Opinions November 12, 2014

Questions on ACA ‘Cadillac Tax’: Part I

Internal Revenue Code section 4980I, as enacted by the Patient Protection and Affordable Care Act (ACA), imposes a 40%, nondeductible excise tax (Excise Tax) on employers, health insurance issuers, and/or other entities administering health plan benefits if the aggregate value of applicable employer-sponsored coverage exceeds a specified annual dollar limit.
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The tax is referred to by some as the “Cadillac Tax.” Below are responses to recent questions received regarding the Excise Tax.

When is the Excise Tax effective?   

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The Excise Tax is effective beginning for taxable years beginning in 2018.  It is likely that any tax owed based on the 2018 tax year will be payable in 2019.

Is there any agency guidance on the Excise Tax? 

No, Treasury and the Internal Revenue Service (IRS) have not yet issued any guidance on the Excise Tax. 

Are all types of health coverage taken into account in determining whether the Excise Tax applies?   

The Excise Tax applies to “applicable employer-sponsored coverage” of employees. Applicable employer-sponsored coverage generally means coverage under any group health plan made available to the employee by an employer that “is excludable from the employee’s gross income under Code Section 106, or would be so excludable if it were employer-provided coverage (within the meaning of Code Section 106).” Thus, both the employer and employee-paid portions of premiums are taken into account. The Excise Tax applies to insured and self-funded plans, as well as governmental plans and coverage providing health insurance to self-employed individuals.

Are any types of coverage exempt from the Excise Tax? 

The following types of coverage are excluded from the definition of applicable employer-sponsored coverage under the statutory language:

Coverage for long-term care.

Coverage (whether through insurance or otherwise) described in Code section 9832(c)(1) (other than coverage for on-site medical clinics):

  • Coverage only for accident, or disability income insurance, or any combination thereof;
  • Coverage issued as a supplement to liability insurance;
  • Liability insurance, including general liability insurance and automobile liability insurance;
  • Workers’ compensation or similar insurance;
  • Automobile medical payment insurance;
  • Credit-only insurance; and
  • Other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits.

Any coverage under a separate policy, certificate, or contract of insurance which provides benefits substantially all of which are for treatment of the mouth (including any organ or structure within the mouth) or for treatment of the eye.

Coverage for a specified disease or illness, or for hospital indemnity or other fixed indemnity insurance, as described in Code section 9832(c)(3), if paid on an after-tax basis (or, in the case of a self-employed individual, on a not deductible basis) and offered as an independent, non-coordinated benefit.

Does the Excise Tax apply to employer-sponsored coverage provided to former employees? 

Yes, the definition of “employee” includes any former employees (as well as surviving spouses or other primary insured individuals).

How is the Excise Tax calculated?    

The Excise Tax for a year is 40% of the “excess benefit” provided under an employer-sponsored plan. The “excess benefit” is calculated on a monthly basis based on the amount, if any, by which the “aggregate cost” of an employee’s applicable employer-sponsored coverage for the month exceeds 1/12 of the applicable “annual limitation” for the calendar year that includes that month.

Got a health-care reform question?  You can ask YOUR health-care reform legislation question online at http://www.surveymonkey.com/s/second_opinions  

You can find a handy list of Key Provisions of the Patient Protection and Affordable Care Act and their effective dates at http://www.groom.com/HCR-Chart.html  

Contributors:  

Christy Tinnes is a principal in the Health & Welfare Group of Groom Law Group in Washington, D.C. She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare. She represents employers designing health plans as well as insurers designing new products. Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.   

Brigen Winters is a principal at Groom Law Group, Chartered, where he co-chairs the firm's Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.  

 

PLEASE NOTE:  This feature is intended to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
Compliance November 11, 2014

SCOTUS Hears Arguments in CBA Benefits Case

The U.S. Supreme Court heard statements Monday in M&G Polymers v. Tackett, about collective bargaining agreement (CBA) provisions for retiree health care benefits.
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Much hinges on the Yard-Man inference, from a UAW case about the vesting of union retiree benefits. If there are gaps in the language to specify in complete detail the plan’s intentions about health care benefits, should that silence be interpreted to benefit the employer’s wishes? Or the employees’?

How should a plan sponsor understand how to carry out the plan’s intentions when they are not explicitly spelled out?

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“A promise of unalterable, costly health care benefits should be negotiated at the bargaining table, not imposed at the courthouse,” said Allyson Ho, an attorney for the petitioners. “In a series of cases, the 6th Circuit has required courts to infer from contractual silence a promise of vested benefits.”

Calling the case one of her favorite subjects, Nancy Ross, a partner at Mayer Brown in ERISA litigation and employment, tells PLANSPONSOR, “First, it’s a very loud statement that the Supreme Court took the case in the first place. For years, parties in retirement medical benefits and the court have routinely denied the petition.” The argument against taking such cases, she explains, is that they are seen as analyses of contracts. 

However, as Ross notes, what is this case but a dispute over language in a contract? “[The Supreme Court] took this case, and the entire argument was really over addressing a contract,” she says. “I like to think they took it because they recognize the critical status of health care in this nation.”

Another factor that may play a part in the Supreme Court’s decision to take the case is a foundational principle of the Employee Retirement Income Security Act (ERISA). Ross notes that a consistent principle handed down by the Supreme Court in ERISA cases is the idea that courts cannot make the administration of plans so onerous that employers stop offering them. “If [the plan sponsor] were forced to litigate in the 6th Circuit, it would most likely not be able to take action with respect to these benefits,” she says. 

Yard-Man can rock the balance of how ERISA plans administer benefits, Ross says. Theoretically, employers could be forced to provide benefits they did not promise, she explains. The balance in the ERISA system is that employers must provide what they promise, but they have the freedom to decide what those benefits will be. If a court interprets these inferences and presumptions, it takes away the employer’s ability to decide what to provide, according to Ross.

In Ross’s view, the petitioner’s counsel, Ho, argued correctly when she said this is not an ordinary principle of contract interpretation. “It’s fascinating that both sides, at least superficially, are requesting the same relief,” Ross observes. “But both sides define that relief differently.” The respondent would like the case remanded to the 6th Circuit to apply ordinary principles of contract interpretation.

If you peel back the first layer, Ross says, the petitioner’s view is that where there is silence, it does not mean a statement of intent to vest. When the contract expires, all terms and conditions expire. The opposing view, that of the respondents’, asks the Supreme Court to tell the 6th Circuit to apply ordinary principles of contract interpretation, but these are defined as looking at the contract to see if there is language that is “reasonably susceptible.”

If the court says, "We are remanding to the lower courts to apply ordinary principles," it will be ineffective. All courts will have the freedom to decide what those traditional rules of contract interpretation are, unless the court gives guidance. "I didn’t get the feeling court would give much guidance about what those principles are," Ross said.

In Ross’s view, “You can’t interpret silence to mean what you want it to mean.” The court could issue a very narrow opinion, she says, based on the facts of this one case only, saying we agree or disagree with the conclusion of the 6th circuit. The court could decide they do not think there is enough evidence without applying the ordinary contract principles without any presumption or inference. However, she said, Yard-Man likely will have to be factored in, in some way.

A transcript of the arguments is here. 

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