Beginning in 2018, the Patient Protection and Affordable Care Act imposes an excise tax on high-cost health plans.
In addition to being a way to raise revenue for the government, the reason for this provision is to reduce the demand for high-cost – or so-called Cadillac – plans, where the individual has little out-of-pocket cost. The point? To encourage employers, providers, and consumers to control health costs.
1. How does the Cadillac tax work?
Beginning in 2018, a 40 percent nondeductible excise tax will be imposed on “coverage providers” that provide high-cost health care coverage to the employer’s employees. Coverage providers include:
- health insurer for fully insured plans,
- the employer with respect to self-insured plans, HSA or Archer MSA contributions, and
- in all other cases, the “person that administers the plan.”
The tax applies to “applicable employer-sponsored coverage,” which is coverage under a group health plan:
2. What is the effect on the excise tax if the employee pays for all or part of the coverage?
Whether the employer or the employee pays for coverage does not impact the determination of whether it is “applicable employer-sponsored coverage.” However, it can affect the cost of that coverage when the amount of an employee’s excess benefit is calculated, which affects the amount of excise tax payable.
3. What coverage is not subject to the excise tax?
The value of employer sponsored coverage for long term care and the following benefits described in Code Section 9832(c)(1) that are excepted benefits and exempt from the portability, access and renewability requirements of the Health Insurance Portability and Accountability Act (HIPAA), namely:In determining whether the value of health coverage exceeds the threshold amount, the following items are not included.
4. Is there any relief in the Cadillac tax rules for people whose health coverage is expensive because their occupation is dangerous?
Yes. The annual limits are increased by $1,650 and $3,450, respectively, for employees in high-risk professions (e.g., law enforcement, EMT/paramedics, construction, mining, longshoremen, and so forth).
5. How is the tax calculated and paid?
Liability for the excise tax is determined on a monthly basis. Employers are required to calculate the amount of the excess benefit subject to the excise tax for each taxable period and to determine each coverage provider’s “applicable share” of the excess benefit. A coverage provider’s applicable share of an employee’s excess benefit is determined by multiplying the aggregate excess benefit for the employee by the ratio obtained by comparing (i) the cost of the coverage provided to the employee by the coverage provider to (ii) the aggregate cost of all applicable coverage.
6. Who pays the excise tax and how it is allocated?
The excise tax is imposed pro rata on the issuers of the insurance. Presumably, that cost will be passed along to the insureds. For a self-insured group health plan, a health FSA or an HRA, the excise tax is paid by the entity that administers benefits under the plan or arrangement (the “plan administrator”). The excise tax is paid by the employer if it acts as plan administrator to a self-insured group health plan, a health FSA or an HRA. Where an employer contributes to an HSA or an Archer MSA, the employer is responsible for payment of the excise tax, as the insurer.
The excise tax is allocated pro rata among the insurers, with each insurer responsible for payment of the excise tax on an amount equal to the amount subject to the total excise tax multiplied by a fraction, having as the numerator the amount of employer-sponsored health insurance coverage provided by that insurer to the employee and having as the denominator the aggregate value of all employer-sponsored health insurance coverage provided to the employee.
A penalty applies to an employer that reports to insurers, plan administrators and IRS a lower amount of insurance cost subject to the excise tax than required. The penalty is the sum of any additional excise tax that each such insurer and administrator would have owed if the employer had reported correctly plus interest attributable to that additional excise tax from the date that the tax was otherwise due to the date paid by the employer.
The penalty does not apply if it is established to IRS's satisfaction that the employer neither knew, nor by exercising reasonable diligence would have known, that the failure existed. In addition, no penalty will be imposed on any failure corrected within the thirty-day period beginning on the first date that the employer knew, or exercising reasonable diligence, would have known, that the failure existed, so long as the failure is due to reasonable cause and not to willful neglect. All or part of the penalty may be waived by IRS in the case of any failure due to reasonable cause and not to willful neglect, to the extent that the payment of the penalty would be excessive or otherwise inequitable relative to the failure involved.
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