“Cadillac Tax” Sparks Concerns as Imposition Date Nears

To many employers, insurers and plan administrators, 2018 seems right around the corner. That’s when the Affordable Care Act’s (ACA’s) “Cadillac tax” provision takes effect. And what felt like a distant prospect when the ACA was enacted five years ago looms large today — particularly given its prospect of imposing a heavy 40% tax burden on the value of health benefits exceeding specified limits.

As originally perceived and characterized, the Cadillac tax would impact only particularly generous plans. But some analysts believe many “nonluxury” plans will be impacted in 2018 and, over time, it may affect almost every plan.

Will Congress repeal?

A recent survey by global consulting firm Mercer predicts that, barring a trimming of benefits, about one-third of employers will see their plans hit by the Cadillac tax in 2018. By 2022, the proportion will rise to around 60%, found the same study. This assumes, however, that the tax survives. Proposals to kill the provision, including one introduced earlier this year, are being discussed in Washington.

The unpopularity of the Cadillac tax spans the political spectrum. For example, a lobbyist for the National Education Association, a strong supporter of the ACA on a broader basis, recently complained that the excise tax provision “can randomly and unfairly cause hardship to American workers and their families” and, therefore, should “be repealed.” Employers, meanwhile, need to operate on the assumption that the Cadillac tax will remain on the books in 2018.

Who gets hit?

As a reminder, the cutoff point for the value of benefits subject to the tax is $10,200 for individual coverage, and $27,500 for “other than self-only,” as the law describes it. Survey data for 2014 from the Kaiser Foundation put the value of the average annual premiums for employer-sponsored health insurance at $6,025 for single coverage and $16,834 for family coverage.

It’s not hard to see how plans with above-average values today, assuming typical annual cost increase rates, will be in trouble by 2018, or shortly thereafter. The Cadillac thresholds will be inflation-adjusted after 2018, but by no more than one point above the consumer price index — in other words, much less than the 5.6% annual increase in health benefits costs projected by the Congressional Budget Office.

What’s “applicable coverage”?

Meanwhile, there remain important technical issues surrounding how the Cadillac tax will be administered. In Notice 2015-16, the IRS laid out its tentative plans for resolving some of the pending questions.

The Notice focuses on fine-tuning the definition of “applicable coverage” — that is, the benefits counted toward the limits. These are defined in Section 4980I (d)(1)(A) of the ACA. According to the IRS, the law’s language:

… provides that applicable coverage means ‘with respect to any employee, coverage under any group health plan made available to the employee by an employer which is excludable from the employee’s gross income under Section 106, or would be so excludable if it were employer-provided coverage, within the meaning of such Section 106.’

The IRS guidance states that the value of employer contributions to Health Reimbursement Accounts (HRAs) is part of the equation. Although subject to further deliberation, executive health/fitness programs will probably be included as well.

Employer contributions to Health Savings Accounts (HSAs) and Archer Medical Savings Accounts are also expected to be factored into the valuation of coverage. Employees’ own contributions to HSAs won’t be included. Nonetheless, the inclusion of employer HSA contributions in the calculation of the value of health benefits means that high-deductible plans with HSA features aren’t a solution for avoiding exposure to the Cadillac tax.

Anything else?

The Notice touched on several other health-oriented benefits that might or might not be included in the calculation. One is on-site medical clinics. The IRS indicates their inclusion depends on what services such clinics offer. If the service menu is limited to basic first aid and “de minimis” health care, clinical benefits won’t be included.

In addition, when the rules are finalized, the IRS anticipates it will exclude “limited scope dental and vision benefits.” These are defined under Internal Revenue Code Section 4980i as:

… any coverage under a separate policy, certificate, or contract of insurance which provides benefits substantially all of which are for treatment of the mouth (including any organ or structure within the mouth) or for treatment of the eye.

Also likely to be excluded: stand-alone employee assistance programs.

Notice 2015-16 indicates that self-insured employers will have two methods of establishing the value of their health benefits:

• The actuarial method, or
• The “past cost” method.

Using the latter requires an affirmative decision; otherwise, the assumed method is the former. These are the same choices employers have with respect to pricing health benefits for COBRA purposes.

Of course, every potential technical question about the Cadillac tax isn’t covered in Notice 2015-16. The IRS states that it intends to “issue another Notice inviting comments on certain additional issues not addressed in this Notice.” The agency is also asking for public input before regulations are finalized, saying it will use public input on the issues discussed “to inform proposed regulations that will be issued in the future for further public Notice and comment.”

Are you ready?

Barring significant legislative action, the Cadillac tax will likely add a significant challenge to many employers’ efforts to control health benefit costs. Future regulatory clarifications from the IRS will likely be instructive but, absent new legislation, they probably won’t alter the impending landscape much. Work with your tax and benefits advisors to ensure you’re ready for the changes.

© 2015