Are You Ready for the Affordable Care Act’s “Cadillac Tax”?

Beginning in 2018, the Affordable Care Act (ACA) will impose a 40% excise tax on high cost employer-sponsored group health benefits. The “Cadillac Tax” will apply to the excess benefit[1] on all fully-insured and self-insured applicable employer-sponsored coverages.[2] 

In this blog we will be covering how “Cadillac Tax” penalties work, and offer insight into what employers need to do to prepare for “Cadillac Tax” compliance in the coming months/years.

It’s an employer/plan sponsor tax, not an insurance company or employee tax. Even though your insurer will remit the tax payment if one is due on your insured plan(s), you can be sure they will be presenting a bill in like amount to you!

In 2018, the total aggregate cost[3] thresholds for the tax will be:

• $10,200 for single coverage and $27,500 for other-than-single-coverage for most active employees; and,
• $11,850 and $30,950, respectively, for non-Medicare-eligible retirees/spouses, and employees involved in certain high-risk industries

Those thresholds will then be COLA-adjusted for 2019 and later years.

In late February, the IRS issued Notice 2015-16[4]. The Notice addressed a number of tax-related provisions and described potential alternative approaches for certain aspects of the law. While inviting public comment on a range of issues, the Notice also gave employers some indication of the IRS’ probable intent regarding the final regulations. A few examples (not at all inclusive):

• self-insured dental and vision plans are excluded as applicable coverage: would lower aggregate cost
• employer contributions to Health Reimbursement Arrangements (HRAs) are included: would raise aggregate cost
• age and gender adjustments to the cost thresholds are included: would raise the thresholds for  employers with qualifying population characteristics

Related Blog: Everything You Need to Know About 1095-C Filing

Via the Notice, the agency is also seeking public comment regarding proposed approaches regarding (1) when the aggregate cost will be calculated and (2) how it will be calculated.

See here for more details regarding Notice 2015-16.

So what does this all mean for employers (again, not an exhaustive list)?

• Despite hopes to the contrary (“It will never be implemented.” “Oh, it will be repealed.”), the Cadillac Tax is very much alive and coming sooner than you think!
• If you provide group benefits through one or more Collective Bargaining Agreements, you may only get one more chance to impact your plan’s total aggregate costs at the bargaining table.
• As always with the Cadillac Tax, cost-shifting (e.g., a copay increase) reduces total aggregate cost. Cost-sharing (increasing employee contributions) does not.
• If employee pre-tax contributions to HSAs are included in the final definition of applicable coverage, employers that already have such arrangements in place will need to take a second look at the contribution strategies in place for that plan(s).

The bottom line: if you haven’t already, start planning/communicating/modeling now!!

1. Understand how the tax is currently structured and calculated.
2. Estimate how it would impact your current benefit offerings (total cost v. thresholds and tax liability), if at all.
3. Watch for developments regarding final regulations, and for their actual release (Or subscribe to our blog in the sidebar to the right so we can push you the necessary updates).
4. Be prepared for a few new wrinkles in the finals regs, some of which will raise your plan’s total aggregate cost.
5. As needed, update your cost/tax liability estimates based on the final regs.
6. If you offer benefits to collectively bargained units, engage your bargaining unit(s). Avoiding the tax will require a long-term collaborative effort.

Remember: It’s not too late to get started, but it will be soon!

[1] Excess benefit: the amount by which the aggregate cost of the employee’s employer-sponsored coverage exceeds pre-determined cost thresholds. “Employee” includes active employees, non-Medicare retirees/spouses and surviving spouses.

[2] Applicable employer-sponsored coverage: means a group health plan that is made available to an employee by an employer, and that either (1) is actually excludable from gross income under IRC §106, or (2) would be excludable if it were employer-provided coverage within the meaning of IRC §106.

[3] Total aggregate cost: the full cost of the employer-sponsored plan, regardless of employer/employee contributions splits, and including all types of applicable employer-sponsored coverage as defined in the final regulations).

[4] The Notice is just that, a notice; it’s not actual regulation. Section VIII of the Notice states: “This Notice does not provide guidance…upon which taxpayers may rely.”