IRS published a notice late last year to the effect it was beginning to work on proposed regulations for the Cadillac Tax. That notice[1] – 24 pages in length – outlined issues that would be in need of address and asked for public comment. After reading this document, we can only hope that sound minds in Congress will repeal this PPACA provision. If it takes IRS 24 pages to identify all the questions it has internally, one can only imagine the extent of final regulations and the degree of complexity.
Background
PPACA created IRS Code §4980I – Excise Tax on High-Cost Employer Sponsored Health Coverage; affectionately pegged the “Cadillac Tax”. The mandate is to levy a 40% excise tax on employer-provided health plans premiums above a baseline. §4980I’s intent was to target rich executive benefit plans.
Current Status
The authors of the legislation thought it appropriate go after gold-plated executive health plans. Indeed, these ACA engineers repeatedly referenced a specific Goldman Sachs executive health plan as prototypical of their target. When PPACA was signed, an enormous roar of protest ensued – but not from Wall Street as one might expect. Rather, the most vocal protestors were the labor unions! In response, the Administration quickly delayed the effective date of the Cadillac Tax until 2018. Then, in the budget bill passed by Congress and signed by the President last December, it was put off another two years; until 2020.
The reality is that this draconian tax will impact middle-income Americans as well; for it is not just the premium that is tested as excessive, there is a laundry list of items that get swept into the “aggregate cost of applicable coverages.” Some plans in some zip codes are already within the Cadillac Tax range. It would appear, from all we read, this is one thing Congress might agree on across party lines; that the Cadillac Tax needs to go. Repeal bills have surfaced in both houses. However, it is not that simple. $87 billion of revenue is anticipated in its first seven years[2]; revenue essential to Obamacare financing. It is in fact one of its financial linchpins. That revenue loss will have to be replaced before repeal can be considered.
Hopefully the Cadillac tax will never see the light of day; and even though unpopular on both sides of the aisle, it would be ill-advised to simply assume this exaction will not survive. Employers should begin to look ahead and plan accordingly.
How is the Tax Calculated?
The Cadillac tax is 40% of the excess of the “aggregated cost of applicable coverages” over a baseline.
What is the Baseline?
The baseline identified in PPACA with passage in 2010 was $10,200 for single coverage and $27,500 for anything other than single. This baseline amount will be indexed for health insurance premium inflation until its effective date. IRS has talked about indexing to the federal government PPO plan or a national premium index. Once effective, the baseline will then be indexed to inflation. Further, the baseline can be increased based on age, gender, and higher-risk occupations. In this regard the plan must fall “predominantly” in a category. For example, a plan for which participants are predominantly pre-age 65 retirees; or one covering law enforcement officers predominantly; or one with a predominantly female population.
What is Included in the Aggregated Cost of Applicable Coverages?[3]
Basically, anything that is not included in the employee’s taxable income….
- Insured and self-funded health premiums; employer and employee contributions; measured as COBRA premium.
- Wellness programs
- FSA’s – flexible spending accounts
- HSA’s – employer contributions and employee pre-tax contributions
- HRA’s – health reimbursement accounts
- On-site medical clinics providing di minimis services
- Executive physicals
- Hospital indemnity or fixed indemnity done pre-tax
- Stand-alone dental and vision if done pre-tax
- Retiree coverage
- Specified disease coverage, pre-tax premiums
- Etc….
And, what is Not Included?
- Accident and disability income
- Workers comp
- S. issued expatriate coverage
- Long-term care insurance
- Hospital indemnity and fixed indemnity done after-tax
- Dental and vision paid for after-tax
- EAP’s
- Employee after-tax contributions to HSA’s
- Specified disease after-tax
- Automobile medical payments
- Liability insurance
- Etc….
Example Tax Calculation
For this example, we have an employer with 100 employees; half of whom elect some level of family coverage. We’ll assume the baseline has been adjusted, and obviously this employer is in a geographic area of relatively high health care costs and/or provides a nice package of benefits to its employees; note, offered to employees and not just to officers. Bear in mind that cost is not merely the premium but can sweep in a plethora of other plans and coverages.
| 50 EE’s w/ | 50 EE’s w/ | ||
| Single | “Other-Than” | ||
| Coverage | Single | ||
| Aggregate cost of applicable coverages | $12,000 | $30,000 | |
| Less: Baseline dollar limit w/inflation | (11,000) | (28,500) | |
| Taxable excess | $1,000 | $1,500 | |
| Tax rate | x40% | x40% | |
| Tax per employee | $400 | $600 | |
| Times: Number of EE units | X50 | X50 | |
| Total tax payable | $20,000 | $30,000 | $50,000 |
Who Pays the Cadillac Tax?
- For insured plans, the employer must calculate the tax and notify the insurer, who will remit it to IRS.
- For self-funded plans, it is “the person who administers the plan benefits”. We assume this would be the TPA, but this is one of the areas IRS says in their notice needs definition.
- And for HSA’s and FSA’s, the employer calculates and pays the tax.
In the end, who really pays? We know the answer to this question; so do the unions; so does Congress’ own Congressional Research Service; so do many Republicans and Democrats in Congress. Of course, it is the employee/participants who ultimately pay; either in the form of increased premium demands or reduced benefits or a combination thereof. This is bad law, plain and simple. Plus, one would think it unneeded, because the non-discrimination mandate itself will block executive carve-out plans. Most understand this, and hopefully Congress will find a means to deal with the revenue loss so it can be nipped in the bud.
[1] IRS Notice 2015-16
[2] Source: Congressional Research Service
[3] The Notice is silent regarding telemedicine plans. It references IRS §9831 and underlying Reg §54.9831-1(c) that define excepted benefits, but neither address telemedicine as such. Treasury has telemedicine on its list of places to visit; particularly whether it makes one ineligible for HSA participation; due to its exponentially-increasing popularity. One could assume if paid by the employer, it is included in aggregate cost; if paid by the EE after-tax, it would be excluded from aggregate cost.
