Upload
others
View
0
Download
0
Embed Size (px)
Citation preview
The Tax Man is Coming… Preparing for the Cadillac Tax
April 15, 2015
Presenters
Rich Stover, FSA
Principal & Consulting Actuary
Knowledge Resource Center
Dave Ratcliffe
Principal
Health & Productivity
April 15, 2015 Proprietary 2
Agenda
• Overview
• IRS Notice 2015-16
• Applicable coverage
• Aggregate cost
• Annual limits
• Tax mechanics
• Strategic planning
• Key open issues
Note: There are no regulations yet on the excise tax. The analyses in this report are based on
our interpretation of the statute and the Technical Explanation. The rules for the excise tax may
change before the effective date. Therefore, we suggest using caution when making strategic
decisions in advance of the issuance of clarifying regulations.
The information contained in this presentation and any accompanying documents does not constitute legal advice; consult with your legal and
tax advisors before applying this information to your specific situation.
April 15, 2015 Proprietary 3
Do you intend to pay the tax?
Proprietary April 15, 2015 4
Overview of the Excise Tax
Starting in 2018, a 40% excise tax will apply to each employee’s excess
benefit, which is the aggregate cost of applicable employer-sponsored
coverage that exceeds the limit calculated on a monthly basis
The tax is allocated by the employer to insurers, TPAs,
PBM and other administrators for payment to the IRS.
Aggregate cost of applicable coverage
Minus: $10,200 or $27,500 annual limit
= Excess benefit
Multiplied by: 40%
= Excise tax attributable to that individual
For each employee,
former employee,
surviving spouse, or
other primary insured
individual
Insurers, TPAs, PBM and other administrators expected to
charge back cost to employer, perhaps with tax gross-up.
April 15, 2015 Proprietary 5
Example
While illustrated on an annual basis, the tax is calculated on a monthly basis
separately for each employee/retiree.
Proprietary April 15, 2015 6
Example (cont.)
While illustrated on an annual basis, the tax is calculated on a monthly basis separately for
each employee/retiree.
Proprietary April 15, 2015 7
Example (cont.)
While illustrated on an annual basis, the tax is calculated on a monthly basis separately for
each employee/retiree.
Proprietary April 15, 2015 8
Applicable Coverage
Generally, “applicable employer-sponsored coverage”…
Includes:
• Health coverage excludable from income,
including HRA contributions
• Health FSA employee and employer
contributions
• HSA contributions – employer
contributions and employee salary
reduction contributions
• Onsite clinics, if considered a group
health plan
• EAP, if considered a group health plan
• Wellness programs, if COBRA charged
• Executive physical programs and
supplemental medical programs if excluded
from income
Excludes:
• Dental and vision “under a separate
policy, certificate, or contract of
insurance” (Self-insured dental and
vision?)
• Employee after-tax contributions to HSAs
• Long-term care
• Accident and disability benefits
• Coverage for a specified disease or illness or
fixed indemnity coverage (e.g., critical illness
and hospital indemnity plans) if 100%
employee paid with after-tax dollars
• Auto insurance
• Liability and credit insurance
• Workers compensation
April 15, 2015 Proprietary 9
Impact of Health FSA
While illustrated on an annual basis, the tax is calculated on a monthly basis separately for each
employee/retiree.
Proprietary April 15, 2015 10
Impact of Health FSA (cont.)
While illustrated on an annual basis, the tax is calculated on a monthly basis separately for each
employee/retiree.
Proprietary April 15, 2015 11
Impact of an HSA
While illustrated on an annual basis, the tax is calculated on a monthly basis separately for each
employee/retiree.
Proprietary April 15, 2015 12
Impact of an HSA (cont.)
While illustrated on an annual basis, the tax is calculated on a monthly basis separately for each
employee/retiree.
Proprietary April 15, 2015 13
Have you measured the impact of the tax?
Proprietary April 15, 2015 14
Aggregate Cost
Aggregate cost “determined under rules similar to” COBRA rates
• Insured plans
‒ Premium
• Self-insured plans
‒ Actuarial basis method – more complex methodology
‒ Past cost method – easiest and generally lowest aggregate cost, but limited use
• Will future guidance require actuarial certifications and/or standard assumptions?
‒ Actuarially sound and self-supporting rates
‒ Will safe harbor assumptions be provided?
Includes employer and employee-paid portions
• Gross cost
• Includes employee pre-tax and after-tax contributions
April 15, 2015 Proprietary 15
Annual Limits
Initial limits: $10,200 individual / $27,500 family, adjusted by “health cost
adjustment percentage” and indexed to general inflation
• 2018: health cost adjustment percentage =
100% + (FEHBP BCBS 2018/FEHBP BCBS 2010 – 55%)
• 2019: 2018 limits indexed to CPI-U + 1%
• 2020+: indexed to CPI-U
Higher initial limits—$11,850 individual / $30,950 family—for:
• Retirees age 55+ but not Medicare-eligible ‒ Employer can elect to combine under and over age 65 retirees
• Employees in high-risk occupations* or who repair/install electrical or
telecommunication lines, if the majority covered by the plan
Additional adjustment to limits for plans with age and gender
characteristics that vary from national workforce
* Law enforcement, fire protection, EMTs/paramedics, long shore, construction, mining, agriculture, forestry, and fishing
April 15, 2015 Proprietary 16
Expected Leveraging of Excise Tax
April 15, 2015 Proprietary 17
Tax Mechanics
Will vendors pass along the cost? Since excise tax is not deductible for
vendors, will they also gross up for taxes to stay whole?
Grossing up increases the cost to employer by about 54%
* Excise tax/(1 – marginal tax rate)
• Payments may vary between not-for-profit and for-profit
administrators
18 April 15, 2015 Proprietary
What actions have you taken to address tax?
Proprietary April 15, 2015 19
Anticipating the “Cadillac” Excise Tax Strategies
• Absorb the cost
• Improve plan efficiency
• Shift cost
• Eliminate ancillary health care benefits
• End health plan sponsorship
April 15, 2015 Proprietary 20
Absorb the Cost
• Not a long-term viable strategy unless combined with other strategies to mitigate
magnitude of annual excise tax increase
• Significant cost impact unless other total rewards components and/or wages
reduced
Current: health
approximately 1/3 of fringe1
Future: other total rewards
and/or wage reductions to
offset higher health cost
63% 24%
8%
6%
• Absorb the cost
• Improve plan efficiency
• Shift cost
• Eliminate ancillary health care benefits
• End health plan sponsorship
1U.S. Bureau of Labor Statistics, Employer Costs for Employee Compensation – December 2014
April 15, 2015 Proprietary 21
Manage Cost – Three Ways
• Medical and Rx
discounts
• Audits
• Contract review
• Performance
guarantees
• Direct contracting
• ACOs
• Collectives and
coalitions
• Program and service
review
Manage
unit costs
• Medical tourism
• Patient-centered
medical home/ACO
• Onsite clinics and
other services
• High performance
networks
• Tele-health
• Transparency tools
• Plan design –
enhanced
precertification;
value based design
• Program
engagement
Promote
health • Health promotion
• Biometric screening
• Incentives
• Accountability
strategies
• Disease
management
• Behavioral
economics
Manage
utilization
April 15, 2015 Proprietary 22
• Absorb the cost
• Improve plan efficiency
• Shift cost
• Eliminate ancillary health care benefits
• End health plan sponsorship
Trend Reduction from Wellness?
69% of U.S. employers who indicated
their wellness program had an
impact on trend, reported
reductions of 2% or more.
12% of U.S. employers who indicated
their wellness program had an
impact on trend, reported
reductions of 6% or more.
Reduction of 0-1 trend percentage
points per year
Reduction of 2-5 trend percentage
points per year
Reduction of 6-10 trend percentage
points per year
Reduction of more than 10 trend
percentage points per year
Proprietary
• Absorb the cost
• Improve plan efficiency
• Shift cost
• Eliminate ancillary health care benefits
• End health plan sponsorship
April 15, 2015 23
Improving Plan Efficiency – Lever to Avoid Cost & Defer Excise Tax
Cost Avoidance
2015-24: $31M
Cost Avoidance
2015-24: $72M
1ACA excise tax estimates
from American Health Policy
Institute 2014 “the Impact of
the Health Care Excise Tax
on U.S. Employers and
Employees”
21,000 active employee
headcount (40% single and
60% family) unchanged from
2014-2024
3Starting cost based on
2014 Kaiser Family
Foundation Employer
Health Benefits Survey
average single/family rates
adjusted by 5%
Tre
nd
ACA Excise Tax
• 38% of large employers impacted in 20181
• $120B in new taxes 2018-20241
2,3
Per 1,000 employees:
• 2% avoids $31M
• 6% avoids $72M
April 15, 2015 Proprietary 24
• Absorb the cost
• Improve plan efficiency
• Shift cost
• Eliminate ancillary health care benefits
• End health plan sponsorship
2% or > trend reduction
• Average incentive 30%
higher
• Higher incentives in 9 of
11 categories
Incentives and Trend Reduction
2% or > trend reduction
• Average incentive 30%
higher
• Higher incentives in 9
of 11 categories
Premium differential is the
most prevalent way to pay
incentives
• 52% use reduction
• 33% use surcharge
April 15, 2015 Proprietary 25
• Absorb the cost
• Improve plan efficiency
• Shift cost
• Eliminate ancillary health care benefits
• End health plan sponsorship
• Reduce medical benefits
• Migrate to lower plan values
• Implement HDHP/HSA plan
• Eliminate employer HSA
contributions; eliminate or cap
pre-tax employee contributions
if subject to the tax
• Voluntary Benefits
• Integrate with core
• Employer subsidy
Market-Based and Excise Tax Avoidance Cost Shifting
Shift Cost to Employees
Max.
Cost
Shift =
Bronze
Plan
(60%)
April 15, 2015 Proprietary 26
• Absorb the cost
• Improve plan efficiency
• Shift cost
• Eliminate ancillary health care benefits
• End health plan sponsorship
Employee or
Employer
Paid
L o w e r e m p l o y e r h e a l t h c a r e c o s t
R e d u c e e m p l o y e e o u t - o f - p o c k e t i m p a c t
VB Supp.
Health Plan
“Buffers”
Create more aggressive plan changes (shifting cost)
Increased employee deductible and coinsurance cost
Accident
Plan
Hospital
Indemnity
Critical
Illness
Plan
Remodel Medical Plan Using Voluntary Benefits as Buffer
April 15, 2015 Proprietary 27
• Absorb the cost
• Improve plan efficiency
• Shift cost
• Eliminate ancillary health care benefits
• End health plan sponsorship
Eliminate Ancillary Benefits
• Employee and employer health FSA contributions will have significant
impact
• Employers will reduce/eliminate employer HSA contribution
• Employers will limit/eliminate employee pre-tax HSA contributions
‒ Employees can make after-tax contributions
• Loss of employee and employer FICA savings
• Lower employee participation and savings rates
• Significant impact on effectiveness of HDHP/HSA programs
April 15, 2015 Proprietary 28
• Absorb the cost
• Improve plan efficiency
• Shift cost
• Eliminate ancillary health care benefits
• End health plan sponsorship
End health plan sponsorship
• Exposed to ACA $2,000/employer shared responsibility assessment
– Nondeductible, indexed, assessed on all full-time employees
• Attraction and retention problem unless employer provides additional
wages to purchase coverage on public exchange and/or significantly
increases other components of fringe
Current split1 Split after ending health
plan sponsorship
81%
1U.S. Bureau of Labor Statistics, Employer Costs for Employee Compensation – December 2014
April 15, 2015 Proprietary 29
• Absorb the cost
• Improve plan efficiency
• Shift cost
• Eliminate ancillary health care benefits
• End health plan sponsorship
Questions?
Contact Information
Rich Stover, FSA
Principal & Consulting Actuary
Knowledge Resource Center
500 Plaza Drive
Secaucus, NJ 07096
201-902-2684
Dave Ratcliffe
Principal
Health & Productivity
1800 M Street NW, 7th Floor/North Lobby
Washington, DC 20036
202-776-1050
April 15, 2015 Proprietary 31
©2015 Xerox Corporation and Buck Consultants, LLC. All rights reserved. Xerox® and Xerox and Design® are registered trademarks of Xerox Corporation in the United States and/or other countries.
Buck Consultants® is a registered trademark of Buck Consultants, LLC in the United States and/or other countries. BR14523