The Affordable Care Act’s Excise Tax is coming January 1st, 2020, and applies to all employers—including small businesses, tax-exempt organizations and government entities. It may seem as though 2020 is a long way off, but it’s never too early to begin planning for your organization’s compliance needs. Some estimates indicate that as many as 60% of employers could be subject to this tax, which is sometimes referred to as the “Cadillac tax” since it targets high-cost health coverage, unless they make changes to their plans before it goes into effect. There are many differing opinions on the value of this controversial aspect of the ACA, with many economists and government agencies believing it is a necessary provision to support healthcare reform, and many politicians and employers believing it will have a net negative effect and calling for its repeal. As it stands, the Excise Tax is law, and the best thing you can do to prepare your business is to be informed.
Essentially, the new rule sets a dollar limit on the total amount employers can spend on health care coverage for employees. Any excess costs above this limit during a “taxable period” will be taxed at 40% (non-deductible). In 2020, these limits are $10,200 for the year for self-only coverage, and $27,500 for family coverage (any coverage provided to an employee and at least one other beneficiary). These limits are slightly higher for retirees and high-risk professionals, and have been indexed to increase with inflation year over year as well. The “taxable period” is generally considered to be a full calendar year; though the language of the legislation does provide the IRS with the ability to prescribe different taxable periods for employers of varying sizes, this has not happened yet. The dollar limit is calculated on a monthly basis, using 1/12 of the annual amount. Calculations are based on the actual plan the employee is enrolled in, rather than the most expensive one offered to them. Exemptions exist for disability income insurance, liability insurance, workers’ compensation, automobile medical payment insurance, dental- and vision-only coverage, and a small number of other plans. However, any employer-sponsored plan that does not meet one of these exemptions may be subject to the tax, regardless of the size of the employer.
One major goal of the Excise Tax is to slow the rate of cost increase for healthcare across the market, which will especially benefit those in low-cost plans. It also aims to cap the amount of tax-free benefits that can be provided by employers, and generate revenue to offset some of the costs of the other aspects of the ACA. A Congressional Research Service report estimates that the tax will reduce healthcare expenditures nationwide by 3 to 4 percent, a savings of $60 billion by 2024, and estimates also show that the tax will reduce the deficit. Research on current health plans indicates that a large majority of covered employees will not be affected by the tax—the average employer-sponsored family plan comes in at 40% under the dollar limit that would be taxed. However, the Excise Tax has also come under fire across the political spectrum for placing an additional burden on employers that provide higher-tier health plans to their employees. The tax would not assist consumers with factors such as rising prescription drug costs, which contribute to a significant portion of health care spending. Many experts are also predicting that employers are likely to reduce health benefits for employees if they would otherwise incur the tax.
The IRS stipulates that the “coverage provider” is responsible for paying the tax. For fully-insured plans, the insurance company is responsible for the tax, though this is likely to be passed on to the employer. For Health Savings Accounts (HSAs) or Archer medical savings accounts (MSAs), the coverage provider is the employer. For self-insured plans, the person that administers the plan benefits is directly responsible, which will usually be the employer. In scenarios for which the employer is not the responsible party, costs are expected to be passed onto the employer. Insurance companies may also bill for a payment of the additional income tax incurred due to the Excise Tax reimbursement, because the tax is nondeductible.
The Excise Tax is perhaps the most controversial aspect of the Affordable Care Act, and several factors are still yet to be finalized and subject to change. For example. final regulations are likely to provide limit adjustments for the age and gender of the covered employee if they differ substantially from the national workforce average. As always, Ultimate Software will stay at the forefront of the legislative landscape and continue to offer updates and services to help your business remain compliant with the ACA.
For more information, take a look at our Demystifying Healthcare Reform volume on the Excise Tax.