On December 18, 2015, the President signed into law an omnibus spending bill that includes a provision that delays for two years the implementation of the "Cadillac Tax" on high-cost employer health plans. Initially set to take effect in 2018 under the Affordable Care Act ("ACA"), employers who provide high-cost group health coverage may now be subject to the excise tax beginning in 2020. The high-cost plan tax, commonly referred to as the "Cadillac Tax," is a 40% excise tax on amounts provided above an annual dollar threshold. This article provides a summary of the general workings of the ACA's high-cost health coverage provisions. The ACA is a complicated law with fact-specific rules. You should consult with your advisor on the rules applicable to your situation.
Who is Subject to the Tax?
The ACA imposes the excise tax upon the coverage provider who provides the applicable employer-sponsored coverage. This means for each of the following types of coverage:
- Health Insurance Coverage. The health insurance issuer is subject to the tax for coverage under a group health plan which provides health insurance coverage.
- HSA and MSA Contributions. The employer is subject to the tax if the employer makes contributions to the Health Savings Account ("HSA") or Medical Savings Account ("MSA").
- Other Coverage. The person who administers the benefit plans is subject to the tax in the case of other applicable health coverage.
Of course, many coverage providers have or will revise their contracts and relationships with employers to pass along some or all of the excise tax to the employer. Employees will also be affected to the extent their health benefits are modified (e.g., reduced) as a result of adjustments made to avoid or reduce the tax.
Who Calculates the Tax?
- The employer is responsible for calculating for each taxable period both the amount of the excess benefit subject to the tax (described below) and each provider's applicable share of such excess benefit. The employer must then notify each coverage provider of the amount determined for it.
- In the case of a multiemployer plan, the plan sponsor shall make the calculations and provide the notice.
How is the Tax Calculated?
The high-cost plan tax is 40% of the difference between the total cost of health benefits (to both the employer and the employee) and the applicable cost threshold. The tax is determined based on an evaluation of each employee's coverage. Consequently, the tax could be triggered based on the coverage expense for some employees but not others (e.g., one employee might elect to make HSA contributions at a level that causes the aggregate benefit to exceed the threshold while another does not).
The thresholds are based on an amount that was set for 2018 that is then adjusted annually based on increases in the consumer price index plus 1%. The amounts for 2018 were:
- $10,200 for self-only coverage (individual coverage)
- $27,500 for coverage other than self-only coverage (e.g., family coverage)
- There are higher thresholds for plans that cover employees engaged in certain high-risk professions.
Notably, because annual increases in healthcare costs have historically exceeded inflation by more than 1% (and are expected to do so for the foreseeable future), the thresholds may not keep up with the cost of healthcare. As a result, more and more employers will be subject to the Cadillac Tax unless they make adjustments to their health coverage.
Example. In 2020, an employee elects to participate in an employer sponsored high deductible group health plan. The employee elects individual coverage that has a premium cost of $9,000 that is paid for by the employer and/or the employee. In addition, the employer and/or the employee contribute a combined $3,350 to the employee's HSA for that year. If that is the only applicable coverage, then the aggregate cost of coverage for this individual is $12,350. Using the 2018 threshold amount of $10,200 for self-only coverage (without inflation adjustment, for convenience), $2,150 of this amount considered an "excess benefit" that is subject to the 40% excise tax. In this example, the tax would be $860. The employer would be responsible for calculating the excess benefit, notifying the insurer of its applicable share (based on the ratio of the cost of its coverage to the aggregate cost), and paying its share of the tax. Depending on their contract, the insurer might pass along its tax expense to the employer.
When Will The Cadillac Tax Take Effect?
Like many things that are unpopular, the Cadillac Tax was delayed. It was initially structured to be one of the last components of the ACA to be implemented (in 2018). Now its implementation has been deferred to 2020. The government is expected to issue regulations to elaborate how the Cadillac Tax will work. It is very possible that the federal government may again amend the ACA to reduce, modify or eliminate the tax. However, because the high-cost plan tax is expected to generate many tens of billions of dollars in revenue annually, the tax is expected to survive in some form. In addition, many proponents of the tax believe it will help curb health costs over time and is therefore a necessary component to the overall purpose of the ACA.
What Should Employers Do Now?
Employers who want to avoid the Cadillac Tax should (if they have not done so already) review their health plan arrangements and project the cost of the coverage (relative to projected thresholds) over time. If changes are needed to avoid the excise tax, employers may want to begin phasing in changes to their arrangements to avoid an abrupt fix just prior to 2020. Because collective bargaining agreements are often operative for multiple years, some employers and unions will negotiate agreements well before 2020 whose benefit arrangements could incur the excise tax beginning in 2020.
Steps that employers can take now to help avoid the Cadillac Tax include the following:
- Increase deductibles which should decrease premiums for employers and/or employees
- Eliminate less desired covered services to reduce the cost of coverage
- Search for less expensive provider networks
If you have any questions about the content of this alert please contact the Barclay Damon attorney with whom you normally work or any attorney in our Labor & Employment Practice Area.