cadillac Tax” on health plans as part of a large spending and tax bill signed into law by President Obama on Friday, December 18, 2015. The Consolidated Appropriations Act (the “Act”) delays the effective date of the Affordable Care Act’s (ACA’s) excise tax on so-called high cost health plans, known as the “Cadillac Tax,” until January 1, 2020.

The Cadillac Tax, previously scheduled to take effect on January 1, 2018, is a 40% excise tax on employers and insurers who offer health insurance plans that exceed specified high-cost limits ($10,200 for individuals and $27,000 for families for 2018). The 40% tax applies to the cost of the plan above these thresholds.

In addition to the delay, the Act makes the Cadillac Tax a tax-deductible expense for employers, somewhat cushioning its impact. The Act also calls for an examination of suitable benchmarks to be used for the adjustment of the excise tax thresholds in future years.

The delay comes after mounting criticism of the Cadillac Tax from employers, insurers, labor unions and lawmakers. Critics argue that the tax, which was expected to affect an estimated 25% to 30% of employers in 2018, and as many as 50% within the next 10 years, unfairly penalizes employers and unionized workers and will ultimately lead to employees paying more out of pocket for medical expenses.

What Does this Mean for Employers?

While opponents of the Cadillac Tax are citing the delay as the first step towards a repeal of the tax, employers must remain cautious and plan for the tax to be implemented in 2020. Employers should continue evaluating the costs of the health coverage offered to their employees and begin to consider alternatives to reduce exposure to the tax in 2020. Additionally, employers should review the accounting consequences of the now deductible Cadillac Tax.

New Guidance: A Reminder the Cadillac Tax is Still Looming

Contributed by Kelly Haab-Tallitsch

The Internal Revenue Service (IRS) recently released its second set of guidance discussing approaches to the excise tax on employer-sponsored health coverage, often referred to as the “Cadillac tax.” Starting in 2018, the Cadillac tax imposes a 40% tax on the cost of employer-sponsored health coverage in excess of $10,200 for self-only coverage and $27,500 for family coverage. Intended to target overly-generous employer-provided health plans, the Cadillac tax continues to be one of the most controversial parts of the Affordable Care Act (ACA) as dollar thresholds set in 2010 look increasingly too low for 2018 plan costs.

The Cadillac tax is extremely complex and we don’t expect final regulations any time soon. The guidance issued so far Health insurnce photodescribes “potential approaches” that may be incorporated into future regulations. Although this preliminary guidance cannot be relied on, it gives some insight into the direction the agency is going.

Notice 2015-52, released July 30, 2015, addresses employer aggregation and the payment of the tax, among other issues. The guidance suggests that related employers will be treated as a single employer for tax calculation and payment purposes. Annually, employers will calculate the cost of the coverage for each month of the calendar year to see if the ‘Cadillac’ threshold was exceeded. The employer will then inform the IRS and the coverage provider (insurance company for a fully insured plan) of their share of the tax. For multiemployer plans, the plan sponsor will make the calculations and provide notice to the IRS.

Notice 2015-16, released February 23, 2015, addressed the definition of applicable coverage, the determination of the cost of coverage and application of the annual statutory limits. Most notably, applicable coverage would include both fully insured and self-insured employer-sponsored health plans, regardless of whether the employer or employee pays for the coverage or whether it is paid for with pretax or post-tax dollars. This would include major medical coverage, employer and employee contributions to health flexible spending accounts (FSAs) and health savings accounts (HSAs), health reimbursement arrangements (HRAs), onsite medical clinics, retiree coverage and executive physical programs.

What is the bottom line? Although opponents of the Cadillac tax continue to fight to have the provision amended or repealed, employers should proceed with the expectation that the Cadillac tax will be implemented in 2018 as planned. Employers should review the coverage offered to employees and begin to take steps to reduce exposure to the tax. Further, employers should consider providing input into the regulatory process—directly or through trade groups—by providing comment on the preliminary guidance.

IRS Begins Implementation of the ACA “Cadillac Tax” for High-Cost Health Plans

Contributed by Kelly Haab-Tallitsch

The IRS and Treasury Department recently issued Notice 2015-16 discussing initial approaches to implementing the 40% excise tax imposed on high-cost health plans under the Affordable Care Act (ACA).  This notice is the first step in the process leading to final regulations.

Beginning in 2018, the excise tax, also called the “Cadillac Tax,” will impose a 40% tax on the cost of employer-sponsored health plans that exceeds certain thresholds. The tax may affect few plans initially, but is expected to affect many more over time as the cost of health care grows faster than inflation.

Notice 2015 -16 addresses three key areas, including:

  • The definition of “applicable coverage”;
  • The determination of the cost of applicable coverage; and
  • The application of the annual statutory limits.

Benefits considered “applicable coverage” will be subject to the excise tax. The notice addresses several areas that were previously unclear.  Most notably, the agencies anticipate that pretax salary reduction contributions made by employees to health savings accounts (HSAs) will be subject to the tax. The ACA statute provides that employer contributions to an HSA are subject to the excise tax, but did not address employee pretax contributions.  Retiree coverage, multiemployer plan coverage, executive physicals and health reimbursement arrangements are also expected to be included as applicable coverage.

Notice 2015-16 anticipates excluding from applicable coverage onsite medical clinics that offer only de minimis care to employees, provided the care consists primarily of first aid during work hours for treatment of an illness or injury that occurs during work hours. Still undetermined is the treatment of onsite clinics that provide additional services such as immunizations, allergy injections, nonprescription pain relievers, and treatment of work injuries beyond first aid.

Self-insured dental and vision plans (consistent with the exclusion of fully insured dental and vision plans in the statute), employee after tax contributions to HSAs, accident or disability insurance, workers’ compensation, long-term care insurance and possibly employee assistance programs are also expected to be excluded.

What This Means for Employers

The cost of applicable coverage that exceeds the thresholds (currently $10,200 for self-only and $27,500 for family coverage) will be subject to a 40% non-deductible excise tax imposed on the employer. To avoid the tax, employers must continue to analyze health plan costs and explore strategies now to manage future costs.

The anticipated treatment of employee pretax contributions to HSAs will likely have a significant impact on HSA programs. As described, many employer plans that provide for HSA contributions will be subject to the tax as early as 2018, unless an employer limits the amount an employee can contribute on a pretax basis.