Planning for the “Cadillac Tax” under the ACA

The information contained in this article is not intended as legal advice and may no longer be accurate due to changes in the law. Consult NHMA's legal services or your municipal attorney.

If taking steps to contain healthcare costs isn’t already a high priority for you, it should be soon. The “Cadillac Tax” is the informal name for the “Excise Tax on High-Cost Employer-Sponsored Health Coverage,” a provision of the Patient Protection and Affordable Care Act (ACA), which becomes effective January 1, 2018. In essence, this provision says that if you, as an employer (large or small employer), are offering healthcare plans that the ACA deems excessively costly, there will be a tax on those excessive costs. In addition to being an important revenue-raising provision of the ACA (it’s expected to raise more than $80 billion in tax revenues through 2025) the Cadillac Tax is intended to encourage employers, health insurance providers and consumers to control health costs. The following information is based on provisions in the ACA law and initial guidance to date, and is subject to change as further guidance is issued by the federal government.

In February 2015, the IRS released its first preliminary “guidance,” IRS Notice 2015-16, that identified issues and requested comments on potential approaches which could be incorporated in future Cadillac Tax regulations. The IRS expects to issue another Notice addressing other Cadillac Tax issues, including the procedures for the calculation and assessment of the tax.

Beginning in 2018, a 40 percent excise tax will be imposed on the “excess benefit” of employer group health plan coverage over certain threshold amounts. The excess benefit is the aggregate cost of “applicable coverage” for each covered employee or retiree above the threshold amounts. “Applicable coverage” costs include both the employer and employee share of the medical plan premium as well as employer and employee salary reduction contributions to health flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), and health savings accounts (HSAs).

The estimated 2018 threshold amounts are $10,200 for individual coverage and $27,500 for 2-person or family coverage. Higher thresholds will apply for early retirees (age 55-65) and plans with a majority of employees in high-risk occupations (police and fire). The 2018 thresholds also may be increased depending on actual medical inflation between 2010 and 2018 for a benchmark Federal Employees Health Benefits (FEHB) plan and pursuant to an age and gender adjustment. Starting in 2019, the thresholds will be indexed for CPI inflation.

For example, say that the total 2014 premium for individual coverage (single plan) in your town is $775 per month or about $9,300 annually. If that premium grows by an average of 6.5 percent per year, by the year 2018, the monthly premium for your individual coverage would be about $997 or $11,964 per year. The Cadillac Tax owed per covered single employee would be 40 percent of $1,764 ($11,964 minus $10,200), or about $705 per year/$59 per month; if you have 35 such single employees, there would be a total excise tax imposed for 2018 of about $24,696 (35 times $705) for those employees’ coverage.

The law is clear that employers will be responsible to calculate the tax with respect to each covered employee or retiree. What is not yet clear is who will be responsible for paying this tax. The insurer is responsible to pay the tax for fully insured group health plans; but for self-insured plans (municipalities who are part of a risk pool like HealthTrust) it is still unclear who will be treated as the plan administrator responsible for paying this tax. However, the ultimate liability for the excise tax will likely rest with the employer, either directly or on a pass-through basis.

Although the Cadillac Tax doesn’t go into effect until 2018, as an employer you need to begin planning now for the future, especially if you have long-term collective bargaining agreements. Here are some action steps you can use to begin strategizing.

Action Steps:

Review the IRS Notice 2015-16 and Estimate the impact of the Cadillac Tax on current plans.

Remember that this guidance indicates that the Cadillac Tax will be based on the total aggregate cost of applicable coverage for each covered employee and retiree above the annual threshold statutory limits. You should consider the impact of any funding arrangements (Health FSAs, HRAs, and HSAs) that you may offer. You may also want to contact your Health Insurance provider or pool to see what resources and tools they have to help determine the potential impact of the Cadillac tax on current plans.

Evaluate Current Plan Options and Consider Lower Cost Alternatives

Employers should contact their Health plan provider or risk pool advisor to assist with evaluating plan options and steps they can take to plan for the Cadillac Tax. This may include considering lower premium medical plan and prescription drug options with somewhat higher cost sharing by employees (deductibles and co-pays). This will encourage and engage employees to become better consumers in their own healthcare.

Establish a Benefits Study Committee.

Establish a committee to include administration and union or employee representatives to develop a multi-year strategic plan. Invite risk pool advisors or consultants to provide education and resources to help the entire group better understand cost drivers, consumerism and future plan options. This committee can help promote wellness initiatives, disease management programs and cost containment strategies to mitigate future increases in rates.

David Law is HealthTrust Benefits and Coverage Counsel and Darlene Simmons is HealthTrust Member Relations Advisor. This healthcare reform material is provided for general informational purposes. It is not intended as and does not constitute legal or tax advice. Questions regarding your specific circumstances should be addressed to your legal, tax or other professional advisors.