Friday, August 21, 2015

Cadillac Tax Notice 2015-52 and Related Ramblings

[I recommend reading my Cadillac Tax Primer that includes information about developing a Glide Path to limbo under the tax before reading this post.]  

Most of the ACA focused on increasing the number of American's with access to health care, but the Cadillac Tax (aka Excise Tax) has a dual purpose. First the obvious, it helps pay for the expansion of coverage. It's expected to raise 87 billion. It's also expected that employers will shift benefit dollars into wages and that people will lose deductions for health care expenses that will raise another 202 billion. 

When I last blogged about the Cadillac Tax, I didn't understand this last item. It's noted in the Congressional Office Budget Report as "other which consists mainly of the effects of changes in taxable compensation on revenues." As I was reading the most recent IRS Notice, it clicked. The ACA isn't just banking on the revenue from the tax which most employers are planning to avoid, it's banking on the increased revenue that will come from the moves employers take to avoid the tax that result in increased taxable income to Americans. For example, if an employer eliminates and FSA that an employee has been putting $2,500 a year into that $2,500 becomes taxable income. 

But, I digress. Let me get to the second purpose of the tax. It is suppose to help the U.S. curb our overall spending on health care. I'm sure you've seen the charts and graphs. We spend more in the U.S. on health care than any other country and our life expectancy is the lowest among comparable nations. Economists believe that the Cadillac Tax will prompt changes to the system that will positively impact this trend. It is anticipated that patients will adopt consumer behaviors they rely on when purchasing other goods and services when they are footing the bills in plans with higher deductibles. In response to pressure from consumers and employers, the health care industry is already evolving to provide greater transparency, lower cost entry points, etc...

I've said before that I think it's wishful thinking that the tax will be repealed. There are two bills floating around the House, but nothing has been proposed in the Senate. I haven't seen any other suggestions for where the 289 billion the tax is expected to generate will come from.

I've been giving some thought to the tax favored status of employer provided benefits, something I'd taken for granted until recently. It was President Reagan that first proposed eliminating tax exclusions for employer provided benefits. It's an idea that's had bipartisan appeal if not support. The Cadillac Tax is an indirect way of accomplishing this. It was included in the ACA as a tax on providers, so it was palatable and didn’t raise a lot of opposition. No one cares if insurance companies pay more in taxes. However, the tax will really be paid by the 60% of Americans that get health insurance through their employer

The association community that I work in relies on heavily on our benefit packages. We pay fairly, but we don't really compete for talent on salary. We attract people that are mission driven, want work/life balance and appreciate a nice benefit package. If those benefits loose their tax favored status, what does that do to our ability to attract and retain talent?

Hmmm, I've taken us down another rabbit hole, haven't I? Back to the tax. The IRS issued Notice 2015-52 on July 30. It gives us greater insight into who is responsible for paying the tax and how it is to be allocated among coverage providers. It also gets into how and how often the tax payments are to be remitted and some other details that Notice 2015-16 did not address. Comments are due by October 1, 2015. Here are some of my observations.

Persons Liable for the Excise Tax
The employer is responsible for calculating the tax on a monthly basis (ack, why not annually?) and allocating it among the "coverage providers" to be remitted to the IRS. Coverage provider is defined as "the person who administers the plan benefits." For a fully insured employer, this is the insurance company. For a self-insured employer, it isn't clear and the notice suggests two approaches that are being considered. 
  1. The entity responsible for performing the day-to-day functions that constitute the administration of plan benefits such as receiving and processing claims for benefits, responding to inquiries, or providing a technology platform for benefits information would pay the tax. This would generally be the plan's third-party administrator (TPA) -- in our case UMR.
  2. The entity with ultimate authority or responsibility under the plan or arrangement with respect to the administration of the plan benefits including the final decision on administrative matters would pay the tax. This would be the plan sponsor or employer
This second approach would be much simpler to administer. (That's probably the understatement of the year.) To understand the impact, think back to how the tax is calculated. This is my simplified formula:

Premium equivalent + HSA & HRA contributions + FSA contributions + EAP = Value

Each addend represents a different coverage provider under the first definition. For ASHA, it would be UMR our TPA + ASHA HSA + Benefit Resource FSA + Health Advocate EAP. (We're adding Teledoc for 2016, so they will become our fifth coverage provider and we're carving out our Pharmacy Benefits Manager (PBM), so they will become our sixth provider.) Imagine going through the onerous process of calculating the value of our benefits to determine our tax liability and then having to allocate that tax among each of six coverage providers every month. 

It's further complicated by the fact that some of these benefits vary on a monthly basis. For example, ASHA funds half of an employee's deductible in our high deductible plan by making a contribution to the employee's HSA in January. The employee can adjust their HSA contributions any pay period during the year and many of our staff choose to front load their account so the money is available to them early in the plan year. The IRS is considering an approach where contributions would be allocated on a pro-rata basis over the plan year. The value of an employee's benefit could appear to be crossing the taxable threshold early in the year only to fall beneath it later in the year. So, the monthly tax payments would have to be reconciled and adjustments would have to be made in subsequent months. The complexity is greatly magnified if the tax payments are being allocated among the coverage providers as described in Option 1. An adjustment to the HSA, would effect the portions of tax paid by the other coverage providers and they would all have to be adjusted and reconciled. (Maybe the real intent of the ACA is to secure jobs for math majors.) 

Option #2 gets my vote because option #1 greatly increases the administrative burden. And, also because it avoids the tax on the tax... 

Tax on the Tax
If the coverage provider is defined as an entity other than the employer (Option #1 above), the coverage providers will pass the cost of the excise tax back to the employer. When the employer pays or reimburses the coverage providers for the tax, it becomes taxable income to the coverage provider. (The tax is nondeductible to the coverage provider.) Therefore, the coverage provider is likely to pass through not just the cost of the Cadillac Tax, but also an additional amount to cover the additional tax the coverage provider will need to pay. 

Let's just look at the biggest portion of the formula above the "premium equivalent" which is the bulk of our benefit that's run through our TPA UMR. Assume UMR pays $50,000 in tax on our behalf and assume a 35% marginal tax rate. UMR will gross up the reimbursement and bill us for $76,923. ($50,000 divided by [1.00-.35]). Keep in mind that ASHA is a 501(c)(6) tax exempt organization. (I hope ASAE is all over this.)

The actual amount of the tax is excluded from the cost of applicable coverage, but the "gross up" (the additional $26,923 in the example above) is not specifically excluded and under consideration by the IRS. The notice includes an income tax reimbursement formula, but I'm starting to get in over my head now and I can imagine your eyes glazing over in my mind, so I'll stop here. 

There is also a section on Flexible Spending Accounts (FSAs) suggesting the cost of applicable coverage for any plan year would be the greater of the amount of an employee's salary reduction or the total reimbursements under the FSA (that would not be known until after the tax year by the way.) Punishment for the whole roll over thing -- I knew that was too good to last.  However, I figure the first thing employers will do to avoid the tax is eliminate FSAs, so this should be practically irrelevant. 

I think that's about enough on the tax issue for now and I know you don't want tax advice from me. Suffice to say, we all need to send a comment letter the IRS pushing for Option #2 where the coverage provider is defined as the employer. 

Age and Gender Adjustments
The ACA allowed for the statutory thresholds -- $10,200 for individual coverage and $27,500 for self + other in 2018 -- to be increased based on the age and gender characteristics of all the employees when compared to the national workforce. This adjustment recognizes the fact that older workers generally have higher health claims than younger workers and that women generally have greater health expenses than men. This could help ASHA and others in the association community because our workforce tends to be older (46 on average) and female (73% at ASHA). 

The notice states that it is not sufficient to compare the average age and gender of an employer's workforce to the average age and gender of the national workforce. The notice proposes developing age and gender adjustment tables and suggest a seven step process for developing the tables using data from Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefits Plan (FEHBP) and the Current Population Survey table of Employed Persons and Employment-Population Rations by Age and Sex.

Like every other aspect of the Cadillac Tax, this gets complicated, but the adjustment is a good thing for employers with an older or predominantly female workforce like ASHA and most associations.

I don't usually label my closing "closing," but I'm unusually pleased to have gotten to this point. I read the IRS notice three times to sort through these issues and that required umpteen cups of coffee and chocolate covered espresso beans. I'm amped up on caffeine. If you read it too, please share your thoughts or link to resources you like below. The best piece I found was a three page alert from Buck Consultants

If you don't already have a plan to limbo under the tax, you need one. This post might help you get started. Be sure to download the white paper developed by Aaron Davis and his team at Nextlogical -- What Works In HealthCare Cost ContainmentUse the download code mcnichol to access a free copy.

If you're an ASAE member, you may have received an invitation to the Power of A Town Hall on the Cadillac Tax planned for September 16. If so, I hope you'll join John GrahamBob Skelton and I to discuss how the Cadillac Tax will impact the association community and what we can do to prepare.

Related reading:

No comments: