Although in 2015 many large employers are grappling with the ACA's so-called "Play or Pay Penalties" for the first time, a new, more far-reaching ACA penalty lurks just on the horizon. This new penalty, often referred to as the "Cadillac Tax," potentially impacts all employers offering health benefits to employees beginning in 2018, irrespective of the size of the employer. This article will provide an overview of the Cadillac Tax and suggest steps employers can take now to help avoid the tax in 2018.
The Cadillac Tax, located in section 4980I of the Internal Revenue Code, provides that beginning January 1, 2018, an excise tax will be imposed on the "coverage provider" if an employee receives any "excess benefit" with respect to employer-sponsored health coverage. The excise tax is equal to 40% of the excess benefit. The excess benefit is calculated as the amount by which the total cost (employer's and employee's share) of health coverage (health insurance and any health FSA contributions) selected by the employee exceeds an IRS prescribed threshold amount (for 2018, $10,200 for individual coverage and $27,500 for other coverage, subject to indexing discussed below). For fully-insured health plans (health coverage provided under a health insurance policy), the tax is assessed on the health insurance company issuing the insurance policy (e.g. Anthem, Cigna, etc.); however, any tax will likely be passed on from the health insurance company to the employer sponsoring the health plan. For self-insured health plans, the tax is assessed directly on the employer sponsoring the plan.
For example, if in 2018 an employer provides single subscriber coverage to an employee under a health insurance policy with a total premium cost of $11,200, the excise tax on the policy would be $400 (40% of the $1,000 excess benefit), assuming no HCAP adjustment (discussed below). Although the $400 excise tax would be assessed on the health insurance company (e.g. Anthem, Cigna, etc.), it is likely that the insurance company would pass the tax along to the employer.
Other relevant details regarding the Cadillac Tax are as follows:
1) May Apply to Small or Large Employers
The Cadillac Tax may apply to any employer-sponsored health plan. Unlike the "Play or Pay" penalties, there is no exemption from the Cadillac Tax for small employers.
2) Applies if the Coverage Selected Exceeds the Applicable Threshold
Any excise tax is triggered by the health coverage selected by the employee and not by the health coverage offered to the employee. For example, if an employer provides two coverage options, High Deductible Coverage (which is below the applicable threshold) and Standard Coverage (which is in excess of the threshold) and if an employee selects High Deductible Coverage, there is no Cadillac Tax triggered with respect to the employee covered under the High Deductible Coverage. In this example, a Cadillac Tax could only be triggered by employees selecting Standard Coverage.
3) HCAP Adjustment for 2018
The Cadillac Tax includes a health cost adjustment percentage (HCAP) whereby either of the standard thresholds ($10,200 or $27,500) are subject to a possible upward adjustment for 2018 if the cost of either single or non-single standard coverage under the federal employees' health plan increases by more than 55% from 2010-2018. If the cost of such coverage increases during this time by more than 55%, the Cadillac Tax standard threshold limits will be increased by any excess. For example, if the cost of single coverage under the federal employees' standard health plan increases by 59% during this time, the Cadillac Tax threshold for 2018 for single coverage will increase by 4% from $10,200 to $10,608. For years after 2018, the standard threshold amounts are adjusted for changes to the Consumer Price Index.
4) Calculating the Threshold Amounts - Include HSA, FSA Contributions
When determining whether your company's health benefits may trigger a Cadillac Tax, certain health benefits, in addition to health insurance, must be included in the calculation, while other benefits are excluded. The following other types of benefits must be included or excluded in the calculation, as indicated:
Included in Cadillac Tax Calculation:
Flexible Spending Account contributions – (Employee and Employer contributions).
Health Savings Account Employer contributions.
Health Reimbursement Account Employer contributions.
Excluded from Cadillac Tax Calculation:
Stand-alone dental or vision plans.
Accident or cisability insurance.
Workers' compensation insurance.
Long-term care insurance.
Supplemental indemnity coverage (e.g. AFLAC) paid with after-tax dollars.
For example, consider an employer that sponsors a fully-insured health plan and allows employees to contribute up to $2,500 to a health FSA. If in 2018, single coverage under the health plan costs $10,000 and employee X contributes $2,000 of his salary to the health FSA, a Cadillac Tax of $720 would be imposed on the $1,800 excess benefit ($10,000 + $2,000 - $10,200 threshold, assuming no HCAP adjustment). Under the law, the pro-rata portion of the tax that relates to the FSA coverage is assessed directly on the employer and the portion of the tax related to the cost of the health insurance coverage is assessed on the insurance company (and likely passed on to the employer). In this example, the employer would be assessed a $120 tax and the health insurance company would be assessed the $600 remaining excise tax (and likely pass it on to the employer as increased health insurance premiums).
5) Employer Responsible for Calculating Any Penalty
Under the law, the employer is responsible for calculating the Cadillac Tax and for notifying the IRS and each coverage provider (e.g. the health insurance issuer) of the amount of tax due. If the employer mistakenly underreports the tax due, the coverage provider (e.g the health insurance company for fully-insured health plans; the employer for self-insured plans and FSA coverage/HSA contributions) is required to pay any additional tax due but the employer may be assessed a penalty.
In order to begin to prepare for the Cadillac Tax provision in 2018, employers should:
1) Examine the health benefits package currently offered to employees and the current cost of health insurance premiums, and determine whether it is likely that one or more of the current health insurance options available to employees will exceed the applicable Cadillac Tax thresholds in 2018. If so, the employer should consider whether there are less costly health insurance options available elsewhere.
2) Examine current employment contracts to determine whether those agreements call for the employer to provide the employee health benefits under a particular health insurance policy. On a go-forward basis, employers should use health benefits language that is flexible and allows employers to change health insurance policies offered for 2018 and beyond if the current policy would generate a Cadillac Tax. In addition, where employers provide employees with multiple health benefits packages, employers should include language in contracts to state that if an employee selects a health coverage option that generates a Cadillac Tax, the employee is responsible for paying 100% of the cost of the Cadillac Tax.
3) Examine their supplemental health benefits offered, such as health FSAs, and determine whether those supplemental benefits are likely to generate a Cadillac Tax. If so, the employer may need to make adjustments to these benefits prior to January 1, 2018. For example, most employers' health FSA's are drafted to allow employees to contribute the maximum permitted salary deferral (currently $2,550). Employers sponsoring health FSA's may need to lower the maximum deferral permitted under their particular health FSA prior to 2018 so that the total cost of the employer's health insurance policy offered to employees plus the maximum health FSA deferral cannot exceed the applicable Cadillac Tax thresholds.