THE ACA S CADILLAC EXCISE TAX

Transcription

1 THE ACA S CADILLAC EXCISE TAX What ALL Public Pension Plans Should Know May 18, 2016 Presented by Kathryn Bakich Copyright 2016 by The Segal Group, Inc. All rights reserved.

2 Excise Tax on High Cost Plans Effective in % tax on excess over threshold Based on total cost of coverage; employer plus employee premium share Cost Threshold for Tax (indexed after 2018) $10,200 Single, $27,500 Family in 2018 Increased by $1,650 Single, $3,450 Family: For retired individuals age 55 or older and not eligible for Medicare If majority of employees covered by the plan are:» Engaged in a high-risk profession (list in statute), or» Employed to repair/install electrical or telecommunications lines 2

3 Excise Tax Notices and Requests for Information Treasury Department and Internal Revenue Service have published two notices requesting comments on various issues related to the excise tax Notice : comments were due May 15, 2015 Notice : comments were due October 1, 2015 Proposed regulations will follow after Treasury/IRS analyze comments Final regulations date unknown 3

4 Who Pays? Insurer for insured plan Plan administrator for self-insured group health plan, Health FSA or an HRA Where the employer acts as plan administrator to a self-insured group health plan, a Health FSA or an HRA, the excise tax is paid by the employer Where an employer contributes to an HSA or an Archer MSA, the employer pays Individuals do not pay the tax 4

5 Governmental Plans Required to Pay Governmental health plans are coverage subject to the excise tax Governmental plans are defined as coverage under any group health plan established and maintained primarily for its civilian employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any such government. 4980I(d)(1)(E) 5

6 Employer/Plan Responsibility The employer is responsible for calculating the excise tax on an employee s coverage The employer must 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 Then, the employer must report the taxable excess benefit attributed to each coverage provider to both the provider and the IRS 6

7 Type of Coverage Subject to the Excise Tax Self-insured employer-sponsored health plans Insured plans Governmental plans for civilian employees Retiree coverage Executive physical programs (Treasury/IRS likely to include) Multiemployer plans Coverage for a specific disease or illness and hospital indemnity or other fixed indemnity insurance, unless the coverage is paid for with after-tax dollars 7

8 Individual Account Plans Included in Cost of Coverage Health Flexible Spending Arrangements (FSA) Employer and employee salary reduction contributions included Health Savings Accounts (HSA) Employer and employee salary reduction contributions included (proposed) After-tax employee contributions excluded Health Reimbursement Arrangements (HRA) HRA applicable premium included Treasury/IRS considering various methods to determine the cost of coverage under an HRA, including how to deal with large balances that carry forward 8

9 On-Site Medical Clinics Included in Cost of Coverage On-site medical clinics are generally subject to the excise tax Treasury proposal: On-site medical clinics that offer only de minimis medical care would be excluded, e.g., first aid for injuries and illnesses What is de minimis? Immunizations Injections of antigens provided by employees Providing pain relievers, aspirin, etc., Treatment of injuries caused by accidents at work beyond first aid Other? 9

10 Employee Assistance Programs Potential approach to propose that EAPs that are an excepted benefit would be excluded Reminder: to be an excepted benefit, an EAP must meet all of the following requirements: Not provide significant benefits in the nature of medical care Not be coordinated with benefits under another group health plan. This means that participants in the other plan must not be required to use and exhaust the EAP benefits before becoming eligible for the other group health benefits, and eligibility for the EAP must not be dependent on participation in another group plan. The plan sponsor must not require participant premiums or contributions in order to participate in the EAP There must be no cost sharing Treasury/IRS ask for comments on why not to implement this approach 10

11 Dental/Vision Coverage under a separate policy, certificate, or contract of insurance which provides benefits substantially all of which are for treatment of the mouth (including any organ or structure within the mouth) or for treatment of the eye are excluded Treasury proposal: Exclude all limited scope dental and vision benefits that qualify as excepted benefits (including self-insured) Self-insured dental/vision coverage must be able to be declined (i.e., opt-out) by the participant or be administered under a separate contract from claims administration for any other benefits under the plan 11

12 High-Risk Professions Individuals covered by a plan sponsored by an employer the majority of whose employees covered by the plan are engaged in a high-risk profession or employed to repair or install electrical or telecommunications lines : Law enforcement officers Employees who engage in fire protection activities Individuals who provide out-of-hospital emergency medical care (including emergency medical technicians, paramedics, and first-responders) Individuals whose primary work is longshore work Individuals engaged in the construction, mining, agriculture (not including food processing), forestry, and fishing industries A retiree with at least 20 years of employment in a high-risk profession is also eligible for the increased threshold 12

13 Retirees and the Excise Tax Retiree-only plans are subject to the tax Some retirees get the higher threshold ($11,850/$30,950) those who are age 55 or older and not eligible for Medicare The ACA statute states that costs for pre-65 and 65+ retirees may be combined: Lower costs for Medicare retirees are permitted to offset higher costs for pre-medicare retirees Unclear whether/when retiree costs can be combined with actives 13

14 Indexing The 2018 thresholds could increase if the actual growth in the cost of U.S. health care between 2010 and 2018 exceeds the projected growth for that period Starting in 2019, the thresholds will increase based on general inflation (i.e., the Consumer Price Index for All Urban Consumers), not medical inflation For 2019, the adjustment will be based on CPI-U plus one percentage point (rounded to the nearest multiple of $50) For 2020 and beyond, the adjustment will be based on CPI-U Medical trend is higher than general inflation 14

15 Cost of Coverage Cost determined under rules similar to those used to calculate the COBRA applicable premium Changing employee premium contributions does not affect the total cost of the plan or the Excise Tax threshold Consequently, the value of the plan must be lowered to avoid reaching the threshold The COBRA premium is based on the cost of coverage for similarly situated non-cobra beneficiaries, and is determined by the plan sponsor in advance For self-insured plans: actuarial basis method and past cost method 15

16 Cost of Coverage Proposed approach in Notice : Each group of similarly situated employees would be determined starting with all employees covered by a particular benefit package, then subdividing that group based on: Mandatory disaggregation rules (self-only or other-than-self-only coverage) Permissive disaggregation rules (e.g., bona fide work classifications, CBA, etc.) High Option HMO PPO-1 Standard Option PPO PPO-2 16

17 Who Calculates the Tax and Who Pays The coverage provider pays the tax: For insured benefits, the health insurer is the coverage provider If the employer makes HSA contributions, the employer is the coverage provider For other self-insured benefits, the coverage provider is the person that administers the benefits The definition of coverage provider is one of the main issues on which Treasury/IRS have sought comments in Notice To calculate the tax, the employer has to: Combine the cost of the different benefits, Calculate the amount of the excess benefit, Determine the pro rata share of the excess attributable to coverage provider, and Report the taxable excess benefit attributed to each coverage provider to the coverage provider and to the IRS 17

18 Penalties Penalties may be assessed on employers or plan sponsors who do not accurately perform the required calculations No penalty to providers, but they must pay any additional tax assessment The penalty amount is 100% of the additional excise tax that must be paid by providers due to the miscalculation, plus interest based on IRS underpayment interest rate Penalties do not apply in certain cases, e.g., if reasonable care was exercised and there is no willful neglect 18

19 Ten-Year Summary of Selected Health Benefit Plan Cost Trends ( Actual and Projected 1 ) Compared to CPI-U 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 9.8% 9.7% 9.7% 9.5% 9.4% 8.9% 7.7% 7.9% 7.0% 2.9% 7.4% 3.8% 10.2% 9.7% 9.5% 7.9% 4.0% -0.3% 8.7% 8.3% 7.6% 6.4% 8.0% 7.8% 8.4% 7.5% 5.0% 3.6% 4.5% 1.6% 3.2% 7.3% 6.7% 5.5% 3.0% 2.1% 6.7% 7.6% 6.1% 5.7% 5.5% 3.1% 10.7% 6.5% 7.8% 7.5% 6.3% 6.2% 1.9% 1.5% 1.6% -1% PPO (without Rx) POS (without Rx) HMO (without Rx) MA HMO Rx 2 CPI-U 3 8.6% 3.9% 0.1% 11.3% 8.0% 7.8% 6.8% 3.5% Source: 2016 Segal Health Plan Cost Trend Survey 1 All trends are illustrated for actives and retirees under age 65, except for MA HMOs. 2 Prescription drug trend data for 2007 only reflects retail. For , prescription drug retail and mail order delivery channels are combined. 3 Consumer Price Index for All Urban Consumers, on a seasonally adjusted basis. Source: Bureau of Labor Statistics. Percentages for represent yearly changes based on yearly averages. Percentage for 2015 represents monthly change from June 2015 to July

20 Regional Variations The Segal Trend survey found regional variation among projected trend rates for PPO and POS plans combined: [note that regional results are subject to greater variations due to limited sample size] The lowest trend rates are expected in the Midwest (6.1%) The highest trend rates are expected for the West (9.8%), for the second year in a row 9.8% 6.1% 7.5% 7.1% National projected trend rates for PPOs and POS plans are 7.9%. 20

21 KFF Prediction of Employers with Excise Tax Liability Year TABLE 1: SHARE OF EMPLOYERS WITH AT LEAST ONE PLAN HITTING THRESHOLD High-Cost Plan Tax Self-Only Threshold Premium, HSA, HRA Premium, HSA, HRA & FSA 2018 $10,200 16% 26% 2023 $11,800 22% 30% 2028 $13,500 36% 42% Source: Kaiser Family Foundation analysis (Aug. 2015) 21

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24 Revenue Effects In March 2015, the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) significantly reduced their most recent estimates of revenue from the Excise Tax New estimate: the tax will raise $87 billion over the first eight years of implementation (FY2018 to FY2025) Previous estimates of revenue were 41 percent ($62 billion) higher Revenue estimate is $3 billion in FY2018 Why the decrease? Decline in premium growth Where does the revenue come from? ¼ would be excise tax receipts ¾ would be from a net increase in employees taxable compensation and, to a lesser extent, in employers deductible expenses This assessment assumes that employers will shift compensation over time from health benefits to wages to reduce or avoid the Cadillac tax. 24

25 Legislative Activity U.S. House of Representatives The Middle Class Health Care Tax Repeal Act (H.R. 2050) sponsored by Rep. Joe Courtney (D-CT) Ax the Tax on Middle Class Americans' Health Plans Act (H.R. 879) sponsored by Rep. Frank Guinta (R-NH) The Guinta bill has only Republican co-sponsors; the Courtney bill has bi-partisan sponsors; Together, the number of co-sponsors of the bills is more than a majority of House members The only substantive difference is that the Courtney bill retains the W-2 reporting requirement for health coverage and the Guinta bill does not. Neither bill has a revenue offset U.S. Senate Senators Dean Heller (R-NV) and Martin Heinrich (D-NM) introduced full repeal bill on September 17, 2015, the Middle Class Health Benefits Tax Repeal Act of 2015 Senator Sherrod Brown (D-OH) introduced full repeal bill on September 24, 2015, the American Worker Health Care Tax Relief Act of 2015 (S. 2075) with 10 Democratic and 1 Independent co-sponsors The Brown bill includes a sense of the Senate regarding revenue offsets for repeal, stating that the revenue loss resulting from the repeal of the excise tax on high cost employer-sponsored coverage under section 4980I of Internal Revenue Code should be offset to ensure that the [ACA] continues to reduce the deficit while improving coverage for millions of Americans 25

26 Potential Amendments to Excise Tax Delay effective date two-five years Improve indexing of the tax thresholds (increase CPI-U) Increase dollar value of tax thresholds Tax triggered at the 90% or 85% AV level Exempt retiree-only health plans Permit geographic adjustments Exempt FSAs, HSAs, and/or HRAs from the cost of applicable coverage (or exempt employee salary deferral) Improve the high-risk occupations language to cover more workers; provide higher adjustment Improve adjustments for age/gender 26

27 First Legislative Change to Tax Consolidated Appropriations Act of 2016 (Public Law ) (December 18, 2015) delays three taxes included in the Affordable Care Act: The excise tax on high-cost plans (delayed until 2020), The health insurance tax (suspended for 2017), and The medical device tax (suspended for 2016 and 2017) In addition to delaying the effective date of the tax, the law Changes the excise tax from non-deductible to deductible, and Calls for a study on how best to determine the age and gender adjustment that can result in an increase in the base threshold The law does not change the threshold levels or indexing for

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29 Avoid the Tax Lower the Baseline Cost Cost Control Strategies Calculation Strategies Retiree Strategies 29

30 Strategies to Manage Health Plan Costs 1. Use plan designs to promote use of lower-cost settings. Adjust participant cost sharing to encourage more efficient use of health care system (e.g., lower copays for primary care providers, retail clinics, telemedicine and generic drugs). 2. Find the best value networks: Consider narrow networks or custom networks Remove high-cost outlier providers who cannot prove their value Direct contract for best value medical providers Install plan cost trend cap or risk-sharing arrangements with networks 3. Ensure that network hospitals use discharge planning, medication management and continuum of care to reduce unnecessary hospital readmissions and complications from non-adherent patient compliance with treatments. 4. Improve wellness programs effectiveness. 5. Encourage insurers to make costs more transparent. 30

31 Strategies to Manage Health Plan Costs 6. Explore how integrated health care, like Patient-Centered Medical Homes (PCMH) and Accountable Care Organizations (ACO) might help to better manage participants health and lower cost from alternative reimbursement strategies. 7. Audit claims for potential waste and abusive billing practices. 8. Expand the use of reference-based pricing, in which the plan limits a payment per treatment or service to a reasonable market-based maximum, to steer participants towards best value, higher-quality hospitals or physicians for specific procedures or conditions. 9. Expand focus of high deductible health plan options with health savings account defined contribution strategies (e.g., premium incentives). 10. Educate participants to be better health care consumers. 31

32 Questions Kathryn Bakich Senior Vice President, National Health Compliance Practice Leader 32