The 2/3/2015 online blog from Employee Benefit Advisor summarizes some key concerns with respect to the Cadillac tax, included in the 2010 legislation that created Obamacare. Even though the tax doesn’t start until 2018, there are some planning issues that may affect your current decisions. Not only will this tax impact employee benefits, but may well impact retiree medical pans as well. Deductibility of the tax is also an issue.
Starting in 2018, the ACA will impose a 40% excise tax on high-cost group health care plans. The so-called “Cadillac tax” remains a top concern for employers … with many in the benefits industry calling for more guidance on several unanswered questions. Here are the top 5 open issues related to the Cadillac Tax, according to Richard Stover and Leslye Laderman, both principals in the Knowledge Resource Center of Buck Consultants.
1. What is employer-sponsored coverage?
The Cadillac tax applies to the cost of “applicable employer-sponsored coverage” that exceeds certain thresholds. But applicable employer-sponsored coverage includes not only group health plans providing benefits to active employees, but also retiree medical plans and other arrangements providing health benefits to employees. Additional guidance is required to clarify how certain benefits are treated for purposes of the Cadillac tax, say Laderman and Stover.
2. How is the aggregate cost determined?
The Cadillac tax will be imposed on the amount by which the “aggregate cost” of employer-sponsored coverage exceeds the applicable dollar limits. According to the ACA, the aggregate cost will be determined under rules similar to COBRA rates. But limited guidance exists on how COBRA rates are determined for self-insured plans, and Laderman and Stover predict future COBRA rate guidance may be forthcoming. As an alternative, they say, safe harbor assumptions or underwriting guidelines may be provided.
3. How will the age and gender adjustment work?
The Cadillac tax is paid on the aggregate cost of coverage in excess of the 2018 statutory thresholds of $10,200 for self-only coverage and $27,500 for other than self only coverage. But these thresholds are subject to a number of adjustments, including higher thresholds for retirees between 55 and 64 and plans where the majority of employees are in high-risk occupations. Adjustments will also be allowed for employers with age and gender characteristics that vary from the national workforce, but Laderman and Stover say questions still remain as to how those adjustments will be determined.
4. Who is a coverage provider?
The employer is required to determine the amount of the Cadillac tax on a monthly basis and then allocate that tax among coverage providers. This monthly calculation and allocation will be an onerous process, particularly depending on how “coverage provider” is defined, say Laderman and Stover. The ACA specifies that the coverage provider for insured health coverage is the insurer and that the employer is the coverage provider for HSA contributions. For all other coverages, however, the coverage provider is “the person who administers the plan benefits,” a vague definition open to interpretation.
5. When is 40% really 60%?
The Cadillac tax is a nondeductible excise tax, which increases the cost impact on for-profit employers. And depending upon who the “coverage provider” is that pays the tax, employers may be paying out closer to 60% to cover the excise tax, say Laderman and Stover. For insured plans, insurers likely will build the excise tax into the premium rates they charge employers. Because the premium amount is taxed for the insurer as income, they’ll likely build in 60% to ensure the 40% is covered after taxes. The tax treatment could also prove costly for non-profits and governments. How the tax treatment will play out remains to be seen.
R Allan Jensen