So Long 2019; Farewell, Cadillac Tax!

We’ve seen the end of 2019. Unless you’re my neighbor, we’ve all put away our holiday decorations and are settling into the new year (and, depending on whom you ask, a new decade).

One of the most exciting developments in our industry in the past few months arrived just as 2019 came to a close: President Trump signed into law the Further Consolidated Appropriations Act of 2020.1 This legislation, which included dozens of significant health and welfare provisions, repealed three tax provisions originally enacted as part of the Affordable Care Act (ACA): the 40 percent excise tax on high-cost employer-provided health coverage, the 2.3 percent excise tax on medical devices, and an annual fee on health insurance providers (which included health insurers, health maintenance organizations [HMOs], and Multiple Employer Welfare Arrangements [MEWAs]).

By way of background, the excise tax on high-cost health coverage (often referred to as the “Cadillac Tax”), was first enacted as part of the ACA in 2010. This tax, which was a significant revenue provision of healthcare reform and intended to curb the preferred treatment of employer-sponsored health plans, was originally added as Internal Revenue Code § 4980I and was to be effective for taxable years beginning after 2017. This provision called for a tax of the amount—if any–by which an employee’s monthly employer-sponsored health benefit cost exceeded an annual threshold amount set by the government. Originally, the statutory limits–to have been effective in 2018–were $10,200 for individual-only coverage and $27,500 for family coverage; they were projected to increase to $11,200 and $30,150, respectively, by 2022.

This would have applied to each primary plan participant, such as current (or former) employees and surviving spouses. The total tax attributable to these excess benefit totals was to be determined by the employer or plan sponsor per person; the sums would then be allocated among the coverage providers that provided the employee’s coverage (such as insurers, administrators, or employer plan sponsors) along with the responsibility of paying this excise tax to the Internal Revenue Service. Not only would insured and self-funded group health plans have been subject to these calculations, but also other employer-sponsored health coverage otherwise excluded from income, such as health savings accounts (HSAs), health reimbursement arrangements, and health care flexible spending accounts (FSAs). And since the Cadillac Tax provisions factored in both employer and employee contributions, 19 percent of employers already in 2015 were considered to have plans that would exceed the statutory thresholds if these tax-favored employee-paid plans were included.2

The administrative burden of totaling these excess amounts coupled with the financial hardship of actually paying these fees made the concept of the Cadillac Tax arguably less than popular, with many voices in the industry–and the employer community at large–calling for changes (if not elimination) of this provision, or at least a means of excluding employee contributions to HSAs and FSAs from the cost calculation. Otherwise, employers sponsoring health plans were faced with the decision of whether they should reduce their benefits or increase their deductibles to avoid payment of the 40 percent excise tax.
Fortunately, this entire excise tax has been fully repealed. Employers and employees can collectively breathe a sigh of relief from the prospect of potential payroll tax increases or reductions in benefits.3

Second, the medical device excise tax, which was enacted as part of the Health Care and Education Reconciliation Act of 2010 (which modified the ACA), imposed a 2.3 percent manufacturer’s excise tax on the value of certain medical devices sold domestically after December 31, 2012. This tax—which would have applied to such devices as pacemakers, imaging technology (e.g., CAT scans, MRIs, ultrasound equipment), and artificial joints; devices generally purchased by the public for individual use were exempted–was twice suspended by Congress and was not in effect between January 1, 2016, and December 31, 2019. The Further Consolidated Appropriations Act of 2020 fully repealed this tax as well, effective January 1, 2020.

Also fully repealed is the annual fee introduced by the ACA on health insurance providers. This provision, which took effect in 2014 (and was subsequently under a moratorium for 2017 and 2019), imposed an annual fee on each covered entity engaged in the business of providing health insurance with respect to the health risks of United States citizens and residents. This would have applied to all policies in the individual and small group markets, insured employer-sponsored plans, Medicaid managed care, Medicare Part D, and Medicare Advantage plans. The fee for all covered entities–referred to as the “applicable amount”–was divided based on their relative market share of the United States health insurance business. Effective January 1, 2021, the repeal of this fee may mean a reduction in premiums passed on to covered individuals in 2021.

But wait, there’s more!

The ACA created the Patient-Centered Outcomes Research (PCOR) Institute, which is a non-profit corporation that supports clinical effectiveness research. To provide financial assistance to this endeavor, certain health insurers and self-insured health plan sponsors are required to pay PCOR fees based on the average number of lives covered by welfare benefits plans. Under the ACA provision, PCOR fees were collected for plan years ending before October 1, 2019. The applicable fee for plan years ending on or after October 1, 2018, and before the 2019 phase-out date, was $2.45. This amount, indexed each year, is determined by the value of national health expenditures and are reported and paid annually with the submission of IRS Form 720 (Quarterly Federal Excise Tax Return). These PCOR fees are due by July 31 of the year following the end of the plan year along with the IRS Form 720. The appropriations act reinstates this PCOR requirement through plan years ending before October 1, 2029.

Another modification of the appropriations act is the extension of the Health Coverage Tax Credit (HCTC). The Trade Act of 2002 created the HCTC, which is a refundable tax credit equal to a portion of premiums paid by certain individuals for COBRA continuation coverage or other qualified health insurance coverage for themselves and their qualifying family members. The HCTC expired on January 1, 2014, but was retroactively reinstated and modified by the Trade Adjustment Assistance Reauthorization Act of 2015 to 72.5 percent of the taxpayer’s premiums through December 31, 2020. The appropriations act extended the HCTC program for coverage periods beginning before January 1, 2021. This amount can be taken as a tax credit or the recipient can elect to receive advance payment of 72.5 percent of premiums paid.

The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.

References:

  1. https://www.congress.gov/116/bills/hr1865/BILLS-116hr1865enr.pdf.
  2. “How Many Employers Could be Affected by the Cadillac Plan Tax?”; http://files.kff.org/attachment/issue-brief-how-many-employers-could-be-affected-by-the-cadillac-plan-tax.
  3. “The Impact of the Health Care Excise Tax on U.S. Employees and Employers,” http://www.americanhealthpolicy.org/Content/documents/resources/Excise_Tax_11102014.pdf.

Jason Folks, CFCI, is the director of compliance services with WageWorks, Inc., in Irving, TX. He has over 15 years of experience in regulatory compliance and employer consultation.

Folks attended New York University and holds a Certified in Flexible Compensation Instructor (CFCI) through the Flexible Compensation Institute, LLC, a wholly-owned subsidiary of the Employers Council on Flexible Compensation.

Folks can be reached via email at: Jason.Folks@WageWorks.com.