What Agents Need To Know About The ACA’s Cadillac Tax

By Trey TompkinsPresident, Admin America

Summer 2016

Legal DisclaimerThe information presented and contained within this document is provided as general information only, and does not, and is not intended to constitute legal advice.

Any opinions expressed within this document or presented along with the document are solely the opinion of the presenter and may not reflect the opinions of Admin America, Inc. or any other personnel affiliated with or employed by either entity.

About Your Presenter: Trey Tompkins• President of Admin America, Inc.

• Independent TPA based in Alpharetta, Georgia

• Specializing in FSA, HRA, HSA and COBRA Administration

• Also consults on PPACA, ERISA and HIPAA compliance

• 19 Years of Employee Benefits Consulting Experience

• Member of National Association of Health Underwriters’ Region V Leadership Team

• Former President of NAHU’s Atlanta and Georgia Chapters

• Former Member of NAHU’s National Legislative Council

• Member of the State Bar of Georgia

• Graduate of Vanderbilt University, the University of Georgia School of Law and Georgia State University College of Business

• President of the Rotary Club of Milton-Windward (Georgia)

The ACA’s Cadillac Tax• Technically titled the “Tax on High-Cost

Health Coverage”

• Found in IRC Code Section 4980I

• Taxes the amount, if any, by which the monthly cost of an employee’s applicable employer-sponsored health coverage exceeds a threshold amount

• Significantly affected by December 2015 federal budget bill

The Purposes of the Cadillac Tax• One of the most significant revenue

provisions of the ACA

• Intended to reduce demand for high-cost coverage by increasing costs

• Indirectly should encourage insurance providers and consumers to control costs

• Reduces the tax preference for employer provided coverage vs. individual coverage

When the Cadillac Tax Goes Into Effect• Originally the tax was scheduled to begin

in 2013

• Was shifted to begin for tax years beginning after 2017

• Recently delayed again until tax years beginning after 2019 by the December 2015 Federal Budget bill

• Not linked to the employer’s Plan Year

What Coverage Is Subject To The Tax: Applicable Employer-Sponsored Coverage

• Generally refers to coverage that is:1. Offered under a Group Health Plan;2. That is made available to employees

by an employer; and 3. That is excludable from gross income

under IRC Section 106 or would be excludable if it was employer-provided coverage

• Special rules apply for self-employed individuals and governmental plans

IRC Section 106

“Except as provided for in this section, gross income of an employee does not include employer-provided coverage under an accident or health plan.”

Accident and health plans are further defined by Code Section 5000(b)(1) as plans which provide health care to employees either directly or indirectly

What Coverage Is Subject To The Tax: Applicable Employer-Sponsored Coverage

Types of Applicable Employer Sponsored Coverage:

• Major medical health coverage• HRAs and MERPs• Health FSAs• Employer contributions to HSAs

What Coverage Is Not Subject To The Tax: Applicable Employer-Sponsored Coverage

Three Categories of Statutory Exceptions:

• IRC Section 9832(c)(1) coverages

• Dental and Vision coverages

• IRC Section 9832(c)(3) coverages

What Coverage Is Not Subject To The Tax: Applicable Employer-Sponsored Coverage

The Section 9832(c)(1) exceptions:

• Long Term Care Insurance• Accident Insurance• Disability Insurance• Workers Comp • Auto medical payment insurance• Any other insurance where medical care

are incidental to other insurance benefits

What Coverage Is Not Subject To The Tax: Applicable Employer-Sponsored Coverage

The Dental and Vision Coverage Exceptions:

• only available when coverage is provided via a separate policy, certificate or insurance contract

What Coverage Is Not Subject To The Tax: Applicable Employer-Sponsored Coverage

The Section 9832(c)(3) exceptions apply to:• Specific Disease coverage• Hospital indemnity coverage• Other fixed indemnity coverage

This exception only applies if the coverage is paid for by the employee exclusively with after-tax dollars

Applicable Employer-Sponsored Coverage:Special Rule For Self-Employed Individuals

• Absent the issuance of further regulatory guidance, self employed individuals must include the Section 9832(c)(1) benefits as Applicable Employer-Sponsored Coverage

• Otherwise, all of the other coverages that typically apply continue to apply

Applicable Employer-Sponsored Coverage:Special Rule For Government Plans

• The general language is similar to the language applicable to other plans

• The inclusion of a special rule for government plans raises an unanswered question as to whether the exceptions available to other plans are available to government plans

• Does not apply to Tricare or veterans health benefits

Applicable Employer-Sponsored Coverage

• Control Group Rules Apply

• Employers can’t split up the coverages provided to a single employee among several different entities to avoid the tax

• Outside of control groups, employers can disregard coverage their employees receive from other employers

Aggregate Cost of Applicable Coverages

• The sum of the costs for each coverage

• The cost of a particular coverage is determined much in the same way it is calculated for COBRA purposes

• It is the cost of providing the coverage to similarly situated beneficiaries

• Separate costs must be calculated for self-only and other than self-only coverage

Special Coverage Cost Issues

• Health FSAs:• The amount of the employee’s salary

redirection; plus• The employer’s cost of any employer

contribution

• HSAs:• The amount of any employer

contributions; plus• Any employee contributions made

through pre-tax salary reductions

Initial Cost Threshold• For 2018 the scheduled standard limits were:• $10,200 for self-only coverage• $27,500 for other coverage tiers

• The limits will be adjusted for 2020

• Special Limits• Qualified Retirees (Pre-65)• Employees in High Risk Occupations• For both categories, the limits are•$11,850 for self-only coverage•$30,950 for other coverage

High Risk Occupations• Electrical and Telecommunication Line

installers and repairmen• Law enforcement officers• Fire protection employees• EMTs and Paramedics• Longshoremen• Construction workers• Miners• Farmers, Lumberjacks and Fishermen

Planned Adjustments To The Threshold• Health Cost Adjustment Percentage• Originally for 2018 only (but now 2020)• Based on the 2010-2020 increase in the

BCBS FEHB standard benefit offering• Amount over 55% applied to Initial Limits

• Annual Cost of Living Adjustments• Age and Gender Adjustments• Adjusted Annually• Also based on the FEHB BCBS plan• Based on the age and gender variations

of that plan

Possible Future Adjustments To The Threshold

• December 2015 federal budget bill directs the U.S. Comptroller General and the NAIC to study whether the ACA uses “suitable” age and gender benchmarks to determine the Cadillac Tax thresholds

• This opens the door to changes in the threshold for future years

Amount of the Tax• 40% of the employee’s “excess benefit”

• Originally not tax deductible

• December 2015 budget bill made these tax payments deductible

• Measured each month and summed for the entire taxable year

• Excess amount is the amount the cost of the employee’s applicable coverage exceeds 1/12th of the annual limitation for the calendar year including that month

Who Calculates the Tax: Where An Agent Can Differentiate Themselves• Employer is responsible for calculating

the tax and allocating the tax to each responsible party• The manner for reporting the tax amount

to the IRS and the responsible parties has not yet been determined.• For union plans, the plan sponsor is

responsible for calculating and reporting instead of the employer

Who Pays the Tax• Each coverage provider must pay the tax

on its share of the excess benefit• The excess benefit is pro-rated over each

of the coverage provider based on cost• The coverage provider is:• the insurer for insured coverage• the employer for HSA contributions• The Plan Administrator for all other

coverage• The definition of Plan Administrator

for this purpose remains unclear

Additional Penalties For Non-Compliance• If the Employer miscalculates the amount

of tax payable by a coverage provider:• The coverage provider must pay any

discovered shortage but not penalty• The Employer will incur a tax penalty

• The penalty amount is 100% of the shortage plus interest• Penalty does not apply if employer’s

failure resulted despite reasonable due diligence.• Penalties can be waived by IRS

Current Congressional Efforts To Further Modify or Eliminate The Tax

• Several bi-partisan Congressional bills to completely eliminate the tax• Also bills to exclude specific benefits • HSA Employee Contributions• Not supported by NAHU

• Supported by diverse organizations • Fiscal conservatives• Unions• Insurance companies• Northeast and West Coast liberals• Trey Tompkins

Two Other Interesting Changes from the December 2015 Federal Budget Bill

• The 2.3% Medical Device Excise Tax has been suspended for 2016 and 2017

• The Health Insurance Provider Fee has been suspended for 2016• Allocable to all U.S. insurers based on

their share of all net premiums written for U.S. health risks each year• Budgeted to raise $11.3 Billion in 2016

Recommendations To Get Ready• Keep pressure on your representatives in

Congress to repeal the Cadillac Tax• HR 879 and HR 2050• S 2045 and S 2075

• Educate your clients now on how the tax will affect the benefits they offer• So they can get ready• So they can add their voice to the

repeal effort

• Monitor changes affecting the tax

How To Keep Up With Cadillac Tax Changes

• NAHU Washington Weekly E-Newsletter

• EBIA Weekly E-Newsletter (ebia.com)

• Others?

• Cadillac Tax Infographic from NAHU

Questions?Speaker Contact Information

Trey TompkinsPresident

O: 678-578-4625

M: 404-915-2004

trey@adminamerica.com

Toll Free: 1.800.366.2961

Please visit our website at: www.adminamerica.com