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Your Glide Path to the Cadillac Tax

Whats the point of the tax?

The Affordable Care Act (ACA) expanded health coverage to millions. The high-cost
plan tax (HCPT), best known as the Cadillac Tax, helps to cover the cost of the
expansion by taxing employers that provide "high-cost" health coverage to their
The tax is also intended 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 (who seem to be the only proponents of the tax
left) believe that the Cadillac Tax will prompt changes to the system that will
positively affect this trend. It is anticipated that employers will put plans in place
with higher deductibles and patients will adopt the consumer behaviors they rely on
when purchasing other goods and services when they are footing the bills.

The Tax Favored Status of Employee Benefits Enjoy it

while it lasts.
Employers began providing health insurance to employees in the 1920s. The
practice really took off in the 1940s during World War II. In 1954, an IRS ruling
exempted the premiums paid by employers and their employees toward employer
plans from being taxed, but not the premiums paid by individuals for their health
care coverage. It excluded the value of employer provided health coverage from all
taxable income to the individual employees including social security and Medicare
payroll taxes. This shaped the provision of employer provided benefits with few
changes until the ACA came along with a provision for a Cadillac Tax.
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 didnt raise a lot of opposition until the IRS
comment letters were released last year. (Evidently, 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 like us.
This is an important point to understand because the real revenue from the Cadillac
Tax comes from making the value of some of our benefits taxable to us as
individuals, not from the actual Cadillac Tax that would be paid by employers. The
Cadillac Tax is expected to raise 87 billion. Another 202 billion in tax revenue would
come from employers shifting benefit dollars into wages and people losing
deductions for health care expenses. For example, if you currently participate in a
flexible spending account (FSA) and contribute $2,500 pretax, your employer will
Janet McNichol
May 5, 2016

likely eliminate your FSA to avoid the Cadillac Tax shifting that $2,500 back into
your taxable income.
The association community relies heavily on our benefit packages. We generally 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 lose their tax-favored status, what does that do to our ability to
attract and retain talent?

What's a Glide Path?

When I was at the World Health Care Congress, I heard big employers like Disney
refer to a glide path. They've projected how the tax will impact them and have plans
in place that will allow them to limbo under the tax thresholds (more on that later.)
FOMO -- I wanted ASHA to have a glide path too and created one.

Isn't there a proposal in Congress to eliminate this tax?

On December 18, President Obama signed the omnibus spending and tax extenders
bill that included a 2-year delay in the implementation of the Cadillac Tax from 2018
to 2020. Interestingly, there was not a lot of noise about the tax until the IRS
released the comment letters last year and employers and labor unions started to
speak up. We now have an additional two years to prepare and a flicker of hope that
the tax will never take effect as originally proposed.
Nothing was proposed to replace the anticipated revenue from the Cadillac Tax, so it
will likely increase the budget deficit. There is a financial hurdle to repeal.
Expanding coverage via the exchanges cost 849 billion dollars and another 847
billion in Medicaid and CHIP outlays. This is being paid for in four ways:

Penalty payments collected from uninsured people (43 billion)

Penalty payments collected from employers (167 billion)
Cadillac Tax (87 billion)
Other which consists mainly of the effects of changes in taxable
compensation on revenues (202 billion) described above

One chief driver of the tax provision was conservatives' insistence that every piece
of the ACA be paid for with new revenues -- now even republicans oppose it.

What else is being considered?

Ive heard some chatter about setting a threshold for premiums and making any
value over that threshold taxable income to employees. (Similar to the tax we pay
on employer provided life insurance over $50,000.) People that earn more would
effectively pay more because their salaries put them in a higher marginal income
tax bracket.

How do you calculate the tax?

Janet McNichol
May 5, 2016

In simple terms and highlighting just what's most relative to most of us in the association
community, the formula looks like this.
Premium equivalent (including commissions paid to brokers) + HSA & HRA contributions +
FSA contributions + EAP = Value
The value of coverage is compared to thresholds set in the ACA -- $10,200 for
individual coverage and $27,500 for self + other. Any Value over the thresholds is
taxed at 40%. All employer and employee pre-tax contributions to HSAs and FSAs
are included in the calculation. HIPAA excepted EAPs will probably be excluded.
(EAPs that include face-to-face visits are subject to HIPAA.)
The delay in the Cadillac tax does not change an indexing formula, which begins in
2019. So when the Cadillac tax is first applied in 2020, the dollar thresholds will
have been increased to reflect approximately two years increase in inflation.
There are some proposed adjustments for covered retirees that are at least 55, but not yet
medicare eligible; high-risk professions like law enforcement; age and gender (if the age and
gender characteristics of an employer's workforce are different from those of the national
workforce.) There is presently no adjustment for geographic location and that seems like a
glaring omission to me. State mandates impact the cost of coverage with heavily regulated
states like Massachusetts and Maryland above the national average. This would create a
double whammy for employers in these states.

Those thresholds sound more like a Camry than a

Yep, 33 percent of employers were expected to be subject to the tax in 2018. If
medical spending increases faster than the general rate of inflation, a higher
percentage of employers will be subject to the Cadillac Tax in 2020 than would have
been in 2018. The impact on the association community is expected to be much

Is it likely that the formula will change before the tax

goes into effect?
Yes, the IRS just requested comments twice last year in Notice 2015-16 and 201552. I helped to prepare ASHA's comment letter. (Bob Skelton at ASAE submitted a
good one too.) The final regulations were to be released in 2017, but I expect this
will be delayed now too.

So, what do we think this will cost?

Of course, we estimated the impact on ASHA before the delay, the best-case
scenario for us in 2018 was about $10,000; worst-case scenario was about
$310,000. There will be a COLA adjustment to the tax before it goes into effect in
2020 as I mentioned, but the picture only gets worse. In 2020, ASHAs best-case
scenario is about $120,000 and the worst-case scenario is $750,000.

Janet McNichol
May 5, 2016

You could drive a truck through the gap in those

projections. Is that the best you can do?
We have to make many assumptions about the cost of coverage and the choices
ASHA staff will make to estimate our tax liability.
In the best-case scenario, we included a 7 percent trend increase in the cost of
coverage. We also assumed staff continue with their current HSA contributions and
an average of the current FSA contributions. (The latter is a lousy placeholder, but
its a start.)
In the worst-case scenario, we assumed a 12 percent trend increase in the cost of
coverage, increased the caps on the FSA by 2 percent and the HSA by 5 percent and
then assumed the staff currently participating all max out their contributions.
When the IRS issues a final ruling on how the tax will be calculated and we get
closer to 2020, I can narrow the gap.

Either way, that's a lot of mula! What can be done to

minimize our potential tax liability?
Employers have many options and need to decide what plan of action is right for
them. Most options take time to implement, so savvy employers are working on a
plan now -- their glide path to 2020. Even if the tax winds up being repealed,
restructuring how we provide our benefits can curb spending on health care and
enhance the employee experience (no those are not mutually exclusive goals.)

Janet McNichol
May 5, 2016

We started educating our staff to be savvy health care consumers in 2014 and
continuing to build on our efforts. In most organizations, healthcare is the second
largest expensesecond only to salariesyet most employers dont teach people
how to get the most out of their investment. 86% of people cannot correctly define
the terms deductible, copay, coinsurance and maximum out-of-pocket. Set aside a
little time and money to make sure your staff understand and know how to use your

How would employers actually pay the tax?

The second IRS notice gave us greater insight into who is responsible for paying the
tax and how it is to be allocated among coverage providers. It also addressed how
and how often the tax payments would be remitted and some other details
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 selfinsured employer, it isn't clear and the IRS suggested two approaches that are
being considered.
Janet McNichol
May 5, 2016

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.
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 (including commissions paid to broker) + 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 + Magellan PBM + Health Advocate Disease
Management & EAP + Teladoc + ASHA HSA + Benefit Resource FSA. 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 affect 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...

What was it I heard about a 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
Janet McNichol
May 5, 2016

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 like most associations.
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.

Janet McNichol
May 5, 2016

Im convinced I need to do
something, where should I start?
1. Estimate your tax liability. (Ask your broker or
consultant to help.)
2. Ask ASAE to advocate on behalf of associations.
3. If you have a commission agreement with your broker,
change to a consulting agreement.
4. Assess what you know about your plan design
utilization and compare it to benchmarks.
5. Read What Works in Healthcare Cost




Containment (
-- developed by Aaron Davis and his team at
NextLogical. Use the download
code mcnichol to access a free copy.
Review Whats Working to Hold Down Cost from
Mercers 2015 National Survey of EmployerSponsored Health Plans--the last page of this
Decide on what changes youd like to make and
develop a timeline to implement them.
Teach you staff to be savvy consumers of
healthcare by educating them about the 10
Behaviors of an Engaged Health Care Consumer.
Plan to communicate with your staff about
year around.




Janet McNichol
May 5, 2016

Whats Working to Hold Down Cost?

From Mercers National Survey of Employer-Sponsored Health Plans 2015
You cant hold down costs just by checking off the boxes; however, these items are
a reflection of organizational culture and worth consideration.

Plan Design & Delivery


Contribution for family coverage

in primary plan is 20% of premium
PPO in-network deductible is
Offer CDHP
HSA sponsor makes a contribution
to employees accounts
Voluntary benefits integrated with
Mandatory generics or other RX
Steer members to specialty
pharmacy for specialty drugs
Reference-based pricing
Data warehousing
Collective purchasing of medical
or RX benefits
Transparency tool provided by
specialty vendor and/or used by 10%
of members
Use private health benefits

Employee Well-Being

Care De

Offer Optional (paid) well-being

programs through plan or vendor
Provide opportunity to participate
in personal/group health challenges
Offer technology-based well-being
resources (apps, devices, webbased)
Worksite biometric screening


Encourage physical activity at

work (gym, walking trails, standing
desks, etc)
Use incentives for well-being
Spouses and/or children may
participate in programs
Smoker surcharge
Offer EAP

Value-based des

Surgical centers
On-site clinic

Medical homes

Accountable care

Janet McNichol
May 5, 2016