ACA Cadillac Tax Delayed

President Donald Trump signed the Federal Register Printing Savings Act of 2017 (the Act) on January 22 to end the two-day government shutdown. In addition to funding the government for two-and-a-half weeks, the Act delays the onset of the Affordable Care Act’s (ACA’s) “Cadillac Tax” by two more years. The Cadillac Tax was originally intended to go into effect in 2018, but President Obama delayed the effective date until 2020. The Act now delays the Cadillac Tax until 2022.

 The Act also extended the Children’s Health Insurance Program (CHIP) funding for six years.

The Cadillac Tax is a 40% tax on the value of employer-sponsored health coverage that exceeds certain benefit thresholds. It is widely unpopular with employer groups and, as we have previously reported, Congress has expressed a strong bipartisan desire to repeal the Cadillac Tax entirely.

In the meantime, the US Department of the Treasury has not issued guidance on the Cadillac Tax since before the initial delay, and therefore, it is likely that the Act will further delay any additional Cadillac Tax guidance. 

The ACA Remains for Now, So What’s Next for Employers?

With the Republicans’ failure to pass a bill to repeal and replace the Affordable Care Act (ACA), employers should plan to remain compliant with all ACA employee health coverage and annual notification and information reporting obligations.

Even so, advocates for easing the ACA’s financial and administrative burdens on employers are hopeful that at least a few of the reforms they’ve been seeking will resurface in the future, either in narrowly tailored stand-alone legislation or added to a bipartisan measure to stabilize the ACA’s public exchanges. Relief from regulatory agencies could also make life under the ACA less burdensome for employers.

“Looking ahead, lawmakers will likely pursue targeted modifications to the ACA, including some employer provisions,” said Chatrane Birbal, senior advisor for government relations at the Society for Human Resource Management (SHRM). “Stand-alone legislative proposals have been introduced in previous Congresses, and sponsors of those proposals are gearing up to reintroduce bills in the coming weeks.”

These legislative measures, Birbal explained, are most likely to address the areas noted below.
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Late Breaking Benefits News for 2016

Congress and the IRS were busy changing laws governing employee benefit plans and issuing new guidance under the ACA in late 2015. Some of the results of that year-end governmental activity include the following:

Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”)

The PATH Act, enacted by Congress and signed into law on December 18, 2015, made some the following changes to federal statutory laws governing employee benefit plans:

• The ACA’s 40% excise tax (aka “Cadillac Tax”) on excess benefits under applicable employer sponsored coverage — so called “Cadillac Plans,” due to the perceived richness of such coverage — is  delayed from 2018 to 2020.

• Formerly a nondeductible excise tax, any Cadillac Tax  paid by employers will now be deductible as a business expense.

• Beginning with plan years after November 2, 2015,  employers with 200+ employees will not be required to automatically enroll new or current     employees in group health plan coverage, as originally required under the ACA.

• After December 31, 2015, individual taxpayers who purchase private health insurance via the Healthcare Exchange will not be eligible to claim a Health Care Tax Credit on their tax returns.

IRS Notice 2015-87

On December 16, 2015, the IRS issued Notice 2015-87, providing guidance on employee accident and health plans and employer shared-responsibility obligations under the ACA. Guidance provided under Notice 2015-87 applies to plan years that begin after the Notice’s publication date (December 16^th), but employers may rely upon the guidance provided by the Notice for periods prior to that date.

Notice 2015-87 covers a wide-range of topics from employer reporting obligations under the ACA to the application of Health Savings Account rules to rules for identifying individuals who are eligible for benefits under plans administered by the Department of Veterans Affairs. Following are some of the highlights from Notice 2015-87, with a focus on provisions that are most likely to impact non-governmental employers.

• Under the ACA, an HRA may only reimburse medical expenses of those individuals (employee, spouse, and/or dependents) who are also covered by the employer’s group health plan providing minimum      essential coverage (“MEC”) that is integrated with the HRA.

• Employer opt-out payments (i.e., wages paid to an employee solely for waiving employer-provided coverage) may, in the view of Treasury and the IRS, effectively raise the contribution cost for employees who desire to participate in a MEC plan. Treasury and the IRS intend to issue      regulations on these arrangements and the impact of the opt-out payment on the employee’s cost of coverage. Employers are put on notice that if an opt-out payment plan is adopted after December 16, 2015, the amount of the offered opt-out payment will likely be included in the employee’s cost of coverage for purposes of determining ACA affordability.

• Treasury and the IRS will begin to adjust the affordability safe harbors to conform with the annual adjustments for inflation applicable to the “9.5% of household income” analysis under the ACA. For plan years beginning in 2015, employers may rely upon 9.56% for one or more of the affordability safe harbors identified in regulations under the ACA, and 9.66% for plan years beginning in 2016. For example, in a plan year beginning in 2016, an employer’s MEC plan will meet affordability standards if the employee’s contribution for lowest cost, self-only coverage does not exceed 9.66% of the employee’s W-2 wages (Box      1).
• To determine which employees are “full-time” under the ACA, “hours of service” are intended to include those hours an employee works and is entitled to be paid, and those hours for which the employee is entitled to be paid but has not worked, such as sick leave, paid vacation, or periods of legally protected leaves of absence, such as FMLA  or USERRA leave.

• The Treasury and IRS remind applicable large employers that they will provide relief from penalties for failing to properly complete and submit Forms 1094-C and 1095-C if the employers are able to show that they made good faith efforts to comply with their reporting obligations.

What the Supreme Court’s Decision on Affordable Care Act Subsidies Means for Employers

In a 6-3 decision handed down June 25th by the U.S. Supreme Court, the IRS was authorized to issue regulations extending health insurance subsidies to coverage purchased through health insurance exchanges run by the federal government or a state (King v. Burwell, No. 14-114 ).

This means employers cannot avoid employer shared responsibility penalties under IRC section 4980H (“Code § 4980H”) with respect to an employee solely because the employee obtained subsidized exchange coverage in a state that has a health insurance exchange set up by the federal government instead of by the state. It also means that President Barack Obama’s 2010 health care reform law will not be unraveled by the Supreme Court’s decision in this case. The law’s requirements applicable to employers and group health plans continue to apply without change.

What Was the Case About?

IRC section 36B (“Code § 36B”), created by the Patient Protection and Affordable Care Act of 2010 (“ACA”), provides that an individual who buys health insurance “through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act” (emphasis added) generally is entitled to subsidies unless the individual’s income is too high. Thus, the words of the statute conditioned one’s right to an exchange subsidy on one’s purchase of ACA coverage in a state run exchange.

Since 2014, an individual who fails to maintain health insurance for any month generally is subject to a tax penalty unless the individual can show that no affordable coverage was available. The law defines affordability for this purpose in such a way that, without a subsidy, health insurance would be unaffordable for most people.

The plaintiffs in King, residents of one of the 34 states that did not establish a state run health insurance exchange argued that if subsidies were not available to them, no health insurance coverage would be affordable for them and they would not be required to pay a penalty for failing to maintain health insurance. The IRS, however, made subsidized federal exchange coverage available to them similar to coverage in a state run exchange.

It is ACA § 1311 that established the funding and other incentives for “the States” to each establish a state-run exchange through which residents of the state could buy health insurance. Section 1311 also provides that the Secretary of the Treasury will appropriate funds to “make available to each State” and that the “State shall use amounts awarded for activities (including planning activities) related to establishing an American Health Benefit Exchange.” Section 1311 describes an “American Health Benefit Exchange” as follows:

Each State shall, not later than January 1, 2014, establish an American Health Benefit Exchange (referred to in this title as an “Exchange”) for the State that (A) facilitates the purchase of qualified health plans; (B) provides for the establishment of a Small Business Health Options Program and © meets [specific requirements enumerated].

An entirely separate section of the ACA provides for the establishment of a federally-run exchange for individuals to buy health insurance if they reside in a state that does not establish a 1311 exchange. That section – ACA § 1321 – withholds funding from a state that has failed to establish a 1311 exchange.

Notwithstanding the statutory language Congress used in the ACA (i.e., literally conditioning an individual’s eligibility subsidized exchange coverage on the purchase of health insurance through a state’s 1311 exchange), the Supreme Court determined that the language is ambiguous. Having found that the text is ambiguous, the Court stated that it must determine what Congress really meant by considering the language in context and with a view to the placement of the words in the overall statutory scheme.

When viewed in this context, the Court concluded that the plain language could not be what Congress actually meant, as such interpretation would destabilize the individual insurance market in those states with a federal exchange and likely create the “death spirals” the ACA was designed to avoid. The Court reasoned that Congress could not have intended to delegate to the IRS the authority to determine whether subsidies would be available only on state run exchanges because the issue is of such deep economic and political significance. The Court further noted that “had Congress wished to assign that question to an agency, it surely would have done so expressly” and “[i]t is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort.”

What Now?

Regardless of whether one agrees with the Supreme Court’s King decision, the decision prevents any practical purpose for further discussion about whether the IRS had authority to extend taxpayer subsidies to individuals who buy health insurance coverage on federal exchanges.

The ACA’s next major compliance requirements for employers: Employers with fifty or more fulltime and fulltime equivalent employees need to ensure that they are tracking hours of service and are otherwise prepared to meet the large employer reporting requirements for 2015 (due in early 2016) ). Employers of any size that sponsor self-funded group health plans need to ensure that they are prepared to meet the health plan reporting requirements for 2015 (also due in early 2016). All employers that sponsor group health plans also should be considering whether and to what extent the so-called Cadillac tax could apply beginning in 2018.

IRS Issues Initial ‘Cadillac’ Excise Tax Guidance

The IRS and the Treasury Department issued a notice on the so-called “Cadillac Tax”—a 40 percent excise tax to be imposed on high-cost employer-sponsored health plans beginning in 2018 under the Affordable Care Act (ACA).

Notice 2015-16, released on Feb. 23, 2015, discusses a number of issues concerning the tax and requests comments on the possible approaches that ultimately could be incorporated in proposed regulations. Specifically, the guidance states that the agencies anticipate that pretax salary reduction contributions made by employees to health savings accounts (HSAs) will be subject to the Cadillac tax.

Background

In 2018, the ACA provides that a nondeductible 40 percent excise tax be imposed on “applicable employer-sponsored coverage” in excess of statutory thresholds (in 2018, $10,200 for self-only, $27,500 for family). As 2018 approaches, the benefit community has long awaited guidance on this tax. While many employers have actively managed their plan offerings and costs in anticipation of the impact of the tax, those efforts have been hampered by the lack of guidance. Among other things, employers are uncertain what health coverage is subject to the tax and how the tax is calculated.

Particularly, Notice 2015-16 addresses:

• Definition of applicable coverage
• Determination of cost of coverage
• Application of dollar limits

The agencies are requesting comments on issues discussed in this notice by May 15, 2015. They intend to issue another notice that will address other areas of the excise tax and anticipates issuing proposed regulations after considering public comments on both notices.

Applicable Coverage

Of most immediate interest to plan sponsors is the specific type of coverage (i.e., “applicable coverage”) that will be subject to the excise tax, particularly where the statute is unclear.

Employee Pretax HSA Contributions
The ACA statute provides that employer contributions to an HSA are subject to the excise tax, but did not specifically address the treatment of employee pretax HSA contributions. The notice says that the agencies “anticipate that future proposed regulations will provide that (1) employer contributions to HSAs, including salary reduction contributions to HSAs, are included in applicable coverage, and (2) employee after-tax contributions to HSAs are excluded from applicable coverage.”

Note: This anticipated treatment of employee pretax contributions to HSAs will have a significant impact on HSA programs. If implemented as the agencies anticipate, it could mean many employer plans that provide for HSA contributions will be subject to the excise tax as early as 2018, unless the employer limits the amount an employee can contribute on a pretax basis.

Self-Insured Dental and Vision Plans
The ACA statutory language specifically excludes fully insured dental and vision plans from the excise tax. The treatment of self-insured dental and vision plans was not clear. The notice states that the agencies will consider exercising their “regulatory authority” to exclude self-insured plans that qualify as excepted benefits from the excise tax.

Employee Assistance Programs
The agencies are also considering whether to exclude excepted-benefit employee assistance programs (EAPs) from the excise tax.

Onsite Medical Clinics
The notice discusses the exclusion of certain onsite medical clinics that offer only de minimis care to employees, citing a provision in the COBRA regulations, and anticipates excluding such clinics from applicable coverage. Under the COBRA regulations an onsite clinic is not considered a group health plan if:

• The health care consists primarily of first aid provided during the employer’s work hours for treatment of a health condition, illness or injury that occurs during work hours.
• Health care is only available to current employees.
• Employees are not charged for use of the facility.

The agencies are also asking for comment on the treatment of clinics that provide certain services in addition to first aid:

• Immunizations.
• Allergy injections.
• Provision of nonprescription pain relievers, such as aspirin.
• Treatment of injuries caused by accidents at work, beyond first aid.

In Closing

With the release of this initial guidance, plan sponsors can gain some insight into the direction the government is likely to take in proposed regulations and can better address potential plan design strategie