As the 2016 presidential election nears, a topic candidates have been and will be discussing is the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148. As the legislation continues to be part of the national conversation, one particular aspect that may be top of mind for tax professionals is the Cadillac tax—the 40% excise tax that applies to certain high-cost employer-sponsored health insurance plans. Employer-sponsored health insurance plans cover roughly 156 million people.
The purpose of the tax is to reduce excess health care spending by employees and employers while helping to finance the expansion of health coverage under PPACA. Additionally, the government wants to encourage businesses to decrease health care budgets and increase employee wages. Because of the complex nature of the tax, many business decision-makers will have questions about whether the tax applies to them and whether it can be avoided altogether.
In December 2015, Congress passed a two-year delay on the Cadillac tax. Originally scheduled to go into effect in 2018, this delay gives employers until 2020 to adjust their health care plans to avoid the tax. This, in turn, gives tax advisers more time to understand the details of this tax and confidently counsel their clients on how to prepare for its implementation. Here are some questions clients may ask their tax advisers about the Cadillac tax and ideas on how to address them.
Will the Cadillac tax apply to me?
The Cadillac tax is set to affect a wide variety of workers. According to the International Foundation of Employee Benefit Plans, 84% of employers surveyed before the provision's effective date was delayed said the Cadillac tax would apply to their policies by 2020 if they made no changes to current coverage (International Foundation of Employee Benefit Plans, 2015 Employer-Sponsored Health Care: ACA's Impact). In short, the tax applies to all employer-sponsored health care plans that the government has deemed "high cost" and subject to the tax—which are plans with premium thresholds higher than $10,200 for individual coverage per year and $27,500 for family coverage per year. The individual and family coverage premium thresholds may rise before the 2020 effective date because of inflation adjustments.
Additionally, qualified retirees and employees in occupations considered "high risk" have higher individual and family coverage thresholds, which will be $11,850 and $30,950, respectively. High-risk employment can include law enforcement, fire protection, medical emergency, construction, mine workers, and similar professions. These employees can expect to see a rise in taxable premium thresholds. Because of their dangerous work environments, these employees need comprehensive insurance plans to feel comfortable at work. However, if an employee falls into both categories of a qualified retiree and a high-risk profession, the employee cannot double the threshold increase (Sec. 4980I(f)).
A common myth about the tax is that both employees and employers are required to pay it. For fully insured plans, the insurer is responsible for paying the tax, while employers will pay the tax on self-insured plans. There are no limitations in the law to prevent plan sponsors from passing on the financial responsibility to employees in the event that the tax applies.
How will the value of coverage be determined?
How coverage value is calculated varies between fully insured and self-insured health care plans. Overall, the cost of coverage is determined by adding the total contributions paid by both the employer and the employees. The Cadillac tax does not apply to cost-sharing amounts-–i.e., deductibles, coinsurance, and copayments—but the following insurance products are included in the calculation:
- Health coverage, including for medical, behavioral, and prescription drugs;
- Health flexible spending accounts (FSAs);
- Health savings accounts (HSAs);
- Archer medical savings accounts (MSAs);
- Governmental plans, except military coverage;
- On-site medical clinics, except clinics that provide minimal medical care;
- Retiree coverage;
- Multiemployer plans; and
- Specified disease or illness and hospital indemnity or other fixed indemnity insurance, when any portion of the premium is paid pretax or by the employer.
Is there a strategy to avoid the tax?
Even though the IRS has not provided complete guidance on the Cadillac tax, there are still quite a few ways to prepare for it. Primarily, employers should think about their health care budgets and whether their plans could be deemed high-cost in 2020.
Direct methods of evaluating and possibly cutting costs include simply understanding what is taxable under the Cadillac tax and what is not. Since ancillary dental and vision coverage is exempt, employers can separate these policies from taxable plans to reduce the total overall cost of coverage. Alternatively, employers can implement high-deductible health care plans and guide employees to that coverage. Strengthening employee wellness options to improve overall health is another option.
A less obvious way to decrease overall health care costs is for employers to consider offering comprehensive voluntary insurance benefits options such as supplemental insurance or other income replacement policies to employees.
What voluntary benefits will not be taxed?
Voluntary insurance products are excepted benefits. This means that PPACA rules, which include the Cadillac tax, generally do not apply to them. These voluntary insurance coverage products are defined as excepted benefits:
- Accident-only insurance;
- Life insurance;
- Short-term disability insurance;
- Limited-scope dental insurance;
- Limited-scope vision insurance;
- Specified disease insurance; and
- Hospital indemnity insurance.
As mentioned earlier, to avoid application of the Cadillac tax, specified disease and hospital indemnity coverage must be paid for with after-tax dollars. Unlike the other excepted benefits listed above, if coverage for specified disease or hospital indemnity insurance is paid for with pretax dollars, it will be included in the Cadillac tax calculation.
Since a variety of voluntary products will not be factored into the Cadillac tax thresholds, employers can pick and choose which products to offer employees, cut back on other health care costs to avoid the tax, and still providing coverage tailored to their workforce's needs. And giving employees a variety of options means that employees at all life stages can tailor their health care coverage to their own personal needs—without worrying about the Cadillac tax.
Bradley L. Knox is senior vice president of Federal Relations at Aflac Corp. He has been with the company since 2006 and has served as the company's lead counsel and key strategist to corporate leadership on matters related to federal legislation and regulations impacting the company. Prior to joining Aflac in May 2006, Knox was chief counsel to the Committee on Small Business for the U.S. House of Representatives and served as an Air Force judge advocate general.
This material is intended to provide general information about an evolving topic and does not constitute legal, tax, or accounting advice regarding any specific situation. Aflac cannot anticipate all the facts that a particular employer or individual will have to consider in their benefits decision-making process. We strongly encourage readers to discuss their health care reform situations with their advisers to determine the actions they need to take or to visit healthcare.gov (which may also be contacted at 1-800-318-2596) for additional information.
This article is for informational purposes only and is not intended to be a solicitation.