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The Internal Revenue Service and Treasury Department’s Feb. 23, 2015,
Notice 2015-16 on the “Cadillac tax”—a 40 percent excise tax on high-cost employer-sponsored health plans beginning in 2018—raises questions that employers have a chance to answer in comments due by May 15, 2015. Among the questions is how to calculate the value of health reimbursement arrangements (HRAs).
“The statute applies a 40 percent excise tax on an excess benefit provided to an employee,” noted Paul Hamburger, an attorney with Proskauer in Washington, D.C. “The term ‘excess benefit’ refers to the total aggregate cost of all the applicable coverage provided to that employee that is in excess of certain statutory dollar thresholds—$10,200 for self-only coverage and $27,500 for other-than-self coverage.”
He explained that “in order to calculate the tax, you first have to figure out what is applicable coverage. Then you have to add up the cost of that coverage. Then you have to compare it to the applicable threshold to see if the tax applies. There are lots of different types of medical coverage available to employees. Some are included in applicable coverage and some are not. But among the included benefits, you don’t measure the tax in isolation—benefit by benefit. Instead, you add up all the applicable coverage benefits to get an aggregate cost.”
“Employer contributions to an HSA [health savings account]—including employer credits as well as pretax employee salary reduction amounts—and to an HRA are within the category of applicable coverage,” Hamburger said. Those amounts “are counted along with all other coverage to determine the aggregate cost. So if an employer has a broad group health plan plus an HSA, the cost of those benefits would be added and then compared to the threshold. If the threshold is exceeded, then a tax is owed.
“If the employer projects that the tax would be exceeded, the employer could decide to lower benefits in order to have the aggregate cost fall below the threshold,” Hamburger added. “This does not mean that the employer has to reduce contributions to the HSA. The employer might be able to reduce benefits under the broad group health plan instead.”
Controversially, employees’ pretax HSA contributions are treated like employer money for excise tax purposes. Richard Stover, FSA, MAAA, a principal and actuary for Buck Consultants in Secaucus, N.J., said including employees’ own contributions as part of the value of the benefit provided could represent a matter of policy. Democrats have been anti-HSAs, and Republicans have been in favor of them, he noted.
HRAs, which are solely funded by employers, clearly are part of applicable coverage, according to Stover. But there is only limited guidance at this point on how to value them. He said there are two main approaches: either to value the amount the employer puts in them within a year or to measure by the average employee usage for a year.
Some employers may prefer a simpler approach for HRA cost purposes, even if that means the HRA would be valued higher than under another approach, according to Hamburger.
“The reason is that employers may believe that they are sufficiently under the applicable threshold, so that a simpler approach would not end up subjecting them to the excise tax. So, for example, measuring cost based solely on amounts made available each year would be simple and provide certainty. However, it might inflate true economic cost if there are large contributions in one year that get carried over to future years,” he said, adding, “There is no one right answer.”
Dental and Vision, EAPs
Fully insured dental and vision plans are excluded from the excise tax. And the agencies may use their regulatory authority to exclude self-insured dental and vision plans from the excise tax, Stover noted.
Employee assistance programs are “excepted benefits” that won’t be subject to the taxes either, Stover said.
The dollar thresholds are indexed to increase according to the Consumer Price Index (CPI)—the general inflation index—not by health care costs, which means more and more of a plan’s value may become subject to the Cadillac tax beyond the initial effective date in 2018, Stover noted.
There’s a chance there may be a change in administrations that might result in the Cadillac tax not taking effect in 2018, Stover added. But he said, “I would not hold my breath waiting for that,” noting that the Cadillac tax was a “Republican idea” that is expected to generate “significant revenue.”
Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him
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