Tag Archives: tax reform

New employer tax credit for paid family and medical leave

Buried within the new amendment to the tax code, the Tax Cuts and Jobs Act, is a provision to allow employers to take a tax credit for providing paid family and medical leave for their employees. The United States is the only developed nation that does not offer paid leave for employees to care for family members. This new provision is a small step to try to fill that gap.

Starting in 2018, employers can now take an additional tax credit for part of the wages that are paid to employees taking qualified leaves. However, the provision is currently set to terminate at the end of 2019, which may make some employers think twice about whether this is the right time to begin offering paid leave. This article will lay out the provisions of the new credit and provide thoughts on how employers can offer this benefit to their employees. Milliman does not provide tax advice, and the commentary provided in this article should not be construed as such. Companies are encouraged to seek tax or legal counsel before pursuing any particular tax strategy.

Who is covered?

An employer is eligible for a tax credit for eligible paid family and medical leave benefits paid to an employee who has been employed by the employer for one year or more and who earned less than 60% of the “highly compensated employee” limit under § 414(q)(1)(B) in the prior year. That means, for 2018, this credit will only apply to employees who made less than $72,000 in 2017. That doesn’t mean that an employer should exclude its higher-paid employees from this benefit, just that the benefits paid to higher-paid employees will not be eligible for the tax credit.

What types of leaves are covered?

In order to receive this tax credit, the program must cover the same types of leaves as those covered under the Family and Medical Leave Act of 1993. These leaves may be taken for the following reasons:

• Birth of a child
• Adoption or fostering of a child
• To care for a spouse, child, or parent with a serious health condition
• The employee’s own serious health condition
• A qualifying exigency arising out of the fact that a spouse, child, or parent is on (or called to be on) active duty in the armed forces
• To care for a member of the armed forces or a veteran (with service in the past five years) with a serious injury or illness who is the employee’s spouse, child, parent, or next of kin

However, if the leave is provided as vacation leave, personal leave, or medical or sick leave (other than for one of the reasons above), then the leave does not qualify for the paid family and medical leave tax credit.

What amount of benefit needs to be provided?

A benefit amount between 50% and 100% of wages must be provided for at least two weeks in order for the employer to receive the tax credit. The tax credit is only available on the first 12 weeks of benefit paid in a year. Appropriate
adjustments are made for part-time employees.

How to determine the amount of the credit?

The amount of the paid family and medical leave tax credit is a sliding scale that increases from 12.5% to 25% of the amount of benefits paid to qualifying employees. The amount varies based on the percentage of the wages that are being replaced. The applicable percentage used to determine the tax credit is 12.5% increased by 0.25% for each percentage point that the rate of payment exceeds 50%. The table in Figure 1 is an example of how the tax credit works for an employee earning $1,000 per week and various options for the percentage of wages being replaced while on leave.

The tax credit increases as the benefit percentage increases, as shown in Figure 1.

Does this credit apply to employers in states that mandate paid family leave already?

This tax credit doesn’t apply to state-mandated leaves. The regulation says that any leave that is paid by a state or local government or mandated by a state or local government shall not be taken into account when determining the amount of paid family and medical leave provided by the employer. Currently California, New Jersey, New York, and Rhode Island have mandated paid family and medical leave programs in place. In addition, Massachusetts, Washington, and Washington D.C. have passed leave legislations and will have mandated programs in place in the next few years.

Considerations in deciding to offer a paid family and medical leave program

If an employer decides to begin offering paid family and medical leave to its employees, it has a few decisions to make. The first decision is whether to insure the plan with an insurance company or to self-insure the benefit. If it decides to self-insure, it then will also need to decide if it wants to administer the plan on its own or if it wants to use a third party administrator (TPA).

The decision of whether to insure or not depends on the employer’s risk tolerance and cash flow availability. Taking into account the employee demographics, an estimate of expected claims costs and expenses can help an employer make the right decision for itself.

Milliman has assisted numerous clients in evaluating whether or not to adopt a paid family and medical leave program for their employees. Claims costs, expenses, and other risk considerations are all important items to review before implementing a new program. The interaction of the new plan with an existing leave program is often an important consideration as well. For example, the way that employees transition from a short-term disability maternity claim to a new child family leave should be carefully thought through from both the employee and the employer perspectives. In our experience, it is not only the cost of the program but also the employee’s experience, which are both important considerations.

This article first appeared in the July 2018 issue of Health and Group Benefits News and Developments.

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Tax reform considerations for group life and disability insurers

How will tax reform in the United States affect the profitability of disability income and group life insurance? To offer some perspective, Milliman consultant Jennifer Fleck performed an analysis measuring the effect that the Tax Cuts and Jobs Act could have on the following products:

• Individual disability income
• Group long-term disability income
• Group short-term disability income
• Group life insurance with waiver of premium

The analysis considered three key changes in the tax law affecting life insurers as well as a fourth change, which remains an open issue. The analysis was done with industry average assumptions on profitable plan designs. Read Jennifer’s article “Tax reform: Disability income and group life” to learn more.

IRS revises HSA family contribution limit and other inflation-adjusted amounts

The Internal Revenue Service (IRS) published Revenue Procedure 2018-18 containing inflation-adjusted amounts revised due to the December 2017 enactment of the Tax Cuts and Jobs Act (P.L.115–97). The law revised the basis for certain tax adjustments from the Consumer Price Index for Urban Consumers (CPI-U) to the Chained CPI-U, effective in 2018. Thus, the new revenue procedure replaces figures previously announced for 2018 in Revenue Procedure 2017-37 (regarding health savings accounts [HSAs] and high-deductible health plans [HDHPs]) and Revenue Procedure 2017-58 (tax provisions, including those covering employer-provided benefits, that are subject to annual cost-of-living adjustments [COLAs]).

Revenue Procedure 2018-18 revises the following items (changed amounts are boldfaced):

HSAs/HDHPs: The maximum contribution limit to an HSA for family coverage under an HDHP is reduced by $50, while all other amounts remain the same. The HSA $1,000 annual “catch-up” contribution limit for individuals aged 55 or older was set by law for 2009 and later years and is not subject to inflation adjustments.

Amounts under Rev. Proc. 2017-37 2018 Updated Amounts under Rev. Proc. 2018-18
Benefit Self-Only Family Self-Only Family
HSA Maximum Annual Contribution $3,450 $6,900 $3,450 $6,850
HDHP Minimum Annual Deductible $1,350 $2,700 $1,350 $2,700
HDHP Maximum Annual Out-of-Pocket Expenses $6,650 $13,300 $6,650 $13,300

Archer Medical Savings Accounts: Some figures decrease for 2018.

Amounts under Rev. Proc. 2017-37 2018 Updated Amounts under Rev. Proc. 2018-18
Benefit Self-Only Family Self-Only Family
HDHP Annual Deductible Between $2,300 and $3,450 Between $4,600 and $6,850 Between $2,300 and $3,450 Between $4,550 and $6,850
Annual Out-of-Pocket Expenses $4,600 $8,400 $4,550 $8,400

Adoption Assistance Programs: All figures decrease for 2018.

Amounts under Rev. Proc. 2017-37 2018 Updated Amounts under Rev. Proc. 2018-18
Excludible amounts
For adoption of special
needs child
$13,840 $13,810
For other adoptions $13,840 $13,810
Phase-out Income Thresholds
Phase-out Begins $207,580 $207,140
Phase-out Ends $247,580 $247,140

Employee Health Insurance Expense for Small Employers: The amount decreases for 2018.

Amounts under Rev.
Proc. 2017-37
2018 Updated Amounts under Rev.
Proc. 2018-18
Small Employer Health Insurance Expense $26,700 $26,600

Employers that offer HSAs/HDHPs, Archer medical savings accounts, or adoption assistance to their employees, and/or employers that receive tax credits for health insurance premiums they pay for employees enrolled in qualified health plans under the Small Business Health Options Program (SHOP) should review their programs and consider modifying the amounts to comply with the updated figures. There are potential penalties and other tax consequences for noncompliance with the revised limits. For example, an employee contributing to an HSA for family coverage could be subject to additional taxes if he or she contributes at the outdated maximum amount. At this time, however, the IRS has not provided guidance on the steps necessary to make the midyear changes, so consulting with tax counsel or other expert advisers may be prudent. Employers also may have to modify administrative systems (e.g., to accommodate payroll withholding) and update communications materials to employees.

For further information about the IRS’s revised figures for 2018, please contact your Milliman consultant.

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 December 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 December 22, 2017, with a healthcare-specific provision that reduces the individual mandate penalty of the Patient Protection and Affordable Care Act (ACA) 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 thresholds for the high-cost health plan excise tax (“Cadillac tax”) 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 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 higher excise taxes 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% to 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 January 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% to 3% for fully insured plans covering active employees and/or non-Medicare retirees. For Medicare Advantage plans, the percentage reduction in premiums will be much larger, because the HIF is applied to estimated premiums prior to reimbursements by the Centers for Medicare and Medicaid Services (CMS).

Finally, in the Bipartisan Budget Act of 2018, signed on February 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.

The individual mandate repeal: Will it matter?

The individual mandate is one leg of the “three-legged stool” of the Patient Protection and Affordable Care Act (ACA). During the crafting of healthcare reform, insurers and other market experts contended that the mandate was absolutely necessary for a functional individual guaranteed issue market. With the passage of the Tax Cuts and Jobs Act of 2017, there are renewed concerns related to the stability of the individual market.

Milliman consultants Fritz Busch and Paul Houchens believe that the individual mandate’s financial penalties at face value are high enough to induce high insurance participation rates, but that the enforcement of these penalties has not been strict enough to fully achieve the mandate’s policy aims. They say that available premium assistance in the insurance marketplaces may provide sufficient financial incentives to prevent a collapse of marketplace enrollment rates resulting from the mandate’s repeal. In their paper, Busch and Houchens examine available empirical data to arrive at this conclusion.

Tax reform considerations for the LTC industry

What effects will the new tax reform law have on long-term care (LTC) insurance and other long-tailed health business? That is a question many actuaries are considering as they hurry to understand how it may affect these lines of business. In this article, Milliman’s Andrew Dalton and Al Schmitz provide an actuarial perspective concerning the immediate implications of the tax law. The authors also discuss how the law may alter the LTC marketplace broadly over the coming years.