PPACA Cadillac plan tax: Who pays what?

Public employers are starting to get a clearer idea of what the dreaded Cadillac plan excise tax might look like.

Section 4980I of the Internal Revenue Code (IRC), a tax-law created by the Patient Protection and Affordable Care Act of 2010 (PPACA) is set to impose a 40 percent tax on the “excess value” of employer-provided, high-value health benefits packages starting with taxable years beginning on or after Dec. 31, 2017.

In the first year, the tax will apply to employee-only benefits with a value over $10,200, and family benefits with a value over $27,500. The thresholds for enrollees in retiree health plans and workers in high-risk professions may be higher. 

Many economists and tax policy specialists like the Cadillac plan tax concept, because they see taxing high-value plans as a good way to mobilize employers and health insurers to do more to control health care costs, rather than simply passing on increases in the underlying costs to customers.

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Jane Gravelle, an economic policy specialist at the Congressional Research Service, recently testified before the Senate Finance Committee, for example, that the Cadillac plan tax will also help reduce the distortion in the health care and health insurance markets created by the exclusion of the value of employer-provided health benefits from employees’ taxable income.

The Internal Revenue Service (IRS) recently hinted what at least part of Cadillac plan tax implementation might look like in IRS Notice 2015-16, a document that talks about how the IRS might define the types of coverage affected by the tax and determine the cost of the coverage.

Accounting experts at PricewaterhouseCoopers said in a comment on the notice that the IRS did not give employers the information they need to prepare to administer the tax, let alone to minimize exposure to the tax.

Comments on the IRS notice are due May 15. Actuaries at Milliman have suggested that group health plan sponsors and administrators consider looking at the notice, thinking about the effects of the excise tax, and submitting comments.

One challenge is that employers have had a vague sense that the tax is coming, but not necessarily how big, or small, the bill would be.

In Connecticut, for example, eBenefits Group Northeast L.L.C. has put an ad in a directory published by the Connecticut Conference of Municipalities featuring a photo of a frightened driver and the headline, “Don’t let the Cadillac Tax drive your benefits into a dead end… Let us steer you in the right direction.”