2 – 2:30 P.M. Thursday August 27, 2015 The Cadillac Tax: Newly Issued Guidance Defining “High - Value” Plans and Strategies Employers Must Understand Today Andrea Esselstein, JD Luke Clark Group Benefits Compliance Senior Consultant Team Leader Group Benefits
HEALTH CARE REFORM Cadillac Tax August 27, 2015
AVOID HEAD-ON COLLISION WITH THE CADILLAC TAX Effective Date Deadline Date January 1, 2018 IRS Notice 2015-52 October 15, 2015 Begin Strategic Planning & IRS Comment Window Closes Preparations in Advance
CADILLAC TAX OVERVIEW Permanent, non-deductible, annual 40% excise tax on Tax is to discourage “high - value” plans (both fully insured and self -funded plans) “rich” benefit plans Tax applies to the plan value in excess of $10,200 which, according to ($850 / month) for single coverage; $27,500 ($2,292 / month) advocates of for other than self-only coverage (family coverage) the tax, PURPOSE contribute to overuse of Reduces tax-preferred treatment of employer-provided health care & excess spending by employers and employees medical care Assists in financing the ACA coverage expansion 4
WHAT IS A HIGH-VALUE PLAN? A bronze-level High-Value Plan : Higher-cost plan based plan with high on plan utilization and CLAIMS utilization by a Basis for Tax: 40% of the difference between the less healthy total cost of health benefits for an employee in a population may year and the threshold amount for that year trigger the tax, per employee/per family member Self-Only Coverage $10,200 per year ($850/month) 2018 THRESHOLDS Non Self-Only Coverage $27,500 per year ($2,292/month) 5
Kaiser Family Foundation Study Share of Employers with at Least One Plan Hitting Thresh old Year Self-Only Threshold Premium, HSA, HRA & FSA Small Firms Large Firms (200 or (3-199 workers) more workers) 2018 $10,200 25% 46% Source: Kaiser Family 2023 $11,800 29% 56% Foundation (KFF) analysis 2028 $13,500 41% 68% KFF assumed the FSA contributions by employees of larger employers would be Threshold amounts will increase annually based on general higher than those by employees inflation (i.e., CPI, not the rate of inflation for medical & Rx costs) of smaller employers KFF assumed annual increases Share of Employers with at Least One Plan Hitting Threshold in the threshold amount of 2.7% Different Premium Growth Assumptions Year Self-Only Threshold Premium, HSA, HRA & FSA Premium Growth 4% 5% 6% 2018 $10,200 24% 26% 27% 2023 $11,800 26% 30% 38% 2028 $13,500 29% 42% 54%
NEWLY ISSUED GUIDANCE EMPLOYER RESPONSIBILITIES & RISK EXPOSURES
DEFINITIONS WHAT IS A “COVERAGE PROVIDER”? Each coverage provider must pay 1. Insurance company for amount attributable to the excise tax on fully-insured plans its applicable share of the 2. Employer for amount attributable to employer HSA excess benefit contributions with respect to an employee “… the person that administers the benefits ” 3. for any taxable for all other amounts period… 8
DEFINITIONS “Coverage Provider” is not WHO REMITS THE TAX? defined in the IRC IRS anticipates it … Depends on which COVERAGE PROVIDER is liable, will be either the i.e., what does employer’s calculations of the excess TPA for a amount show as the source(s)? self-insured plan or “…the person with Insured Health Plan: Insurance Company ultimate HSA: Employer authority…with All Other Amounts : Person Administering Plan Benefits respect to the administration of plan benefits ” 9
CADILLAC TAX “TAX ON THE TAX” ISSUE • For-profit insurance companies pay Federal Income Taxes on all revenue received. • When the insurance company is liable for the Cadillac tax as the coverage provider, the insurance company will invoice their employer groups an amount to cover not just the 40% tax, but an amount which will cover their income taxes on the receipt of that 40% tax amount. If an employer group is in the same tax bracket as the insurance • company, there is no “tax on the tax” problem since the employer group is able to get a deduction for the full amount paid to the insurance company. – Problems occur when the employer group is in a lower tax bracket than the insurance company. 10
EXAMPLE “TAX ON THE TAX” ISSUE Not-for-Profit Example : Assume 10 employees with individual coverage each have fully-insured plans with annual premiums @ $10,700. – Cadillac Tax due is $2,000 • ($10,700 - $10,200) X 40% X 10 EEs = $2,000 • $2,000 / $5,000 = 40% – Because the Insurance Co. is in the 35% Federal Corporate Tax bracket, they will charge their clients ~154% of any Cadillac Tax, to net 40% of the tax due. Example based on above: • $2,000 X 154% = $3,080 • $3,080 X (1-35%) = $2,000 Therefore, the Not-for-Profit Company Pays a Cadillac Tax = 61.6%, $3,080 / $5,000 11
COST OF APPLICABLE COVERAGE NOTICE 2015-52 IRS is aware of this issue and is asking for proposed solutions • • IRS disapproves of an exclusion of amounts billed for the tax from the carriers’ taxable income if those amounts are included in the premiums (i.e., not billed separately) The Notice contains a proposed solution, specifically, if the tax • would be billed separately, the IRS is considering an ” Income Tax Reimbursement Formula ” 12
INCOME TAX REIMBURSEMENT FORMULA NOTICE 2015-52 Basic concept is to allow the exclusion from the cost of applicable coverage an amount that would represent the “grossed -up ” in premium that a coverage provider would invoice a plan sponsor The proposed formula to compute the amount to exclude would use either: 1. coverage provider’s actual marginal Federal Income Tax rate or 2. prescribed rate defined by the IRS IRS solicited comments regarding all issues regarding the Income Tax Reimbursement Formula 13
RECENT REGULATORY GUIDANCE EMPLOYER RESPONSIBILITY Excess amount REMINDER : Tax Period = Calendar Year will be determined for each Employers will be responsible for determining the tax amount employee … AND allocating the amount among coverage providers owing the tax. One employee’s Employers must also notify the parties owing the tax AND plan selection notify the IRS of taxes due from each coverage provider. and HSA / FSA contributions are If the amount paid is less than the amount due as a result of different from an employer calculation error , the tax remains due and the employer may owe an additional penalty equaling the others… amount of the error plus interest . 14
COST OF APPLICABLE COVERAGE TIMING NOTICE 2015-52 Determination Period “Treasury and IRS anticipate that employers will be required to determine the cost of applicable coverage provided during a taxable year sufficiently soon after the end of that taxable year to enable coverage providers to pay any applicable tax in a reasonably timely manner.” 15
AGE & GENDER ADJUSTMENTS NOTICE 2015-52 Only additions to the 2 baseline limits will be made Age & Gender (i.e., no downward adjustment to the limits) adjustments Age & gender adjustments will be made for the self-only and may apply to non-self-only limits lower risk Treasury & IRS propose using the DOL’s “ Current Population exposure, Survey ” to determine the age & gender characteristics of the depending on national workforce employee PROPOSAL: Require employers to use the 1 st day of a plan year demographi cs as the snapshot date to determine the composition of its employee population 16
HIGHER RISK JOBS & HIGHER LIMITS Law Enforcement & Fire Protection Workers • No adjustments • Emergency Medical Care Technicians are made for Construction, Mining, Agriculture Industry • geography, • Forestry, Fishing Industry, Longshore Workers high-cost Electrical / Telecommunication Repair & Installers • claimants or Retirees from Higher Risk Professions, if in the Profession • plan design for 20 years Self-Only Coverage $11,850 per year ($988/month) 2018 THRESHOLDS Non Self-Only Coverage $30,950 per year ($2,579/month) 17
COMMON CONTROLLED GROUPS NOTICE 2015-52 Comment Request for How to Identify: 1. Coverage made available to member employers 2. Age & gender adjustments and the adjustment for high-risk professions 3. Taxpayer responsible for calculating and reporting the excess benefit 4. Employer / Member liability for any penalty for failure to properly calculate the tax 18
REMINDERS TAKEAWAYS
Next Steps • Member’s costs are equal to cost of goods and services Top 3 Drivers of the purchased & number of purchases Cadillac Tax Evaluate both suppliers’ costs for purchases - & member utilization 1. Cost of the members’ medical and Rx claims Some example steps: - Evaluate use of narrow networks Market Rx program 2. Cost of the members ’ Incentivize employees to obtain age-appropriate medical and Rx claims preventive exams Consider value-based plan designs 3. Cost of the members ’ Alternative will be a “race to the bottom”, i.e., how many • medical and Rx claims benefits can be eliminated to avoid the tax (e.g., not offering FSAs or eliminating employer HSA contributions) 20
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