preparing for the cadillac tax - xerox · 2015-04-17 · overview of the excise tax starting in...

The Tax Man is Coming… Preparing for the Cadillac Tax

April 15, 2015

Presenters

Rich Stover, FSA

Principal & Consulting Actuary

Knowledge Resource Center

Dave Ratcliffe

Principal

Health & Productivity

April 15, 2015 Proprietary 2

Agenda

• Overview

• IRS Notice 2015-16

• Applicable coverage

• Aggregate cost

• Annual limits

• Tax mechanics

• Strategic planning

• Key open issues

Note: There are no regulations yet on the excise tax. The analyses in this report are based on

our interpretation of the statute and the Technical Explanation. The rules for the excise tax may

change before the effective date. Therefore, we suggest using caution when making strategic

decisions in advance of the issuance of clarifying regulations.

The information contained in this presentation and any accompanying documents does not constitute legal advice; consult with your legal and

tax advisors before applying this information to your specific situation.


Do you intend to pay the tax?

Proprietary April 15, 2015 4

Overview of the Excise Tax

Starting in 2018, a 40% excise tax will apply to each employee’s excess

benefit, which is the aggregate cost of applicable employer-sponsored

coverage that exceeds the limit calculated on a monthly basis

The tax is allocated by the employer to insurers, TPAs,

PBM and other administrators for payment to the IRS.

Aggregate cost of applicable coverage

Minus: $10,200 or $27,500 annual limit

= Excess benefit

Multiplied by: 40%

= Excise tax attributable to that individual

For each employee,

former employee,

surviving spouse, or

other primary insured

individual

Insurers, TPAs, PBM and other administrators expected to

charge back cost to employer, perhaps with tax gross-up.


Example

While illustrated on an annual basis, the tax is calculated on a monthly basis

separately for each employee/retiree.


Example (cont.)

While illustrated on an annual basis, the tax is calculated on a monthly basis separately for

each employee/retiree.


Applicable Coverage

Generally, “applicable employer-sponsored coverage”…

Includes:

• Health coverage excludable from income,

including HRA contributions

• Health FSA employee and employer

contributions

• HSA contributions – employer

contributions and employee salary

reduction contributions

• Onsite clinics, if considered a group

health plan

• EAP, if considered a group health plan

• Wellness programs, if COBRA charged

• Executive physical programs and

supplemental medical programs if excluded

from income

Excludes:

• Dental and vision “under a separate

policy, certificate, or contract of

insurance” (Self-insured dental and

vision?)

• Employee after-tax contributions to HSAs

• Long-term care

• Accident and disability benefits

• Coverage for a specified disease or illness or

fixed indemnity coverage (e.g., critical illness

and hospital indemnity plans) if 100%

employee paid with after-tax dollars

• Auto insurance

• Liability and credit insurance

• Workers compensation


Impact of Health FSA

While illustrated on an annual basis, the tax is calculated on a monthly basis separately for each

employee/retiree.


Impact of Health FSA (cont.)


employee/retiree.


Impact of an HSA


employee/retiree.


Impact of an HSA (cont.)


employee/retiree.


Have you measured the impact of the tax?


Aggregate Cost

Aggregate cost “determined under rules similar to” COBRA rates

• Insured plans

‒ Premium

• Self-insured plans

‒ Actuarial basis method – more complex methodology

‒ Past cost method – easiest and generally lowest aggregate cost, but limited use

• Will future guidance require actuarial certifications and/or standard assumptions?

‒ Actuarially sound and self-supporting rates

‒ Will safe harbor assumptions be provided?

Includes employer and employee-paid portions

• Gross cost

• Includes employee pre-tax and after-tax contributions


Annual Limits

Initial limits: $10,200 individual / $27,500 family, adjusted by “health cost

adjustment percentage” and indexed to general inflation

• 2018: health cost adjustment percentage =

100% + (FEHBP BCBS 2018/FEHBP BCBS 2010 – 55%)

• 2019: 2018 limits indexed to CPI-U + 1%

• 2020+: indexed to CPI-U

Higher initial limits—$11,850 individual / $30,950 family—for:

• Retirees age 55+ but not Medicare-eligible ‒ Employer can elect to combine under and over age 65 retirees

• Employees in high-risk occupations* or who repair/install electrical or

telecommunication lines, if the majority covered by the plan

Additional adjustment to limits for plans with age and gender

characteristics that vary from national workforce

* Law enforcement, fire protection, EMTs/paramedics, long shore, construction, mining, agriculture, forestry, and fishing


Expected Leveraging of Excise Tax


Tax Mechanics

Will vendors pass along the cost? Since excise tax is not deductible for

vendors, will they also gross up for taxes to stay whole?

Grossing up increases the cost to employer by about 54%

* Excise tax/(1 – marginal tax rate)

• Payments may vary between not-for-profit and for-profit

administrators

18 April 15, 2015 Proprietary

What actions have you taken to address tax?


Anticipating the “Cadillac” Excise Tax Strategies

• Absorb the cost

• Improve plan efficiency

• Shift cost

• Eliminate ancillary health care benefits

• End health plan sponsorship


Absorb the Cost

• Not a long-term viable strategy unless combined with other strategies to mitigate

magnitude of annual excise tax increase

• Significant cost impact unless other total rewards components and/or wages

reduced

Current: health

approximately 1/3 of fringe1

Future: other total rewards

and/or wage reductions to

offset higher health cost

63% 24%

8%

6%

• Absorb the cost


• Shift cost



1U.S. Bureau of Labor Statistics, Employer Costs for Employee Compensation – December 2014


Manage Cost – Three Ways

• Medical and Rx

discounts

• Audits

• Contract review

• Performance

guarantees

• Direct contracting

• ACOs

• Collectives and

coalitions

• Program and service

review

Manage

unit costs

• Medical tourism

• Patient-centered

medical home/ACO

• Onsite clinics and

other services

• High performance

networks

• Tele-health

• Transparency tools

• Plan design –

enhanced

precertification;

value based design

• Program

engagement

Promote

health • Health promotion

• Biometric screening

• Incentives

• Accountability

strategies

• Disease

management

• Behavioral

economics

Manage

utilization


• Absorb the cost


• Shift cost



Trend Reduction from Wellness?

69% of U.S. employers who indicated

their wellness program had an

impact on trend, reported

reductions of 2% or more.

12% of U.S. employers who indicated

their wellness program had an

impact on trend, reported

reductions of 6% or more.

Reduction of 0-1 trend percentage

points per year


points per year


points per year

Reduction of more than 10 trend

percentage points per year

Proprietary

• Absorb the cost


• Shift cost



April 15, 2015 23

Improving Plan Efficiency – Lever to Avoid Cost & Defer Excise Tax

Cost Avoidance

2015-24: $31M

Cost Avoidance

2015-24: $72M

1ACA excise tax estimates

from American Health Policy

Institute 2014 “the Impact of

the Health Care Excise Tax

on U.S. Employers and

Employees”

21,000 active employee

headcount (40% single and

60% family) unchanged from

2014-2024

3Starting cost based on

2014 Kaiser Family

Foundation Employer

Health Benefits Survey

average single/family rates

adjusted by 5%

Tre

nd

ACA Excise Tax

• 38% of large employers impacted in 20181

• $120B in new taxes 2018-20241

2,3

Per 1,000 employees:

• 2% avoids $31M

• 6% avoids $72M


• Absorb the cost


• Shift cost



2% or > trend reduction

• Average incentive 30%

higher

• Higher incentives in 9 of

11 categories

Incentives and Trend Reduction

2% or > trend reduction

• Average incentive 30%

higher

• Higher incentives in 9

of 11 categories

Premium differential is the

most prevalent way to pay

incentives

• 52% use reduction

• 33% use surcharge


• Absorb the cost


• Shift cost



• Reduce medical benefits

• Migrate to lower plan values

• Implement HDHP/HSA plan

• Eliminate employer HSA

contributions; eliminate or cap

pre-tax employee contributions

if subject to the tax

• Voluntary Benefits

• Integrate with core

• Employer subsidy

Market-Based and Excise Tax Avoidance Cost Shifting

Shift Cost to Employees

Max.

Cost

Shift =

Bronze

Plan

(60%)


• Absorb the cost


• Shift cost



Employee or

Employer

Paid

L o w e r e m p l o y e r h e a l t h c a r e c o s t

R e d u c e e m p l o y e e o u t - o f - p o c k e t i m p a c t

VB Supp.

Health Plan

“Buffers”

Create more aggressive plan changes (shifting cost)

Increased employee deductible and coinsurance cost

Accident

Plan

Hospital

Indemnity

Critical

Illness

Plan

Remodel Medical Plan Using Voluntary Benefits as Buffer


• Absorb the cost


• Shift cost



Eliminate Ancillary Benefits

• Employee and employer health FSA contributions will have significant

impact

• Employers will reduce/eliminate employer HSA contribution

• Employers will limit/eliminate employee pre-tax HSA contributions

‒ Employees can make after-tax contributions

• Loss of employee and employer FICA savings

• Lower employee participation and savings rates

• Significant impact on effectiveness of HDHP/HSA programs


• Absorb the cost


• Shift cost



End health plan sponsorship

• Exposed to ACA $2,000/employer shared responsibility assessment

– Nondeductible, indexed, assessed on all full-time employees

• Attraction and retention problem unless employer provides additional

wages to purchase coverage on public exchange and/or significantly

increases other components of fringe

Current split1 Split after ending health

plan sponsorship

81%

1U.S. Bureau of Labor Statistics, Employer Costs for Employee Compensation – December 2014


• Absorb the cost


• Shift cost



Questions?

Contact Information

Rich Stover, FSA

Principal & Consulting Actuary

Knowledge Resource Center

500 Plaza Drive

Secaucus, NJ 07096

201-902-2684

[email protected]

Dave Ratcliffe

Principal

Health & Productivity

1800 M Street NW, 7th Floor/North Lobby

Washington, DC 20036

202-776-1050

[email protected]


mailto:[email protected]

mailto:[email protected]

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preparing for the cadillac tax - xerox · 2015-04-17 · overview of the excise tax starting in...

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