Tag Archives: Cadillac tax

Effect of recently enacted laws on employer-sponsored group health plans

Employer-sponsored group health plans have been directly impacted by changes under three statutes enacted since Dec. 22, 2017. This Benefits Alert summarizes the new laws’ healthcare provisions affecting employer-sponsored plans.

The Tax Cuts and Jobs Act of 2017 (TCJA) was enacted on Dec. 22, 2017, with a healthcare-specific provision that reduces the Affordable Care Act’s (ACA) individual mandate penalty to $0 beginning in 2019.

• For group health plan sponsors, perhaps a more significant provision is the TCJA’s change to the methodology in which the high-cost health plan excise tax (“Cadillac tax”) thresholds are indexed. Originally, the ACA increased the cost thresholds triggering the tax based on the Consumer Price Index for Urban Consumers (CPI-U). However, the TCJA changed the basis for the Cadillac tax (and other) purposes, from CPI-U to Chained CPI-U, which has measured, on average, approximately 0.25 percentage points lower than CPI-U (or about 90% of CPI-U). This change will cause employer health plans to cross the cost threshold earlier than under the original law and expose them to a higher excise tax unless employers make plan design changes or other action to avoid the excise tax. The estimated impact of this change is an increase of approximately 2%-4% in a plan’s long-term cost, based on Milliman’s healthcare cost trend model.

The Continuing Appropriations Act, 2018 (CAA ’18), signed on Jan. 22, 2018, delayed the application of the Cadillac tax to 2022 from 2020. For any employer health plan projected to begin paying the excise tax in 2020 or 2021, the delay will provide relief for one or two years. For plans not projected to have to pay the Cadillac tax prior to 2022, this delay will have no effect.

• Also in the CAA ’18, for 2019 only, fully insured plans are exempt from the ACA’s health insurer fee (HIF), an annual assessment that health insurance companies typically pass on to plan participants through premiums. This moratorium could produce a one-year savings of 2%-3% for fully insured plans covering active employees and/or non-Medicare retirees. For Medicare Advantage plans, the percent reduction in premiums will be much larger, because the HIF is applied to estimated premiums prior to reimbursements by the Centers for Medicare & Medicaid Services.

Finally, in the Bipartisan Budget Act of 2018, signed on Feb. 9, 2018, two changes impact employers with an employer group waiver plan (EGWP).

• The Medicare Part D coverage gap (which under prior law would occur when a beneficiary accumulates $3,820 in total drug spending in 2019) will be eliminated in 2019 instead of 2020. The law also provides a reduction in beneficiary coinsurance to 25% (from 30%) in 2019, which is the same coinsurance the beneficiary pays prior to the coverage gap (hence, the coverage gap is “closed”).
• Simultaneously in 2019, the pharmaceutical manufacturer discounts for Medicare beneficiaries reaching the coverage gap will increase to 70% from 50%.

The net effect of these two changes on EGWPs is that an employer’s health plan liability will be reduced to 5% (from 20%) of total prescription drug costs in the coverage gap, which will result in savings to the employer (see How will the Bipartisan Budget Act of 2018 impact Part D in 2019 and beyond?).

For further information about how these changes may impact your plans, please contact your Milliman consultant.

President signs bill with “Cadillac tax” delay and other benefit provisions

On December 18, the president signed a bill (H.R.2029) that funds federal agencies for the remainder of the 2016 fiscal year and extends numerous popular expired, or expiring, tax provisions. The “Consolidated Appropriations Act, 2016” (P.L.114-113) contains several employee benefit provisions:

• “Cadillac tax”: The law delays for two years, until 2020, the application of the Patient Protection and Affordable Care Act (ACA) 40% excise tax on high-cost employer-sponsored healthcare coverage that was set to go into effect in 2018.

• The 2018 applicable dollar limits (generally, $10,200 for self-only coverage and $27,500 for other than self-only coverage) will continue to adjust according to changes in the Consumer Price Index in the period to 2020.

• The tax will be deductible for tax-paying entities.

• The law calls for a study on suitable benchmarks for the age and gender adjustment of the excise tax.

Mass transit passes: The law permanently extends parity for the exclusion from income for employer-provided transit passes and vanpool benefits with qualified parking benefits, retroactive to January 1, 2015. Thus, the excludable amount for 2015 will be $250 per month. In 2016, the amount increases to $255 per month.

Annual fee on health insurance issuers: The law waives this annual fee that applies to “covered entities” for calendar year 2017 only, and collections resume after December 31, 2017. A covered entity is one engaged in the business of providing health insurance and does not include self-insured employers, governmental entities, certain nonprofit corporations, and certain voluntary employees’ beneficiary associations (VEBAs). The fee typically is passed on to employers that purchase fully insured coverage.

Despite efforts by some lawmakers to include a delay or prohibition of the U.S. Department of Labor’s regulation on retirement plan advisors’ conflict-of-interest/fiduciary definition, no such provision is included in the new law.

In other employment-based areas, the law modifies the filing dates of Internal Revenue Service (IRS) Forms W-2, W-3, 1099, and similar wage/compensation information; clarifies certain tax rules for church retirement plans; and extends various tax credits (e.g., Work Opportunity) and wage credits (e.g., for wages paid to employees on active military duty).

For additional information about the employee benefits and related provisions of the law, please contact your Milliman consultant.

Implications of the “Cadillac tax” for employers

Bierman-TerryThe year 2018 may mean very little to the average Joe on the street, but it means a great deal to employer groups. That’s because 2018 is the year that the dreaded “Cadillac tax” kicks in. There has long been the belief that as 2018 comes closer, Congress will act upon this piece of the Patient Protection and Affordable Care Act (ACA) regulation to ease the impact of the Cadillac tax, by either delaying it or altering the impact. If the Cadillac tax stays as currently written, plan sponsors have a right to be concerned.

The Cadillac tax, or “excise tax” as it is also referred to, is calculated as 40% of the cost of health coverage exceeding annual threshold amounts of $10,200 for individual coverage and $27,500 for family coverage in 2018. For fully insured plans, the insurer will pay the tax, which will ultimately be passed onto the employer group. For self-funded plans, the employer groups must calculate and subsequently pay the tax. It is important to note that Cadillac tax payments are not tax-deductible for federal tax purposes.

We have access to a database of group health plan information for over 3,900 employers across the United States with an average size of over 700 employees. Utilizing single and family fully insured premiums or fully insured equivalent budgeted rates for self-insured employer groups, we can project the expected number of plan sponsors that will hit the Cadillac tax thresholds in 2018 and subsequent years. We assume that each plan’s healthcare trend will continue at 6.4%, consistent with the Milliman Medical Index average over the past five years.1 Also, we assume that each employer will keep its current plan design in place throughout the duration of the 10-year projection.

Based on our analysis, we expect 28.5% of plan sponsors will hit the Cadillac tax threshold in 2018. We expect that number to grow to 31.7% by 2019 and 59.2% by 2024. The rapid growth is due to the fact that the Cadillac tax is linked to the consumer price index (CPI) while medical costs are rising at a much higher rate. Therefore, more and more plans will hit the Cadillac tax threshold in each passing year. The year 2023 will be the first year that we project more plan sponsors will be paying the Cadillac tax than those that aren’t.

Figure 1: Percentage of Employers Hitting Cadillac TaxCadillac tax image

One of the major underlying issues with the Cadillac tax is that it doesn’t adjust the threshold for the geographic area. Clearly, healthcare costs vary significantly across the country, but the ACA ignores this important factor when determining the threshold amount. In 2018, we will see a wide differential in prevalence of plans that hit the threshold. The high-cost areas in the West and North Atlantic regions have the highest percentage of plans we expect to hit the threshold, with close to 40%. Similarly, the lower-cost areas in the Midwest and East South Central regions of the country have the lowest percentage of plans potentially affected.

Figure 2: 2018 Cadillac Tax Prevalence

Cadillac tax prevalence image

What can plan sponsors do to combat the impact of the Cadillac tax? First and foremost, many are beginning to reduce their plans’ benefit levels. By moving to higher deductibles, copays, and out-of-pocket maximums, plan sponsors can shift some cost to the employee and lower the cost to the plan. Employers also can implement spousal surcharges or reduce spousal subsidies with the idea of driving the more costly spouses off the plan. Another less onerous option is to offer wellness programs in order to drive down the cost of healthcare. Employers may also consider searching for lower-cost health plan vendors in an effort to reduce healthcare costs.

The ultimate goal for any employer will be to limit its healthcare trend to the CPI. Once a plan hits the Cadillac tax threshold, it will be extremely difficult to get back below it in subsequent years. Congress may act on the Cadillac tax prior to 2018, but the success of the ACA relies heavily on the income expected to be generated by this tax. Therefore, it is probably not wise to expect help from Congress if the ACA is to stay properly funded.

For assistance in dealing with the Cadillac tax, please contact your Milliman consultant.

1Future medical trend rates may be materially higher or lower than the assumed 6.4% in this blog.

IRS seeks comments on additional ACA “Cadillac tax” issues

The Internal Revenue Service (IRS) has issued Notice 2015-52, requesting comments on the procedures for calculating and assessing the 40% nondeductible excise tax (also referred to as the “Cadillac tax”) that in 2018 will apply to high-cost employer-sponsored health coverage under the Patient Protection and Affordable Care Act (ACA). The notice supplements the agency’s Notice 2015-16, which sought comments on “applicable coverage” issues (see Client Action Bulletin 15-2). The IRS will consider comments received by October 1, 2015, on both notices in developing a proposed rule.

Key issues Notice 2015-52 specifically requests comments on include:

The persons liable for the excise tax: The IRS is considering two approaches for determining the party responsible for paying the tax in situations where the “coverage provider” has not been defined (i.e., the insurer or, for health savings accounts, the employer): the person administering the plan benefits with day-to-day administrative functions (e.g., a third-party administrator [TPA] in the case of many self-insured plans) or the person with the ultimate authority or responsibility for plan administration. The IRS requests comments—including from collectively bargained multiemployer health plans—on these approaches, the ease or difficulty in identifying such persons, and any other related issues they raise. For example, if a plan sponsor engages a pharmacy benefit manager to process all pharmacy claims separate from the medical TPA, how should this be addressed?

Employer aggregation: The IRS requests comments on the practical challenges of requiring single-employer treatment under the aggregation rules, such as identifying applicable coverage, determining the age and gender adjustment, and identifying the taxpayer responsible for calculating and reporting the excess benefit or the employer liable for the penalties for a failure to properly calculate the tax. When applying single-employer logic to a multiemployer plan, how should costs, excess calculations, and reporting responsibilities be allocated?

Calculating the cost of applicable coverage: The notice indicates that future regulations will exclude excise tax reimbursements (e.g., where the tax is calculated by an employer, paid by an insurer or TPA, and then repaid by the employer/plan sponsor to the insurer or TPA) from the cost of applicable coverage. Thus, the reimbursements will be treated as additional taxable income to the coverage provider. The IRS requests comments on whether some or all of the income tax reimbursement could be excluded from the cost of applicable coverage, and if so, how the agency could develop and present a workable approach.

The notice discusses the timing of the final calculation relative to the different types of financial arrangements: fully insured plans, plans that reward favorable experience in a final accounting, and self-insured plans. The run-out of claims following the applicable year will determine actual costs for the latter two arrangements, and the IRS requests comments on whether there is a timelier approach to reporting.

The notice also contemplates how contributions to health flexible spending arrangements (FSAs), health savings accounts (HSAs), and health reimbursement arrangements (HRAs) could be allocated on a pro rata basis over a plan year rather than on a month-by-month basis when contributions are actually made. For health FSAs with employer flex credits, the IRS is considering safe harbors. The agency invites comments on these approaches and possible alternatives.

Age and gender adjustment to the dollar limit: The notice details possible options for employers to apply the permitted, limited age- and gender-based cost adjustments and seeks comments on the various aspects of the calculation.

For additional information about the IRS’s announcements about the changes to the determination letter program or the closing of the avenues to obtain answers to technical questions, please contact your Milliman consultant.

ACA’s influence on the large employer market

Hart, SueLast year’s Milliman Medical Index (MMI) report noted that emerging reforms required by the Patient Protection and Affordable Care Act (ACA) had yet to show material direct impact on the cost of care for our family of four because this family is often insured through large group health plans. Some of the most far-reaching ACA reforms are focused on access to insurance in the individual and small employer markets and have more immediate impacts on premium rates in those markets. While this modest impact continues in 2015, there are a number of influences that the ACA may have on costs in the large employer market over the next few years. Some of these influences will directly affect the large employer market—the Cadillac tax is the most visible such change—while others may be indirect, with spillover from provisions in other markets driving change in the large employer market.

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Healthcare costs climb to $24,671 for a typical American family in 2015

Milliman today released the 2015 Milliman Medical Index (MMI), which measures the cost of healthcare for a typical American family of four receiving coverage from an employer-sponsored preferred provider organization (PPO) plan. In 2015, costs for this family will increase by 6.3% ($1,456), resulting in a total cost of $24,671. The employer pays $14,198 of this and the employee—through payroll deductions and cost sharing at the time of service—pays $10,473. Of this year’s total $1,456 increase, $467 was a result of prescription drugs, a 13.6% increase after a five-year period in which prescription drug costs averaged annual increases of 6.8%.


“For the last several years we’ve noted that the Milliman Medical Index was only indirectly affected by the Affordable Care Act, since the employer-sponsored insurance market was not a focus of the early reforms,” said Chris Girod, coauthor of the Milliman Medical Index. “But now we have the prospect that this family’s health plan—which, in terms of actuarial value, is in a ‘gold’ plan—may trigger the ‘Cadillac tax‘ that goes into effect on high-cost health plans in 2018. Whether or not our typical family of four finds themselves affected by the Cadillac tax will depend on whether future trends exceed recent levels, with people insured through smaller employer-sponsored plans potentially being more susceptible.”

This year’s 6.3% cost increase follows last year’s all-time low of 5.4%. Most of the components of care analyzed by the MMI (physician, outpatient, inpatient, other) experienced trends in line with recent years, but the sharp increase in prescription drug costs heightened the overall rate of increase.

“The rate at which prescription drug costs increased this year doubled over the average increase of the prior five years,” said Scott Weltz, coauthor of the MMI. “This was driven by a combination of factors, including the introduction of new specialty drugs, a continued increase in compound drugs, and price increases for both brand name and generic drugs.”


“Healthcare costs for this family have doubled in the past decade, and tripled since we began tracking this information in 2001,” said Sue Hart, coauthor of the MMI. “As has been the case throughout the time we have studied costs for this family, the rate of increases far outpaces the consumer price index.”

Employees and employers have shared the burden of this cost increase. The MMI is somewhat unique among health cost studies because it measures the total cost of healthcare services used by the family of four, including out-of-pocket expenses paid at time of service, and it separates the costs into portions paid by employer versus employee. For the fifth consecutive year, employees have assumed an increasing percentage of the total cost of care.


To view the complete MMI, go to http://us.milliman.com/MMI.