As published in The Self-Insurer,
Many employers and their TPAs are still working through the 26 USC § 4980H analysis (Shared Responsibility for Employers Regarding Health Coverage) and whether the coverage being offered is good
enough so as to avoid excise taxes. However, it is already time to start contemplating and preparing for the Cadillac Tax and the analysis of whether the coverage being offered is too good so as to avoid excise taxes.
Beginning January 1, 2018, the Patient Protection and Affordable Care Act (PPACA) will impose the Cadillac Tax. The Cadillac Tax is an excise tax on applicable employer-sponsored health coverage that provides benefits to employees (current and former employees) and other covered individuals that exceeds specific pre-determined thresholds (“excess benefits”.) The excise tax was intended to be a permanent, non-deductible tax touted to help slow the growth rate of health costs (particularly premium growth), reduce health care usage, encourage employers to offer cost-effective benefits, encourage employee engagement and practically speaking – to help finance the expansion of health coverage under PPACA.
Final regulations have not been issued and we are anticipating further guidance on many unanswered questions. However, based on our current understanding the applicable coverage to be taken into account to determine if a plan meets the qualifications includes all applicable employer-sponsored health coverage including, but not limited to, coverage provided for medical, prescription drugs, dental, vision, health FSA, HRA, HSA and on-site clinics. Dental and vision may be excluded if provided to employees under a separate plan, as well as “excepted benefits.”
The Cadillac Tax will be imposed on the cost of the applicable employer-sponsored health coverage that exceeds the yearly allowable pre-determined threshold. The cost of coverage is the sum of the employee and employer shares, which includes premiums paid by the employee and employer, as well as the employee and employer contributions to health FSAs, HRAs, HSAs, on-site clinics and any other applicable coverage.
To calculate the Cadillac Tax, all monthly excess benefit amounts must be aggregated to determine the yearly amount of excess benefits. The aggregated excess benefit amount is then multiplied by 40%. For planning purposes and for 2018, the threshold amounts are expected to be $10,200 for single coverage ($850 per month) and $27,500 for family coverage ($2,291.67 per month) which will likely increase each year based on increases in health care costs, cost-of-living adjustments, as well as age and gender adjustments. The annual threshold amounts will also be adjusted for high-risk professions and qualified retirees.
Company XYZ offers a comprehensive, self-funded medical plan to its full-time employees in 2018. The total cost of coverage (employee share and employer share) for each employee covered on the plan electing self-only coverage is $12,000 and the total cost of coverage for each employee covered on the plan electing family coverage is $30,000.
Employers are ultimately responsible for calculating the excise tax for the applicable employer-sponsored health coverage regardless if they are fully insured or self-funded and in either case, the employer and/or plan size is irrelevant.
Although many observers are hoping for repeal, the Cadillac Tax is expected to be a significant source of revenue to assist in keeping the PPACA programs alive. Many of the funding mechanisms for PPACA have already been delayed or set aside and many argue that it may not survive another financial hit.
Is the Cadillac Tax a “tax” or is it simply the elimination of an existing tax break?
Advocates contend that the excise tax is necessary due to the long- standing unequal tax benefit that has existed for decades. Employers receive a tax incentive for offering health benefits to their employees in lieu of wages and the benefits are provided to the employee on a tax-free basis. Some advocates have argued that the higher paid employees receive a higher level of income due to the tax-free value of the health benefits provided to them. By excluding the full value of employer-sponsored health insurance from individuals’ taxable income, one estimate is that the federal government is currently providing Americans with more than $250 billion each year in tax subsidies. Since both employers and employees presently benefit from the tax incentives currently in place, any attempt to eliminate them has been met with significant opposition.
Critics of the Cadillac Tax claim that employers, in their quest to obey the law but avoid an additional excise tax, may make changes resulting in decreased benefits provided to their employees and will likely attempt to impose significant changes in cost-sharing differentials. By increasing deductibles and co-payments, employers may shift a larger portion of the cost of health care on to the employee which may result in increased individual debt and/or deferred medical treatment. It is not too soon for TPAs to begin consulting with their respective clients in contemplation of developing a long- term deliberate health care strategy for the employer. Employers should be considering, at a minimum:
- Will the current offering be subject to the Cadillac Tax?
- What would the amount of the excise tax be?
- What thresholds does the plan currently qualify for?
- What are the current cost-drivers for the health plan?
- What cost-containment strategies could be implemented now and over the next several years, to significantly impact claim costs.
One method of managing excess benefits provided to employees is managing the cost of the health plan. Effective cost-containment strategies may allow employers to manage plan costs while continuing to provide high quality benefits. Some examples of these strategies include, but by no means are limited to: case management and disease management intervention opportunities for those individuals identified as having a chronic condition; travel benefits (domestically and internationally) to obtain high quality low cost treatment; reference- based pricing strategies; incentivized wellness programs; custom network arrangements with preferential rates; implementation of narrow networks; and detailed auditing programs. If it hasn’t already occurred, now is the time for TPAs to assist employers in exploring cost-containment strategies that are appropriate for a particular employer’s population.
The industry eagerly awaits regulations that will provide more specific information and guidance and whether the Cadillac Tax will survive is a hotly debated topic. In the meantime, it is important that employers and TPAs work together to control the cost of health coverage for their employees in order to minimize or avoid any excise tax that may apply. TPAs are perfectly positioned to assist their clients through this analysis, assist their clients with the calculation and with any subsequent reporting. Failure to properly plan ahead could significantly impact an employer and the viability of its benefit offering.
This article is intended for general informational purposes only. It is not intended as professional counsel and should not be used as such. This article is a high-level overview of regulations applicable to certain health plans. Please seek appropriate legal and/or professional counsel to obtain specific advice with respect to the subject matter contained herein.