Groups Ask for Flexibility With Cadillac Tax; Say It Will Paralyze Plan Design

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By Kristen Ricaurte Knebel

May 22 — A chorus of employer groups asked that forthcoming regulations implementing the ACA's Cadillac tax provide employers with maximum flexibility, as many are concerned the tax has the potential to negatively affect plan design and benefits.

In addition to the flexibility that employers need to implement the tax, groups said that more plans than intended will eventually get swept up in the excise tax on high-cost health plans under tax code Section 4980I, resulting in negative consequences for employers and their employees, according to various comment letters, all dated May 15.

Groups also pushed for a delayed implementation date of the tax, or at the very least a good faith compliance period.

The comments were in response to Internal Revenue Service Notice 2015-16, which kick-started the process of crafting regulations for the excise tax under Section 4980I that many employers have dreaded since the Affordable Care Act became law.

The IRS and Treasury Department said Notice 2015-16 was “intended to initiate and inform the process of developing regulatory guidance” regarding the Affordable Care Act's 40 percent excise tax under tax code Section 4980I, informally known as the Cadillac tax. The notice addresses several areas of interest under Section 4980I, including the definition of applicable coverage, how the cost of applicable coverage is determined and “the application of the annual statutory dollar limit to the cost of applicable coverage.”

Deep Concerns 

There is deep concern among National Business Group on Health members that implementing Section 4980I will increase the cost of providing group health coverage and hinder the ability to “maintain innovative plan features,” the group said in its comment letter.

Based on its preliminary estimates, the NBGH said its members expect the cost of the health coverage they offer will trigger the tax's applicable dollar limits for self-only and other-than-self-only coverage sometime between 2018 and 2025.

Additionally, “as health care cost inflation continues to outpace increases in the consumer price index, it will be increasingly difficult to offer plan options” that satisfy the ACA's annual cost-sharing limits, meet the minimum value standard and don't exceed the tax's applicable dollar limits.

“This will be particularly true if only a cost-of-living adjustment—as opposed to an adjustment for health care cost inflation—applies to determine §4980I applicable dollar limits for taxable years after 2018,” the NBGH said.

The NBGH said its members also are concerned that the IRS is planning to include in the definition of applicable coverage contributions to health flexible savings arrangements, health reimbursement arrangements and health savings accounts that are coupled with high-deductible health plans.

All of those arrangements play an important role in employer-provided coverage for many reasons, including helping to contain costs and encouraging participants to look for “higher-quality and lower-cost health care services and providers,” the NBGH said.

The group also asked that the IRS exclude from applicable coverage on-site health clinics, wellness programs and self-insured limited scope dental and vision coverage that meets the definition of an excepted benefit.

Delay the Date 

Because of the limited amount of time the IRS and Treasury have to craft rules on the Cadillac tax before 2018, the ERISA Industry Committee asked the agencies to consider postponing the implementation date, according to a letter from the group.

“We suggest a two-year transition period to provide ample time to develop appropriate cost-determination rules, to develop a workable system for collecting and paying any excise tax due, and to provide employers time to plan and implement benefit design changes, to develop and test systems and to communicate changes to covered employees and retirees,” ERIC said.

Like the NBGH, the group asked that the IRS exclude health savings accounts, most on-site medical clinics, wellness programs and excepted benefits.

“These benefits are all incidental, and do not in any way represent ‘high-value' employer-provided coverage; many, in fact, have been instituted to keep employees and their dependents healthier and to help reduce the cost of health care coverage,” ERIC said.

In addition, the group asked for a “blanket exception” for retiree health plans as employers and retirees shouldn't be “punished” for following expectations for “bona-fide health coverage” that were created before Section 4980I's effective date.

ERIC also asked that the IRS and Treasury not chain Section 4980I's methods for determining cost to the cost determination rules of the Consolidated Omnibus Budget Reconciliation Act, as was put forth in Notice 2015-16. The organization said these cost determination methods serve a completely different purpose.

“Instead, the cost-determination methods should be flexible enough to permit employers to use any actuarially reasonable cost determination,” the group said in the letter.

Negative Impact 

The U.S. Chamber of Commerce also said it is concerned about the impact the Cadillac tax will have on plan designs, saying that the tax “will have sweeping and unanticipated adverse impacts on plan designs that Congress likely did not believe were either high cost or overly generous.”

Those designs include high-deductible health plans that are offered along with HSAs, as well as minimum essential coverage that employers must offer under Section 4980H.

“We urge Treasury and the IRS to carefully promulgate rules that only impose the tax on the plans that Congress intended—the excessively generous group health plans—and not group health plans that merely provide the minimum required level of coverage,” the group said.

The organization pointed out that while the Joint Committee on Taxation initially estimated that only a “small subset of plans” would be affected by the tax, a Mercer LLC study released in November 2014 indicated that around 30 percent of all employers would be subject to the tax in 2018 and around 58 percent will surpass the tax's threshold by 2022.

“We urge Treasury and the IRS to consider how to advance the underlying policy goals of the law and provide consistency as to what the law is attempting to encourage employers to do—offer minimum essential coverage,” the group said.

The group asked the IRS and Treasury to create rules for the tax that include a safe harbor that will exempt group health plans meeting the minimum essential coverage requirement from the tax.

As other groups did, the Chamber asked that the IRS define health coverage to exclude benefits that are offered separately or can be offered apart from health coverage.

Undermining the System 

While the ACA was designed to build on the employer-provided, health-care system, the excise tax under Section 4980I could undermine that very system, according to a letter from the American Benefits Council.

“The 40 Percent Tax will very negatively impact American workers and their families, ultimately leaving them with fewer choices and higher out-of-pocket costs,” the ABC said in the letter.

The group argued that employers may have to perform what is tantamount to a high-wire act to try to satisfy Section 4980H and avoid the Cadillac tax, something that employers shouldn't have to do.

“Employers should not—and cannot—be put in the untenable position of having to choose between offering qualifying coverage under Code Section 4980H (the employer shared responsibility requirement) or offering coverage that is not subject to the 40 Percent Tax under Code Section 4980I,” the group said.

Because of this, it is important that the IRS and Treasury make it clear that offering minimum essential coverage for purposes of Section 4980H won't result in also having to pay the Cadillac tax, the ABC said.

The group asked that the final rules implementing the tax be easy to administer for both employers and coverage providers and to have safe harbors where appropriate that would reduce administrative burdens and “increase tax certainty and efficiency.”

Additionally, employers will need information on the applicable limits and valuation rules well before the rules go into effect in 2018, the group said.

“This is not just a one-year transition issue, but an issue that will play out year after year because of the time constraints faced by employers in designing plans and preparing enrollment materials and other employee communications,” the ABC said.

More Plans Hit 

Consulting firm Mercer said in its letter that it projects the number of employers paying the Cadillac tax will increase steadily from year to year, because the indexing formula for the Section 4980I excise tax is tied to the consumer price index and not medical inflation.

This means even employers who drastically change their coverage to avoid the tax are projected to eventually hit it, Mercer said.

“We are concerned that the employer goal to continue to provide employee health coverage that satisfies the Affordable Care Act mandates, avoids employer shared responsibility assessments and meets employee needs is on a collision course with the excise tax,” Mercer said.

Mercer followed suit with the other groups, asking that Treasury and the IRS exclude “non-core medical benefits” from the calculation of coverage costs “to the extent permitted by the statute.”

In addition, Mercer asked that employers be permitted to have the flexibility to calculate the cost of coverage in a manner that is consistent with reasonable actuarial principles.

The group also asked that the agencies either delay the implementation date of forthcoming regulations or provide employers with a “good faith compliance period.”

To contact the reporter on this story: Kristen Ricaurte Knebel in Washington at kknebel@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com

The comment letters are at: ABC (http://op.bna.com/pen.nsf/r?Open=krkl-9wrn9u), Chamber of Commerce (http://op.bna.com/pen.nsf/r?Open=krkl-9wrk7l), ERIC (http://op.bna.com/pen.nsf/r?Open=krkl-9wrjxx), Mercer (http://op.bna.com/pen.nsf/r?Open=krkl-9wrkvk) and NBGH (http://op.bna.com/pen.nsf/r?Open=krkl-9wrhyq).