‘Greatness Never Goes Out of Style’ – Or Does It?

Jul 20 2015 | Beth Allen, AVP, Benefits Compliance, Counsel

Believe it or not, the statement in quotation marks above was Cadillac’s slogan in 1965. That was 45 years before the PPACA passed — and included an excise tax for high-cost coverage that would come to be referred to as the Cadillac tax. Although the tax isn’t slated to be imposed until 2018, we get a lot of questions about it. So here’s a look at where we are now and how far we have to go before the tax is actually imposed on anyone.

The Cadillac Tax at Present
Basically, the Cadillac tax is a 40 percent tax on the amount by which the monthly cost of an employee’s employer-sponsored health coverage exceeds a certain threshold. With that basic premise come many other questions:

What Is the Threshold? The threshold amount for 2018 is $10,200 for self-only coverage and $27,500 for other-than-self-only coverage (e.g., self + spouse, self + children, family).

What Goes into That Cost Calculation? At this time, the value of the plan is expected to include the cost of medical coverage in addition to coverage provided through reimbursement arrangements. So, in essence, cost equals the medical premium amount plus FSA, HSA and HRA coverage. Also keep in mind that coverage for long-term care and for HIPAA-excepted benefits isn’t included.

Who Pays the Tax? The tax is imposed on “coverage providers.” For insured plans, the insurer is the coverage provider, and the insurer is responsible for paying the tax. Keep in mind that the insurer will likely pass that cost onto the employer/group health plan. For self-insured plans and HSAs, the employer is the coverage provider and is responsible for the tax. For all other types of coverage, the coverage provider is the “person that administers the plan.”

Are There Special Considerations? Yes. The annual limits are increased by $1,650 and $3,450, respectively, for employees who are in high-risk professions – such as law enforcement officers, paramedics, construction workers, miners and longshoremen – and for 55-year-old individuals who are not Medicare eligible and are receiving employer-sponsored retiree health coverage. Additionally, for multi-employer plans, the $27,500 family threshold will be used for all insureds regardless of the tier of coverage.

The Cadillac Tax to Come
Although the tax isn’t to be imposed for another two and a half years, some employers are already considering what changes may need to be made to avoid the tax — hence the question of whether or not “greatness will go out of style” when it comes to Cadillac-level benefit plans. However, we caution employers not to jump ahead of themselves by making changes based on the Cadillac tax. (Admittedly, this is probably the only time that compliance will ever tell employers to hold off on considering compliance, but follow me here.)

The first reason we say to hold off on making changes based on the Cadillac tax is that the IRS has issued very little guidance. There hasn’t been a final regulation or even a proposed regulation on the Cadillac tax. All we’ve seen in the way of guidance is IRS Notice 2015-16, which was really just a request for comments in anticipation of a proposed rule. Although the IRS revealed some “possible” future regulations, they really only addressed two aspects of the tax: possibly allowing employers to calculate cost based on the number of participants in the family instead of based on two tiers (self-only and anything-other-than-self-only) and possibly changing the threshold values ($10,200 and $27,500) to base figures with index factors added.

However, the notice doesn’t settle anything. The IRS solicited comments that were due in May, after which they’ll publish a proposed regulation. That proposed regulation will then be open to a comment period and hearing before a final regulation can be passed. It’s clear that we’re still in the early stages of the regulations on the Cadillac tax.

Second, a lot could happen politically before 2018. Although we don’t generally give compliance advice based on the political climate, it’s important to note that we could have a different composition of Congress and will definitely have a different president between now and 2018. Considering the fact that there’s still a lot of debate surrounding this tax, the 2018 version of the Cadillac tax – if it even still exists – may be virtually unrecognizable from the provision we have today. As such, it may not be the best idea for employers to completely change their benefits before we know more.

What to Do Now
Obviously, a discussion about the basics of the Cadillac tax will be important for clients who sponsor self-insured plans, as helping clients understand their possible exposure under the upcoming Cadillac tax won’t hurt. To assist, we have a Cadillac Tax Modeling Tool that can help show the amount of excise tax likely to be imposed in 2018.

However, other than that, we’re waiting to receive additional guidance, which we’ll definitely pass on as we get closer to the effective date of the provision. Once that guidance is received, we’ll be able to better assist in providing advice to employers on appropriate plan design changes.