For several years now, employers have spent a great deal of time focusing on the Affordable Care Act’s (ACA) play-or-pay mandate. Numerous articles have been written and numerous educational seminars have been given discussing issues such as who is subject to the play-or-pay mandate, what is the definition of a full-time employee, how are hours counted, etc. Finally, the benefits community is starting to focus more on the next major ACA issue: the so-called “Cadillac tax,” a 40% nondeductible excise tax on high-cost health coverage that applies beginning in 2018. The Cadillac tax taxes the amount by which the monthly cost of an employee’s employer-sponsored health coverage exceeds a specified limit. The tax is imposed on employers, insurers and/or entities administering plan benefits. The tax is designed to raise revenue to offset the cost of other provisions of health care reform and to reduce the demand for high-cost coverage by making it more expensive.
On February 23, 2015, the Department of the Treasury and the Internal Revenue Service released Notice 2015-16, which is the first piece of preliminary guidance regarding the tax. The notice describes the approaches that Treasury is considering with regard to certain components of the implementation of the tax. While we have all been referring to the tax as the Cadillac tax, it appears from the notice that the tax is likely to sweep in a broader range of health plans. Plans that are Cadillac plans are subject to the tax. But other plans – plans that no one would think of as Cadillac plans – also appear likely to be subject to the tax. So, perhaps rather than referring to it as the Cadillac tax, we should instead be referring to it as the “Toyota tax.”
The tax applies to “applicable employer-sponsored coverage.” This includes insured and self-funded plans. Many of us have incorrectly thought of the tax as only applying to medical coverage. Without question, however, other welfare benefits must be taken into account when determining the amount of the tax, including health reimbursement arrangements, flexible spending arrangements, and most on-site medical clinics. What this means is that when an employer is evaluating whether it will have to pay the tax, the employer must consider the value of its health plan as well as the value of certain other welfare benefits, such as HRAs and FSAs.
The tax is triggered if there is an “excess benefit” at any time during the calendar year (determined on a monthly basis). To determine if there is an excess benefit, an employer must (a) determine the aggregate monthly value of the coverage it is providing (by adding the costs of each type of coverage); and then (b) determine whether that amount exceeds the applicable limit for any month during the year. For 2018, the limit is $10,200 for self-only coverage and $27,500 for coverage other than self only (i.e., $850 per month for self-only coverage and $2,291 per month for other coverage).
If you are an employer, you might ask, “How do we determine the value of the coverage that we are providing?” The answer is: That’s a great question – and precisely what the regulators are looking to clarify for us in the final regulations that have not been issued. It appears that the final regulations are likely to require an employer to look at the coverage in which the employee is enrolled (rather than the cheapest available), and then use rules similar to those that apply for determining the “applicable premium” for COBRA to determine the cost of that coverage.
The sponsoring employer is responsible for determining the amount of the tax. Once the tax is calculated, the employer must allocate that tax among the entities liable for paying the tax, which might include an insurer (for any fully-insured benefits), the employer (for any HSA or medical savings account), or the plan administrator for any other benefits (which is likely the employer).
If you are an employer and your welfare benefit consultant has not yet talked to you about the Cadillac/Toyota tax, now is the time to ask them about it. Ask questions like:
- Am I subject to the tax?
- Is it likely that I will have to pay the tax?
- What options do I have for reducing my exposure to the tax? (e.g., wellness strategies)
Now is the time to ask these questions. If you wait until 2017 to think about this, it will likely be too late.