Note: The Treasury Department and the Internal Revenue Service are seeking comments on a range of issues related to implementation of the Affordable Care Act’s excise tax. For details about Notice 2015-16, the request for comments, which focuses on the types of coverage that are included and excluded in determining the cost of coverage for purposes of the excise tax, as well as how to calculate the cost of coverage, see Sibson’s March 5, 2015 Capital Checkup.
Beginning in 2018, the Affordable Care Act1 imposes a 40 percent excise tax on the cost of high-cost health plans above a certain threshold. The base thresholds for 2018 are $10,200 for self-only coverage and $27,500 for all other coverage tiers, with higher thresholds available for certain participants. Plan sponsors wishing to shield the plan from the excise tax should take steps now to understand when their plan may hit the excise tax threshold, and how to minimize the impact of the tax.
This issue of Health Care Reform Insights discusses what plans and coverage are subject to the tax, what entity is responsible for paying the tax, how the total cost of coverage is calculated, how the basic thresholds will be adjusted, and how excise tax potentially affects calculations of the value of post-retirement health benefits. It closes with options for plan sponsors to consider in order to shield the plan from the tax. Because the Treasury Department and the Internal Revenue Service have yet to issue any guidance on the excise tax, many questions remain about how the federal government will implement the tax.2
In general, all group health plans are subject to the tax, which is non-deductible.
Group health plans include both fully insured and self-insured health coverage, and include many on-site medical clinics. Retiree health plans are also subject to the tax, even if they are separate retiree-only plans.
In addition, benefits provided through arrangements such as a Health Reimbursement Arrangement (HRA) are counted toward the value of the group health plan for purposes of determining the amount by which the value of the plan exceeds the threshold amount.
Health Flexible Spending Arrangements (health FSAs) will be included in the plan’s value — both the amount attributable to the employee’s salary reduction and any available reimbursement in excess of the salary reduction. For Health Savings Accounts (HSAs), the employer contributions appear to be included in the calculation.
The value of benefits that are “excepted benefits” under the Health Insurance Portability and Accountability Act (HIPAA) are not included in determining whether a plan exceeds the cost thresholds. This includes accident or disability income insurance, liability insurance, workers’ compensation, and other similar insurance. In addition, dental and vision coverage that is provided under a separate insurance policy is not counted. Self-insured dental and vision coverage that is separately elected appears to be excluded, but regulatory guidance is not yet available to confirm this.
Employees themselves do not pay the tax, even though the cost of each employee’s coverage is compared to the appropriate threshold based on the tier of coverage in which each employee is enrolled (i.e., self-only or other tier). The tax is based on the plan in which the employee enrolls. The liability for paying the excise tax rests with the plan’s coverage provider(s).
The excise tax will be imposed when the total cost of coverage under the plan exceeds certain thresholds. The tax applies to all group health plan coverage without regard to whether the employer or the employees pay the cost of premiums for the coverage. In other words, asking employees to pay a greater percentage of the premium cost (or premium equivalent) will not change the way the tax is calculated.
Many plans have benefits that are administered by separate entities. For example, a plan sponsor might offer a self-insured medical benefit using a third-party administrator (TPA) and contract separately with a pharmacy benefit manager for the prescription drug benefit. The only way to know whether the total cost of the plan as a whole exceeds the applicable threshold is to combine all of the types of coverage subject to the excise tax. The law requires the employer to combine the cost of the different benefits, calculate the amount of the excess benefit, and determine the pro rata share of the excess attributable to each type of benefit. The employer notifies each coverage provider of its applicable share of the excess benefit and notifies the Treasury Department as well. Penalties are assessed on employers or plan sponsors that do not perform these calculations.
As noted above, the two base thresholds for 2018 are set in the law: $10,200 for self-only coverage and $27,500 for all other coverage tiers. There is no variation for high-cost regions of the country.
The base thresholds can be increased in several ways:
For the last two adjustments noted above, the self-only threshold is increased by $1,650 and the threshold for all other coverage tiers is increased by $3,450.
Starting in 2019, the base thresholds (as adjusted under the first bullet above, if applicable) and the $1,650/$3,450 adjustment amounts under the last two bullets above will increase based on general inflation (i.e., the Consumer Price Index for All Urban Consumers), not medical inflation, which is historically higher than general inflation. In general, this means that plans will pay higher taxes, and could even pay the tax sooner, than if the thresholds increased with medical inflation.
Medical trend is a better measure of the expected increase in plan costs than general inflation. Medical trend consists of medical inflation plus changes in utilization and the impact of new treatments, therapies and technology over time. With medical trend running at about three times the rate of general inflation, the gap between actual plan costs and the general-inflation-adjusted thresholds will keep getting bigger, thus triggering even higher taxes over time than if the thresholds increased at a more realistic rate.
Plans that offer retiree health benefits must project the cost of the benefit to determine when the cost threshold is passed and the plan will be subject to the excise tax. All plans must recognize the excise tax in their retiree health valuations if the amount is deemed significant, and should be doing so today.
Plan sponsors should take action now to evaluate when and under what circumstances their plans could be expected to reach the excise tax threshold. Plan sponsors should find out in which year the plan is likely to exceed the thresholds and by how much. Sibson can provide an estimate of the amount of taxes that a plan will likely owe, by year, using Sibson’s Excise Tax Forecaster, a proprietary tool that incorporates variable assumptions about general inflation and medical trend. The Excise Tax Forecaster can examine a variety of medical trend scenarios to estimate excise tax liability. A plan sponsor that expects to exceed the thresholds in 2018 or a few years beyond 2018 may want to begin considering changes that would slowly bring down the total cost of the coverage.
The tools at the plan sponsor’s disposal to rein in total plan costs includes various cost-control strategies plan sponsors use today. Possible options include:
Finally, plan sponsors may want to consider changing the way dental and vision coverage is structured so that these benefits are not counted toward the threshold. This would mean separately insuring the benefits or adding a separate election if the coverage is self-insured.
The course of action that will make the most sense will vary considerably from plan to plan. Given the extended time frames necessary to make plan and program changes, plan sponsors should begin charting the course now so that necessary changes can be rolled out gradually and communicated clearly to employees.3
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For assistance in determining the potential impact of the Affordable Care Act’s excise tax on your plan, guidance on strategies for shielding your plan from the tax and assistance with communications, contact your Sibson consultant or the nearest Sibson office. You can access a list of offices by clicking on the third link in the text box below.
1 The Affordable Care Act is the abbreviated name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-148, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Health Care Reform text.)
2 The excise tax is codified at IRC Section 4980I. The only additional guidance on interpretation of the tax is a 2010 report from the Joint Committee on Taxation, “Technical Explanation Of The Revenue Provisions Of The “Reconciliation Act Of 2010,” As Amended, In Combination With The “Patient Protection And Affordable Care Act”: https://www.jct.gov/publications.html?func=startdown&id=3673. (Return to the Health Care Reform text.)
3 For a discussion of Affordable Care Act communications, see Sibson’s September 2013 Spotlight, “It’s Time to Talk to Employees About the Affordable Care Act”. (Return to the Health Care Reform text.)
Employers should rely on their attorneys for authoritative advice on the interpretation and application of the Affordable Care Act. Sibson will keep clients informed as Affordable Care Act regulations are issued.
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