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Experts Weigh in on the ‘Cadillac Tax’

Jul 1st 2015
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Are your big-company clients asking for preliminary projections to determine whether they'll have to pay the so-called “Cadillac tax” on healthcare benefits starting in 2018?

The Cadillac tax, an excise tax on high-cost health plans that is designed to help finance the Affordable Care Act, is aptly nicknamed, says Roberta Watson, an expert on employee benefits and the Affordable Care Act with Boston-based Wagner Law Group.

“It will cause policies not to be so rich that they trigger the tax,” said Watson, who has been the chair of both the Tax Section of the Employee Benefits Committee and the Health Law Section of the Employee Benefits & Executive Compensation Interest Group for the American Bar Association.

At issue is a 40 percent nondeductible excise tax on the health benefits companies provide their workers above a threshold: $10,200 for individual coverage and $27,500 for family coverage.

The levy has been one of the most controversial aspects of Obamacare, which has seen its share of controversy, and that is why the tax has been delayed until 2018. But now that the US Supreme Court ruled last week to extend the Affordable Care Act's tax subsidies for health insurance coverage to all 50 states, more attention will likely be paid to the Cadillac tax.

“The Supreme Court's decision to uphold subsidies on the federal exchange resolves a looming uncertainty in the benefits industry. Many are now refocusing on revising key pieces of the healthcare reform law that broker- and employer-lobbying groups seek to amend or repeal, including the Cadillac tax,” Watson said.

AccountingWEB spoke to Watson – as well as Fred Slater, CPA, an expert on the IRS and state tax issues at MS 1040 LLC in New York, and Joseph Romano, partner at Presti & Naegele, a full-service accounting firm in New York – about what your clients can do to avoid triggering the tax and where accountants should look for guidance, among other things.

AccountingWEB: How is the Cadillac tax projected to tone down rich healthcare policies?

Roberta Watson: Healthcare exchanges label plans as platinum for first-dollar coverage, no deductible, and minimal or no copayments; gold, covering 80 percent of healthcare costs; silver, 70 percent; and bronze, just 60 percent – catastrophic coverage, basically.

So the idea is that if your client has a plan in the 90 percent [platinum] range, it may consider transitioning to lesser coverage that won't trigger the tax.

Of course, many firms are postponing dealing with the tariff, hoping it will be repealed. I see a lot of pressure to change or abolish the levy. But that would leave a more than $80 billion hole, according to the Congressional Budget Office, so there's a great incentive to go forward.

AWEB: Where should accountants look for guidance?

Watson: The IRS has proposed possible solutions, asking interested parties to comment. Employers complain that they need more details. The tax has an interesting structure: It will be imposed on the entity that administers the plan, which can be the insurer or even a third-party administrator, but the employer has to say who's being covered to figure out the share of tax. That's awkward. Insurers can't directly control the situation, and that's why I expect the insurance lobby to work with the IRS on details for implementation.

Employer- and employee-paid premiums and employer contributions to health savings accounts and flexible spending accounts are included in the 40 percent excise tax, and even employer- or union-provided on-site clinics may be included. This is something the IRS is asking for comments on. Expected are some adjustments for areas where health care is more expensive and for employees in high-risk jobs, like construction.

AWEB: What other outcomes do you see?

Watson: The excise tax was not designed to affect the 60 percent to 70 percent plans. The expectation was that instead of looking at it as a penalty tax, it would nudge employers, insurers, and unions to drop their levels of coverage, making modest redesigns to avoid having to pay the Cadillac tax. Local, state, and federal government plans often offer richer benefits because they pay lower salaries. Toned-down plans will be one effect of the tax, but mainly, I don't see this affecting the vast majority of people. However, if healthcare spending continues to greatly exceed inflation, a larger percentage of plans will qualify.

It's a weird statute. Will we be going back to taxable cash compensation? The IRS needs time and input to figure out what to do with the levy. What is expected is redesigned coverage below current levels. This will especially hit unions that will have to tone down their policies.

Fred Slater: Unions' benefits are especially in the Cadillac category. It's been estimated that unions offer 16 percent higher coverage than private plans, so expect that when contracts end, so will higher-level plans. This means that unions will ask for wage increases when new contracts are negotiated. It's becoming clear to companies, unions, and insurers: Reduce Cadillac plans.

The end result: lowering employer contributions and passing costs to employees as higher employee premiums, higher deductibles, and removing employer contributions to health savings accounts and flexible spending accounts. This wasn't the original intent of the Affordable Care Act. The Affordable Care Act was meant to offer more people health care, which should, in theory, cut the cost, spreading it over a bigger base. It was created for that.

Joseph Romano: I think the limits are pretty high for single and family coverage, so I don't see the tax affecting many people at the start. Politics will ultimately play the most key role, but inflation, willingness to shift healthcare coverage from a tax break to a tax burden, and whether or not you think the levy can slow healthcare costs – all these factors will play roles. If you've been among folks who've decried the steep rise of healthcare costs, you may feel this is a remedy – and want to advise firms to concentrate on wellness programs.

Related articles:

Supreme Court Upholds Obamacare Tax Credits; 'Status Quo is Preserved'
'Cadillac Tax' is Expected to Drive Up Healthcare Costs, Survey Finds