Affordable Care Act – Planning to Deal
with the Pay-or-Play Penalties
Effective January 1, 2015
Anne Hydorn Hanson Bridgett LLP Telephone: (415) 995-5893 Email: [email protected]
Judy Boyette Hanson Bridgett LLP Telephone: (415) 995-5115 Email: [email protected]
September 23, 2015
Employer-Shared Responsibility
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Large Employers Must Play or Pay
• Prior to health care reform, no employers were required
to offer health coverage to employees
• Employer mandate: beginning January 1, 2015, possible
penalty tax on certain Large Employers
(called Applicable Large Employers - ALEs)
• Penalty tax applies to all employers: private,
governmental, for-profit, and non-profit
• Individual mandate went into effect January 1, 2014
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Play or Pay Effective Dates
• Play or pay rules originally effective January 1, 2014
• One year “reprieve” granted for all affected employers –
delay to January 1, 2015
• Final IRS regulations published on February 12, 2014
Additional one-year “reprieve” for employers with
50-99 full-time equivalent employees – now effective January 1, 2016, but special conditions apply to take advantage of delay
For large employers with 100+ full-time equivalent employees – still became effective January 1, 2015
Special (and extremely complicated) transition rules for non-calendar year plans
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Employers with Fewer than 100 FTEs
• Additional one-year implementation delay for employers
with 50-99 full-time equivalent employees – must
comply effective January 1, 2016
• Special conditions apply for relief
Must base measurement of FTEs on 2014 data
Beginning February 9, 2014 through December 31, 2014, the employer could not reduce the hours or size of the workforce to take advantage of the delay (workforce reductions for bona fide business reasons not included)
Must not eliminate or materially reduce the coverage offered as of February 9, 2014 (special rules about what it means to not
“eliminate or materially reduce” coverage)
Required certification that conditions are met
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Who is an Applicable Large Employer?
• Applicable Large Employer (ALE) for current calendar year if in prior calendar year period, averaged at least 50 “full-time” employees (or full-time equivalents – FTEs)
Special transition 2014 “look-back” period for determining 2015 status (any consecutive 6-month period, if desired)
• Full time = avg. at least 30 hours of service per week or 130 hours of service per month (part-time is anything less)
• Common law definition of employee applies (excludes leased employees, independent contractors, sole proprietors, partners, and 2% S corporation shareholders); definition hard to apply
• Must count all hours of service for which employee is paid or entitled to pay including for paid time off (e.g., vacation, sick etc. – no limit)
• All employees of a “controlled group” are counted to determine whether each entity within the controlled group is an ALE
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Special Rule for “Seasonal Workers”
• General rule – seasonal workers are taken into account for purposes of determining ALE status
• Who is a “seasonal worker”?
Workers who perform labor or services on a “seasonal basis”
Retail workers employed exclusively during “holiday seasons” (final regulations intentionally do not indicate specific holidays or length of holiday season)
Employers can apply a reasonable good faith interpretation of that term to define who is a “seasonal worker” for determining large employer status
• If you have 50+ FTEs for 120 days or less during the previous year only because you counted seasonal workers, not an ALE for the current calendar year
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New Rule: Certain Veterans Excluded
• July 2015 – New legislation: Surface Transportation and Veterans Health Care Choice Improvement Act of 2015
• Exempts individuals (solely for determining ALE status) in any month for which they have medical coverage through (1) any uniformed services (including TRICARE), or (2) certain Veterans’ Affairs health care programs
• Applies for months beginning after December 31, 2013 8
Counting Full-Time Employees
• Total FT employees per month +
• Total FTEs per month
Total PT hours for month, divided by 120
Example: 40 part-timers at 90 hours per month (3,600 total hours) = 30 FTEs
Step 1 Step 2 Step 3
Is average of monthly total in Step 1 ≥ 50?
No: you are not a Large Employer
Yes: go to Step 3
Was monthly total ≥ 50 for 120 or fewer days (or four calendar months) AND total would be < 50 if seasonal workers were excluded?
Yes: you are not a Large Employer
No: you are a Large employer
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Newly Large Employers
• Some employers will transition from a small employer to a large employer due to an expansion in number of employees
• Final rules provide that if employee not offered coverage at any time during prior calendar year because employer was not an ALE in prior year, you must offer coverage on or before April 1 of the first year you are an ALE to avoid penalties for January through March
• This transition is available only once – so if an employer drops below 50 and then grows again – no grace period
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Penalty A Basics: Failure to Offer Penalty
• Employer fails to offer 95% (70% in 2015 only) of its full-
time employees and their dependents group health
coverage that provides “minimum essential coverage,” and
• Receives certification that at least one full-time employee is
enrolled in an Exchange AND eligible for a federal subsidy
• PENALTY
$2,000 X [the number of full-time employees less the
first 30 (80 in 2015 only)]
First 30 (80 in 2015 only) employees are disregarded for
purposes of calculating the tax
Penalty amount adjusted for inflation beginning 2015
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Who is a Dependent?
• Son, daughter, adopted child, or child placed for adoption –
up to age 26
• Final regulations:
removed stepchildren and foster children from definition
excluded children who are not U.S. citizens or nationals, unless a resident of U.S., Canada, or Mexico
confirmed that the term dependent does not include a spouse
clarified that a child is “dependent” through the end of the month he or she turns age 26
• Employers may rely on the employee’s representation about
children and their ages
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What is Minimum Essential Coverage?
• Group health coverage provided by an employer to its
employees
• Very broad – excludes HIPAA excepted benefits such as
certain stand-alone dental and vision policies or salary
reduction only health FSAs
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Who Can Get a Federal Subsidy?
• Subsidy may be available if:
you have household income between 100% and 400% of the federal poverty line
• 2 person family – income up to $63,720 (2015)
• 4 person family – income up to $97,000
• 6 person family – income up to $130,280
you are not eligible for Medicaid (or other government-sponsored programs like CHIP)
you are not eligible for employer-provided coverage or are eligible for employer-provided coverage, but it is not of minimum value or affordable
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Penalty A: 2016 Example
• Large Employer fails to provide minimum essential
coverage to 95% of its full-time employees (and
dependents), and receives certification that at least one full-
time employee is enrolled in an Exchange and qualifies for
federal assistance
• In 2016, employer has 1000 full-time and 20 part-time
employees
• Penalty does not apply to part-timers or first 30
full-timers
Penalty = $1,940,000 ($2,000* X 970)
*as adjusted for inflation
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Penalty B Basics: Inadequate or
Unaffordable Coverage
• Employer offers 95% of its full-time employees (and their
dependents) minimum essential coverage, but coverage
does not provide minimum value or is unaffordable, and
• Receives certification that at least one full-time employee is
enrolled in an Exchange and eligible for a federal subsidy
• PENALTY – the lesser of:
$3,000 X [the number of full-time employees receiving
federal assistance], or
the amount calculated under Penalty A
Penalty amount adjusted for inflation beginning 2015
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Penalty B: Minimum Value
• Minimum-value test
Plan provides minimum value if it covers at least 60% of
benefit costs
Methodologies
• Minimum value calculator
• Design-based safe harbor checklists
• Actuarial certification
IRS proposed regulations – must also cover
“substantial” hospitalization and physician services
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Penalty B: Affordability
• General rule: “affordable” if employee contribution for self-
only coverage of the employer’s lowest cost plan that
provides minimum value does not exceed 9.5% of
employee’s household income
• Three safe harbor methods under which employers can test
the 9.5% to determine affordability
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Penalty B: Affordability Safe Harbors
Safe Harbor #1: Employee’s W-2 wages
• For full-year offers of coverage, 9.5% of the amount that
is equal to W-2 Box 1 wages determined after the end of
the calendar year on an employee-by-employee basis
• Required employee contribution for coverage during the
year must remain consistent amount or percentage of
W-2 wages – no employer discretionary adjustments to
contributions permitted
• Special adjustments for partial-year offers of coverage
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Penalty B: Affordability Safe Harbors
Safe Harbor #2: Rate of Pay• Hourly Employees
For each month, compare employee contribution to 9.5% of the amount that is equal to 130 hours multiplied by the lower of (a) the employee’s hourly rate of pay as of the first day of the coverage period (generally the first day of the plan year), or (b) the employee’s lowest hourly rate of pay during the calendar month
• Non-Hourly Employees
For each month, compare employee contribution to 9.5% of amount that is equal to employee’s monthly salary as of the first day of the coverage period
If monthly salary is reduced (including due to a reduction in work hours), the employer cannot use this safe harbor method
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Penalty B: Affordability Safe Harbors
Safe Harbor #3: Federal Poverty Line
• 9.5% of amount that is equal to the federal poverty line for a
single individual for the calendar year divided by 12
• Example:
2015 poverty line for a single individual = $11,770
(9.5% of $11,770)/12 = $93.18
Employee’s monthly contribution for self-coverage
cannot exceed $93.18
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Penalty B: 2016 Example
• Large Employer provides minimum essential coverage that
doesn’t meet minimum value or affordability tests, and
receives certification that at least one full-time employee is
enrolled in an Exchange and qualifies for federal subsidies
• In 2016, Large Employer offers coverage to 1000 full-time
employees, of whom 20 enroll in Exchange and receive a
federal subsidy
Penalty = lesser of
$60,000 ($3,000* × 20)
or $1,940,000 ($2,000* x 970)
*as adjusted for inflation
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Measuring Full-Time
• ACA focus is on full-time employees
• Full time = avg. at least 30 hours of service per week or 130 hours of service per month (part-time is anything less)
• For non FT employees (e.g., part-time or variable hour), can determine status using “look-back” measurement – very complex rules (or can use month-by-month measurement)
• Must count all hours of service for which employee is paid or entitled to pay, including paid time off (e.g., vacation, sick etc. – no limit)
• Final rules exclude bona fide volunteers
• If full-time during look-back measurement period, offer coverage for future “stability period”
• Recordkeeping is crucial
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Measurement, Administrative, & Stability
Periods
• There are generally three different “periods” that apply when measuring employee status
Measurement Period (MP) – the look back period during which you record hours and “measure” status
Administrative Period (AP) – the period you use for administering the results and offering coverage (e.g., open enrollment)
Stability Period (SP) – the period that a FT employee must be offered coverage, regardless of their FT or PT status during that period
• Measurement period must be 3-12 months – employer chooses
• Each “measurement period” has a corresponding “stability period” for offering coverage
MPs 6 months or less must have SPs of 6 months
MPs longer than 6 months must have equal SPs
• May have differing MPs and SPs for salaried versus hourly, different states, represented and non-represented, separate bargaining units, and different large employers within a controlled group
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Simple MP and SP examples
• MP is 3 months → SP is 6 months
• MP is 5 months → SP is 6 months
• MP is 9 months → SP is 9 months
• MP is 12 months → SP is 12 months
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Measurement and Administration
• If the period of coverage immediately followed the measurement period, there would be no time to:
Notify the employee of coverage availability
Let the employee make health care elections
Implement payroll changes for premium deductions
• An “administrative period” or “AP” is available before coverage must be offered
Up to 90 days after the end of the measurement period
Employers can fit the AP with open enrollment
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Example – 12 Month Measurement Period
Reasons for Choosing
• You choose 12 months for administrative simplicity
• Fits with one open enrollment per year
If 6 months, could need 2 open enrollments/year
Example MP (measure) Oct 15 – Oct 14
AP (administer) Oct 15 – Dec 31
SP (offer coverage) Jan 1 – Dec 31
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Basic Questions Employers
Need to Answer
• Are you an Applicable Large Employer?
• Who is a “full time” employee?
• How will you measure average hours worked for each employee?
• How you will deal with new hires in determining full time status?
• What coverage is offered to each full time employee?
• What is the value of that coverage?
• What is the cost of the coverage to each full time employee compared to his/her earnings?
• Are you subject to either of the two tax penalties?
• Are you better off from a financial standpoint paying the penalties?
• How will you report the required information to the IRS and others? 28
Very Complex – but don’t panic
• Many technical and complex rules relating to variable
hour, part-time, staffing agency, and other types of
employees
• There are ways to approach for determining strategy
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Enforced by IRS
• Annual report by each employer to IRS beginning 2015
• Includes: substantial information including name,
address, SSN of every full time employee with coverage
and months of coverage
• Annual information to each FT employee
• Information by Exchange to IRS
• IRS will use as basis for penalties
Employer can challenge, but you will need records for this
• Detailed regulations, draft instructions, and FAQs
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Information Reporting
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Overview
• The Affordable Care Act added two new sections to the Internal Revenue Code: 6055 and 6056
• In a nutshell: new information reporting to the IRS and individuals about health care coverage
• Why? – Help the IRS enforce individual and employer mandates
Code Section 6055 (Providers) – IRS enforcement of the individual mandate (individual shared responsibility)
Code Section 6056 (Large Employers) – IRS enforcement of the employer mandate (employer shared responsibility)
6055 & 6056 – who is eligible for federal premium assistance at the Exchange?
• Reporting is mandatory
• First information returns cover health care provided in 2015; information due to IRS and individuals early 2016
• Many, many details beyond the information presented today 32
Individual Mandate IRC Section 6055
Providers of Coverage Applies to:
• Insurers
• Small employers with self-insured plans
• Large employers with self-insured plans* File on the B-Series (Forms 1094-B and 1095-B)
1094-B = Transmittal Form to the IRS 1095-B = Statement to Covered Individual
Employer Mandate IRC Section 6056
Large Employers Applies to:
• Large employers with insured plans
• Large employers with self-insured plans*
File on the C-Series (Form 1094-C and 1095-C)
1094-C = Transmittal Form to the IRS 1095-C = Statement to Employee
*As a provider of coverage, Large Employers who provide coverage under a self-insured plan combine 6055 reporting with 6056 reporting on the C-Series forms
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6055: Individual Shared
Responsibility (Individual Mandate)
• 2014 – Individuals mandated to have “minimum essential
coverage” or pay a tax penalty
• Reported on individual’s federal income tax return
• Collected in the same manner as income tax
owed to the IRS
• “Minimum essential coverage” examples
Government-sponsored coverage (Medicare, Medicaid, CHIP, and TRICARE)
Qualifying employer-sponsored health coverage (excludes HIPAA excepted benefits such as certain stand-alone dental and vision policies or salary reduction only health FSAs)
Individual market health coverage (e.g., Exchange coverage) 34
Section 6055 Reporting –
Applies to Providers of Coverage
• Requires any “person” who provides minimum essential coverage to an individual during a calendar year to report health care coverage information to the IRS, and also provide a written statement to the individual
• Generally applies to:
Plan sponsors of self-insured health plans
Insurers with respect to insured plans, including those offered by employers, but not insured plans on the Exchange
Other entities that provide minimum essential coverage
• Allows individuals to establish, and the IRS to verify, the months in the year individuals were enrolled in minimum essential coverage and whether an individual is responsible for an individual tax penalty
• Insurers, and sponsors of self-insured health plans who are not applicable large employers (less than an average of 50 full-time equivalent employees), generally report information on Form 1094-B (transmittal form) and Form 1095-B (the employee statement)
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Plan Sponsors of Self-Insured Plans
• Who is the plan sponsor that must report?
Single employer with a self-insured group health plan
• the single employer
Plan maintained by more than employer
• each participating employer
Multi-employer plan
• the association, committee, joint board of trustees, or other representatives who establish or maintain the plan
• Employers who only sponsor an insured plan do not have a reporting requirement under Section 6055.
The insurance carrier is responsible in that case.
• Employers who offer self-insured coverage and are also a large employer subject to the employer-shared responsibility rules (i.e., subject to both sections 6055 and 6056) combine the reporting in one form under Section 6056 (Form 1095-C).
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Section 6055 Reporting – What Must
Employers Report?
• Name, address, and employer’s EIN number
• Responsible person’s name, address, and taxpayer ID number (TIN) or birth date if reasonable efforts to obtain TIN not successful (responsible person = primary insured)
• The name and TIN (or birth date) of each individual covered under the plan (i.e., including covered dependents) and the months for which the individual was enrolled in coverage and entitled to receive benefits
• In addition to this information, a provider must provide a contact person and contact information on the statement that the provider gives to the individual
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Section 6056 Reporting – Applies to
Applicable Large Employers
• ALEs report information on Form 1094-C (transmittal form) and Form 1095-C (the return/statement)
1094-C and 1095-C provided to IRS
1095-C also provided to employees
• Requires an ALE to report information about whether it offers
“minimum essential coverage” to its full-time employees, including various information about their enrollment in health care coverage
• Allows the IRS to enforce and administer the employer-shared responsibility rules (penalty taxes), and make determinations about an individual’s eligibility for a federal subsidy (premium tax credit) for Exchange coverage
• ALEs who offer self-insured plans combine their 6055 reporting obligations with 6056 reporting on Series-C forms
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Special Rule for Governmental Employers
• General rule: ALE members who are part of an aggregated ALE under the controlled group rules must separately file and use their own EINs for reporting.
• Special rule: ALE members that are agencies or units of a government can designate another related governmental unit to report on their behalf; for example, a special district in California could designate another governmental agency in California to report on its behalf.
The designated reporting agency assumes responsibility for timely and accurate reporting, but the ALE member retains liability for potential penalty taxes.
The designation must be in writing, identify the category of employees for which the designated agency is responsible for reporting, and be signed by both the ALE member and the designated reporting agency, among other requirements.
The parties must make or revoke the designation before the deadline for filing the returns or furnishing the statements.
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Overview of the 1094-C Transmittal Form
Part I
• Identifying information about ALE Member; number of forms being transmitted with transmittal
Part II
• Whether transmittal is the “authoritative transmittal” for the ALE
• If authoritative: total number of forms filed for ALE; whether ALE member is part of an aggregated ALE; and certifications of eligibility for simplified alternative reporting methods and transitional relief
Part III
• Completed only for authoritative transmittals
• Indicate whether ALE member offered minimum essential coverage to substantially all of its full-time employees and their dependents for the entire 12 calendar months or for only specific months
• Provide full-time employee counts, and total employee counts by month Part IV
• Information about other ALE members, if part of an aggregated ALE 42
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Section 6056 Reporting: General Method
and Three Alternative Methods
• General Method
Report all information required on Form 1094-C (transmittal) and 1095-C (return/employee statement) for each employee
If an ALE cannot use one of the alternatives with respect to an employee, it must use the General Method
• Alternative Methods
Alternative 1: Qualifying Offer Method
Alternative 2 (2015 Only): Qualifying Offer Method Transition Relief
Alternative 3: 98% Offer Method
• Use of Alternative Methods
Alternative Methods are optional but are designed to minimize cost and administrative burden
• Using alternative methods, if eligible, can potentially reduce the amount of required reported information to the IRS and/or individuals
ALEs who qualify to use these alternative methods for any or all of its employees, certify so on the return transmittal form (Form 1094-C)
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Section 6056 Reporting – What Must
ALEs Report under the General Method?
• Name, address, and employer’s EIN number
• Name and telephone number of the employer’s contact person
• The calendar year for which information is being reported
• A certification by calendar month as to whether the employer offered its FT employees and their dependents the opportunity to enroll in minimum essential coverage
• The months during the calendar month for which coverage was available
• Each FT employee’s share of the lowest cost monthly premium (self-only) for coverage providing minimum value by calendar month
• The number of FT employees the employer had for each month during the calendar year
• The name, address, and TIN of each FT employee during the calendar year and the months, if any, during which the employee was covered under the plan
• Additional information is to be provided using certain indicator codes on the forms
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Overview of the 1095-C Statement
Part I
• Identifying information about employee and employer Part II
• Information about employee’s offer and coverage for each month of the year by indicator code (Code Series 1)
• Employee share of lowest cost premium for self-only minimum value coverage
• Safe harbors and other employer relief by indicator code (Code Series 2) Part III (Self-Insured Coverage)
• If employer provides self-insured coverage, the names and tax-payer identification numbers for all covered individuals through employee’s enrollment
• Months of coverage
• May be used to report coverage for non-employees to meet 6055 reporting requirements for those individuals
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Reporting Due Dates
• Applicable Large Employers and Employers Providing Self Insurance
Provide employees with statements (Form 1095-B or 1095-C) by February 1, 2016, but generally are due January 31 of each subsequent year.
Provide IRS with applicable Forms 1094 and 1095 by February 29 or March 31, 2016 (if file electronically).
• Employers may use third party administrators to file the returns and furnish statements to employees but this does not transfer any liability to the third party administrator for failure to report or provide information.
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Penalties for Non-Compliance
• Penalties may apply if:
you fail to file with the IRS and/or fail to furnish to the employee a timely return, or
you fail to include all information required to be shown, or
you include incorrect information.
• The amount of the penalty is based on when you file and/or furnish the correct information return.
• Short term relief from reporting penalties related to incorrect or incomplete information provided for the 2015 calendar year returns to allow additional time to develop appropriate procedures, collection of data and compliance, but reporting entities must be able to show that they have made good faith efforts – no similar good faith penalty relief for untimely filing
• CAUTION – incorrect reporting may also result in an incorrect IRS penalty assessment under the employer shared responsibility rules 51
Reporting Penalties
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What Should Employers Do Now?
• Start preparing to comply with reporting requirements as soon as possible
• Begin learning the information reporting rules early and determine the scope that applies to you
Review applicable forms and instructions
Read related FAQs on the IRS website
Attend trainings, as needed
• Adopt a process for collecting needed 2015 data (including social security numbers of employees and dependents) for reporting required information about full-time employees and covered individuals
• Work with IT and your vendors/third party administrators to ensure proper systems and reporting mechanisms are in place
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Cadillac Tax
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“Cadillac Tax”― High-Cost Coverage Tax
• Effective 2018
• No “small employer exception”
• Applies to tax-exempt and government entities
• No “excepted benefits” – tax is not a market reform
Means applies to “retiree-only” plans
• 40% excise tax on the aggregate cost of employer-sponsored health care coverage exceeding certain annual dollar thresholds
$10,200 for individual coverage and $27,500 for family coverage
Thresholds are higher for plans covering retirees and workers in high-risk jobs (construction, fire protection, law
enforcement, etc.)
Subject to future indexing
• IRS issuing guidance and seeking public comments in anticipation of releasing future regulations
• Legislation introduced in Congress to repeal the tax
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“Cadillac Tax”― High-Cost Coverage Tax
• Who Calculates the Cadillac Tax?
Employer calculates the tax based on all coverage
Use costs of coverage paid by employer and paid by employee through salary deduction, cafeteria plan, or with after-tax dollars
• Who Pays the Cadillac Tax?
Each coverage provider is responsible for paying pro-rata share of tax for any “excess”
Employer or plan administrator pays for self-insured coverage
Failure to accurately calculate the tax results in a tax penalty for the employer: 100% of the additional amount owed as a penalty, plus underpayment interest
• But coverage provider still pays the remaining tax owed
• Employees do not directly pay the tax
But likely will be reflected in higher premiums and/or cost control actions by employer sponsor
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“Cadillac Tax”― High-Cost Coverage Tax
• Why was the Cadillac Tax included in ACA?
Revenue Generation –
According to IRS guidance, 75% of scored revenue from ACA was based on the presumption that employers will provide cheaper plans and raise taxable wages, resulting in increased tax revenue
• Control health care costs by reducing demand for high cost coverage
• Potential trickle down to employees
Employers may stop offering “Cadillac” plans
Plan designs may change (e.g. higher deductibles and copays) to reduce premium costs to below the threshold for the tax
Insurers may pass on the cost in higher premiums
Employers may stop or cut back contributions to health and flexible spending accounts
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QUESTIONS?
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QUESTIONS?
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