Wednesday, March 5, 2014

ACA's Cadillac Tax


Ordinarily, this blog addresses current events in the health insurance and health care spaces.  But this week I'm making an exception and informing about a provision of the Affordable Care Act (ACA) that is not set to take effect until 2018.  Many of the clients, colleagues, friends and audiences I encounter are talking (if not worrying) about the so called Cadillac tax...now!  Accordingly, this week's post is meant to provide some background on this provision, if not for those merely worrying about it, but for those that are long term planners.  Please keep in mind that final regulations addressing the Cadillac tax have not been released to date.  Here is what we do know...

  • The Cadillac tax provision is set to take effect - "for tax years beginning in 2018".
  • It is an excise tax of 40%, applicable to "high-cost group health coverage" (more on that).
  • It applies to all group health plans (i.e., governmental, private-sector, fully insured, self insured).  The tax does NOT apply to excepted benefits, which include the following coverages:
  1. Long term care 
  2. Dental 
  3. Vision
  4. Accident
  5. Disability Income
  6. Supplemental liability
  7. Workers compensation (or similar coverage)
  8. Automobile medical
  9. Credit-only
  10. Other similar coverage under which benefits for medical care are secondary/incidental
  • The tax is applicable to an employee's "excess benefit" and is calculated by the employer, and paid either by the employer or the employer's coverage provider (i.e., insurer, employer, third party administrator).  There are two (2) separate excise benefit tax annual limits (or thresholds), based on distinct classifications of employee:
  1. Most employees$10,200 (employee only); $27,500 (employee + dependent(s)); and
  2. Qualified Retirees/High Risk Professions/Employees that repair/install electrical/telecommunication lines:($11,850 (employee only); $30,950(employee+dependent(s) Note: high risk professions include law enforcement, fire protection, emergency medical technicians, paramedics, first responders, individuals in the construction/agriculture/forestry/fishing industries, long shore work; and retirees from one or more high risk professions for a minimum of 20 years.  
These amounts may change in 2018, based on significant changes to the cost of health care between 2010 - 2018.  The annual limitation will be adjusted annually to reflect cost of living changes, and may also increase based on age and gender adjustments.
  • Self funded plans utilize COBRA premium rate equivalencies for tax calculation purposes.
  • In short, premium (and spending account) amounts that exceed the aforementioned annual limits are subject to the 40% excise or Cadillac, tax.  For example, an employee with family coverage having a total (employer + employee share) annual premium of $32,500 would subject an employer to a Cadillac tax for that employee of $32,500 - $27,500 = $5,000 x .40 = $2,000.
  • Special rules apply in determining the cost of spending account based coverage (i.e., HSA, HRA, and FSA) as follows:
    • FSA - the amount of an employee's salary reduction contribution is subject to the tax.
    • HSA - employer contributions and employee contributions that are made on a pre-tax basis are subject to the tax. (Note: after-tax employee contributions are not.)
    • HRA - since these are 100% employer funded, the entire amount of the HRA is subject to the tax.
  • Penalties for non-compliance equal 100% of the underpayment plus interest
According to a projection published by benefits consulting firm TowersWatson, 60% of large employer plans will be subject to the Cadillac tax in 2018.  Also, based on projections published by the Kaiser Family Foundation for 2018, the average cost of employee only coverage will be $9,040; and family coverage will be $25,350.  If you consider the additional costs associated with spending accounts, it will not be difficult to arrive at Cadillac tax exposure.
 
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