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Start Planning Now for the ACA’s Cadillac Tax

Effective in 2018, high-cost health plans will be subject to the ACA’s new “Cadillac tax.” For fully insured plans, the carrier will be responsible for paying this excise (that is, nondeductible) tax. For self-funded plans, the plan sponsor (employer) is responsible.

The ACA added new Section 4980I to the Tax Code, a 40 percent excise tax on any “excess” health benefit provided by an employer to an employee (or former employee or retiree). While indexed beginning in 2019, Section 4980I imposes this excise tax on amounts exceeding $10,200 annually for employee-only coverage, and $27,500 annually for other-than-employee-only coverage. Note that, much like the way high-deductible health plans operate in an HSA environment, there are only two levels for purposes of the 4980I Cadillac tax. While these amounts are annual, the actual calculation is performed on a monthly basis. And while others, such as health insurers or TPAs, may pay the tax, it is up to the employer to properly calculate and report the taxable amounts under Section 4980I to those payers. Of course, the cost of the actual tax is likely to be passed back to the employer by an outside entity.

The IRS has issued Notice 2015-16 which outline the agency’s thinking of what goes into the calculation of a health benefit offered by an employer. While most of the included items were not a surprise, some of the costs going into the health benefit calculation raised a few eyebrows. For example, any pre-tax salary reduction amounts to a health care FSA or HSA (by either the employee or employer) and employer contributions to an HRA are includible in the health benefit cost equation. Included too are the costs of onsite medical clinics, retiree coverage, executive medical exam programs, and pre-tax specific disease (e.g. cancer insurance) and hospital or other fixed indemnity programs.

While of course anything can happen between now and 2018, including the repeal of the Cadillac tax, the savvy employer will start planning now to see if their current health benefit design and cost structure might trigger the upcoming tax, and if so, take actions to minimize or avoid it. Stay tuned for more developments, as we expect further guidance from the IRS in the next few months and years on this new tax.

Posted on April 22, 2015 by GARY B. KUSHNER, SPHR, CBP, PRESIDENT AND CEO

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