Banyan Administrators have been providing us with beneficial information about several different aspects of the Health Care Reform and how it affects us. Over the next months and years, employers will be faced with numerous changes, many of which require regulatory clarification. Banyan will continue to keep us up to date and on target with decisions that affect our plans. Over the next couple of weeks, Banyan will be providing answers to many questions regarding how the Health Care Reform Cadillac Tax will affect you. We are sure you will find the following information from Banyan Administrators valuable.
Health Care Reform Cadillac Tax
What You Need to Know Now About: The Cadillac Tax
Another component of the Patient Protection and Affordable Care Act (PPACA) commonly referred to as the Health Care Reform Act is a tax on benefit-rich or “gold-plated” insurance plans. This tax is often referred to as “The Cadillac Tax” and, although it is not scheduled to go into effect until 2018 and may see several revisions in design before then, some plan sponsors are beginning to develop strategies to address it.
1. Why was “The Cadillac Tax” included in the Health Care Reform Act?
There are two primary reasons for the inclusion of The Cadillac Tax in the Health Care Reform Act. The first is to stem the rise of health care costs. One belief is that excessively benefit-rich plan designs encourages higher utilization, even overuse, of health care services by the plan participants and, as a result, have a greater influence in driving escalating health care costs.
The second reason is to generate revenue to help pay for covering the uninsured. The Congressional Budget Office (CBO) estimates that The Cadillac Tax will generate $149B over a 10-year period.
2. What plan sponsors and plan designs are subject to The Cadillac Tax?
Beginning in 2018, if a benefit-rich insurance plan has an annual value of more than $10,200 for an individual and $27,500 for a family, then the insurance plan is subject to a 40% excise tax.
The 2018 annual value amounts of $10,200 and $27,500 include medical, prescription drugs, administrative fees and also include employee and employer contributions to flexible spending, health reimbursement or health savings accounts. Stand-alone vision and dental plans are not included in the calculation. However, there has been some recent confusion on the topic as it appears that the cost for a self-funded dental plan must be added to the calculation whereas a fully-insured dental plan does not. More guidance from the IRS/DOL is needed.
3. How is the 40% excise tax calculated and who pays it?
The 40% excise tax is calculated on the amount above the annual value amount. For example:
A. 2018 Annual Value Amount – Individual $10,200
B. Insurance Plan’s Actual 2018 Annual Value Amount – Individual $11,200
C. Difference Insurance Plan’s Amount v. Allowed Amount (B – A) $1,000
D. 40% Excise Tax – “The Cadillac Tax” (C * 40%) $400
The excise tax is paid by the plan sponsor and is paid for each participant in excess of the 2018 allowed amount so, in this example, if the plan sponsor has 500 participants with Individual coverage in the insurance plan at an 40% excise tax of $400 each participant, then the plan sponsor would pay a Cadillac Tax of $200,000.
Of course, although the plan sponsor is responsible for paying The Cadillac Tax, many may pass on some, if not all, of the cost on to the plan participants in some form such as higher employee contributions.
4. Will the Annual Value Amounts for Individual and Family change after 2018?
Yes, it is anticipated that the Annual Value Amounts for subsequent years will be indexed and will increase. At the moment, the expectation is that the amounts will increase, annually, by the medical inflation rate. Usually, this rate averages between 3%-5%.
It should also be noted that some plan sponsors might find in 2018 that they do not trigger the tax, however, because their insurance plan costs continue to rise faster on an annual basis than the medical inflation rate that in a subsequent year such as 2019, 2020, etc., they will trigger the tax.
[Image Source, Information Source]