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The Ever-Changing ACA (Affordable Care Act)

Updates on the Three ACA Taxes, Particularly the Cadillac Tax — One of the Most Significant Revenue Provisions to Fund the ACA!

Presentation Summary Part 1:
Recently two employee benefits experts presented to a couple hundred Northwest employers featuring ERISA attorney Iris Tilley from Barran Liebman, and Sarah Friend, Employee Benefits Consultant at The Partners Group. Iris Tilley advises employers in all aspects of employee benefits. She practices law in Oregon and Washington and often speaks and writes about employee benefits topics, including health care reform. Sarah Friend also regularly presents on the Affordable Care Act, having worked in the employee benefits business for over twenty years. According to Sarah, “I’m one of those strange folks who actually enjoys getting into this law and staying up to speed on the changes, the rules, and of course following all of the very interesting politics that go along with it!”

This article is designed to help keep employers informed and up-to-date:

PATH -‘Protecting Americans from Tax Hikes’ Act of 2015

  • 2016 Federal Budget Bill (PATH) & Its Effect on the ACA
  • What it is and what it signals

– Updates– Significant changes to three ACA taxes:

  • Health Insurance Industry tax (HIT) – Was supposed to be one of the biggest ACA revenue generators
  • Medical device tax
  • The Cadillac Tax or The High-cost plan tax (HCPT) – The big one!

The Cadillac Tax

Even though it’s been delayed for two years, it’s still a hot topic and something to prepare for now. We are still getting a lot of questions from our clients about what this really means, and what they should be thinking about now to avoid having to pay this tax in the future. (Particularly for any groups with collective bargaining agreements.) You want to make sure you have the most up to date information about the Cadillac Tax as possible.

– Application of Dollar Limits

– Who Will be Liable to Pay the Excise Tax?

– How Will the Tax be Allocated Among the Applicable Taxpayers?

Considerations and strategies for the Cadillac Tax, including:

  • Why you should prepare for the Cadillac Tax now even though it’s been delayed
  • The future of ACA
  • Leading presidential candidate predictions

– Employer and Health Plan Reporting: Click here for the latest updates and code clarification regarding 1095-C’s.

“Regardless of your political beliefs and what you believe the election might bring, don’t assume the Cadillac Tax will be repealed as you manage your plans, even though it has bipartisan support.”

 2016 Federal Budget Bill (PATH)

PATH – ‘Protecting Americans from Tax Hikes’ Act of 2015

PATH was signed and effective December 18, 2015. What we see as we dig into the specific provisions that effect the ACA, is that it will raise a lot of the revenue generation measures under the ACA.  This signals two things: 

  1. The ACA was designed to be a revenue generator from the government side, but they scaled back a little as it took effect. Then they ultimately determined it would be revenue neutral.
  2. We’re seeing as these provisions get delayed further and further, the argument to leave everything in place as is.

Updates– Significant changes to three ACA taxes:

  • Medical Device Tax
  • Changes to the Health Insurance Industry Tax (HIT)
  • High-Cost Plan Tax (HCPT) or Cadillac Tax – most heard about and most discussed in this review

We’ll start by briefly reviewing the medical device tax and the HIT — Health Insurance Industry Tax.

The Medical Device Tax:

  • Permanent, ACA tax, levied on manufacturers or importers of devices sold after 12/31/12
  • Originally projected to net nearly $30 billion over the course of a decade
  • Imposes two-year moratorium/suspension  on the 2.3%  tax for devices sold January 1, 2016 through December 31, 2017

The Medical Device tax levies a tax on medical devices covered under insurance policies. This is one of those taxes that is largely invisible to employers since you don’t necessarily see it unless you have a self-insured plan.  However, you will see that your insurance rates are a little higher.  This tax initially was supposed to go into effect 12/31/2012, and it was projected to net nearly $30 billion over the course of a decade.  Other than the Medicare increase, which was another one of the big taxes that wasn’t affected here, it was supposed to be one of the biggest revenue generators within the ACA.

PATH is imposing a two-year moratorium or suspension on the 2.3% tax for devices sold through January 1, 2016 through December 31, 2017. When you received your rate increases for the 2016 year, this delay wasn’t in place yet, and it just went into effect around mid to late December.  As the typical behavior we’ve been seeing with the ACA, everything is taking place at the last minute.  Consequently you wouldn’t see this delay reflected in your rates.  Perhaps we’ll see some type of rate correction the next time around, but it is hard to know with the ACA.  

HIT or Health Insurance Industry Tax

  • Permanent, annual fee paid by health insurers beginning in 2014
  • Raised $8 billion in 2014, will increase to $14.3 billion annually by 2018
  • Applies to insured medical, dental and vision plans
  • Imposes a one-year moratorium on the collection of the ACA’s health insurance providers fee for 2017
  • Should result in lower increases for insured group health renewals for 2017 (worth 3-4% of premium)

The health insurance industry tax premium for fully insured plans is definitely already baked into those fully insured rates, and this is true for the medical device tax as well. We always keep our fingers crossed that employers are going to see lower increases in the future.  The health insurance industry tax is the permanent, annual fee that is paid by health insurers, and this is for insured plans, not self-insured plans.


Picture3.jpgCadillac Excise Tax—EffectivePicture4

The Big One!  One of the most significant revenue provisions to fund the ACA

The Cadillac Tax is coming across the desks of employee benefits attorneys more and more due to a high level of confusion. It is not 100% planned yet how the tax is going to be broken out among the various payers, and it is just incredibly vague at this point.

  • The original intent of the tax was to discourage companies from offering rich health plans instead of higher wages.
  • The Cadillac Tax was projected to raise $87 billion in the first eight years, although this is a moving target with the continuous delays of the Cadillac Tax.
  • Delayed implementation of the ACA’s Cadillac tax on high-cost group health coverage for two years, until 2020
  • PATH also removed a provision prohibiting the Cadillac Tax from being deducted as a business expense.
  • PATH requires a study be conducted to determine exactly how the annual limit will be adjusted. Essentially there will be adjustments to the annual limit over time. The statute basically talks about medical inflation which is incredibly vague, and calculated in many different ways.

Let’s look at exactly what the Cadillac Tax means, and why it has been delayed from the extended effective date of 2018 to 2020. It’s certainly still on the horizon for planning purposes.  Especially for those of you who have collective bargaining plans, you are all probably thinking about this even more as you’re putting agreements into place that stand until 2019 or 2020, for a prolonged collective bargaining agreement.

  • Part of the 2010 ACA legislation
  • Originally intended to take effect in 2013
  • Immediately delayed until 2018 following the ACA’s enactment
  • Now it’s extended to 2020 based on the 2016 federal budget bill
  • Both parties are now calling for its repeal

There is hope for the future that the Cadillac Tax may disappear, however it is not a sure thing. As you may have noticed by following the ACA, there have been delays on every single item that was supposed to have gone into effect.  According to Tilley “Based on the reading I’ve done, I believe it was delayed in order to avoid turning it into a big fight.  There is no doubt the approved delay was to get through the 2016 elections without a stalemate. Basically the issue is being tabled for discussion until later on, and again we’re keeping our fingers crossed that it will ultimately disappear.”

The Determination of the Cost of Coverage

The Cadillac Tax = 40% excise tax on high-cost health coverage.

If the cost of coverage exceeds the amount set by this tax , you have a 40% tax on the portion between what the Cadillac Tax says the top amount should be, and what it actually cost. Thus it’s not a 40% tax on the full amount.

The Cadillac tax applies generally to coverage under a group health plan excluding stand alone vision and dental programs, and those programs.

The tricky thing is, as we’ll be discussing further down, the amount you use to determine the Cadillac Tax includes everything imaginable. It applies to generally the entire coverage under a group health plan, excluding standalone vision and dental programs.  This is definitely an annoying piece of how it’s set up right now.

There is no exception for Grandfathered group health plans

There’s also no exception for grandfathered group health plan coverage, however very few grandfathered plans exist out on the marketplace right now.

Cadillac Excise Tax—Background

  • The Cadillac tax imposes a limit on the value of “tax free” benefits that employees can receive through their employer sponsored health plans

To give you a little bit of background on the Cadillac Tax, ultimately it puts a cap on the amount of tax free benefits. The “tax free” classification of employee benefits has been one of those areas that has been getting a lot of discussion in the last few years.  Tilley said “I think the IRS looks at employee benefits and health care as one of those things that snuck through over the course of time.”

  • The current tax exclusion dates back to World War II (Emergency Stabilization Act, Oct. 1941) when wage controls were enacted

Employee benefits first got the tax free treatment back in World War II. We’ve seen sometimes that retirement plan experts are pushing back on the retirement plan tax and more toward a tax on health benefits.  There are certainly groups of people who think that health benefits should be taxed.

  • Employer Sponsored Insurance (ESI) tax subsidy (fringe benefits not paid out in cash) didn’t violate the wage ceiling; this led to pensions, medical insurance, paid holidays, and vacations

Nothing the ACA does in any way creates an overall tax on health plans. They knew there was some concern when W2 reporting came out that ultimately it would be an indication that health plans could be taxable in the future.  At this point there is nothing to indicate that health plans will ultimately be taxable in a more general sense.  However this tax suddenly turns anything above this amount into a taxable benefit at a really high 40% tax rate.

“The $87 billion dollars projected from this tax revenue is likely going to be reduced to close to nothing as long as employers can avoid it.  Everyone is just readjusting how they’re offering their benefits in order to avoid the tax. 

  • Currently, there is no limit on the value of the existing ESI tax subsidy

There is currently no limit on the value of what we can exclude. We do see some taxation exclusions where self-insured plans discriminate in favor of highly compensated people. In those situations you end up with taxable benefits, and you’ll also sometimes do that in the executive benefit context.  However, as long as it’s a plan that’s being offered to employees in the more general sense, there is no tax at this point.  The Cadillac tax will change that.

Cadillac Excise Tax—Effective 2020

  • The Cadillac tax is expected to generate $87 billion dollars in the first 10 years – Down 42% from original projections

This is unsurprisingly down from the original projections. From the beginning they marketed this as a huge revenue generator.  Subsequently they’ve been scaling it back during the last six years.

  • Employers are already scaling back their plans to avoid the tax
  • 17% of employers made changes in 2015*
  • Quite a few more– 40% were seriously considering making changes*

Tilley said “I definitely have been seeing this on my end as well, primarily in the union context because those plans are often so rich. I’ve also been seeing it where we have a few employers who just offer really, really good health benefits.  For example if we projected out where we think the plans are going to be with my husband’s company, his plan would probably violate it.  They’re a single employer plan who just offers really good benefits.

  • 15-30% of plans were expected to be impacted in 2018 and 75% of plans will be impacted in 2029

There are no new projections yet for 2020. *

  • The Cadillac Tax was intended to be a significant funding mechanism for the ACA

Other than the Medicare tax, which we don’t really get into here, it was really designed to be the significant funding mechanism.  Consequently if it disappears entirely, that would have a pretty big impact on the ACA’s overall fiscal viability moving forward.


Both Sarah Friend and Iris Tilley predict the $87 billion dollars projected from this tax revenue is likely going to be reduced to close to nothing as long as employers can avoid it.  Everyone is just readjusting how they’re offering their benefits in order to avoid the tax.  Many of the ACA revenue generators are in essence based on penalties.  Tilley said “I don’t know of any employers who are sleeping at the wheel and not considering whether or not this is going to be a concern at all.  They’re already paying so much for benefits, that adding in this additional payment is really not viable for so many.”

Cadillac Excise Tax—How is the Tax Paid?

It’s Complicated! Final rules not yet released.

Alright, so how is the tax going to get paid? As mentioned at the beginning, it’s not 100% clear how the tax will be paid.  Employers have had this looming tax since 2013.  Now a few years later, no one can tell you exactly how you’re going to pay it, or exactly how it’s going to be allocated.

Two Notices have been issued by the IRS

  1. Notice 2015-16, with comments due by May 15, addresses:
    • Definition of applicable coverage
    • Determination of cost of coverage
    • Application of dollar limits
  2. Notice 2015-52, with comments due by Oct. 1, addresses:
    • Who will be liable to pay the excise tax
    • How the tax will be allocated among the applicable taxpayers
    • How the tax will be paid
    • Who is the employer (employer aggregation)

The end of above notice numbers where you see 2015-16 and -52 indicate when they were issued within the year. Both of these notices were pretty early in 2015, and in addition to the bulleted requests above, they address exactly how you deal with situations where an employer has multiple entities within the same control group.

These notices tell all of us in the industry that regulations are on their way. This was an indication that the IRS was in an information gathering mode and trying to determine exactly how these joint regulations were going to be issued.  Ultimately they weren’t issued, and thus we don’t know exactly where the IRS is standing on these issues.   However based on the information we do have, we’ve come up with where we see everything falling within the information that we do have at this point, to give you a better idea of what you’re dealing with.

Cadillac Excise Tax—Definition of Applicable Coverage

“Applicable Coverage” — The first big question deals with what we are thinking about when we talk about “applicable coverage”. We use the term “applicable coverage” here to determine the part of your health insurance that is actually included in that tax calculation.  For example, when you have a number for 2020, and you know the Cadillac Tax limit for a family or an individual in 2020 is X dollars, what exactly are you putting in that bubble?  The answer is basically almost everything.  There are few limited carve outs, however the big item to remember is you’re including employer provided coverage, and you’re also including FSAs, HRAs and HSA contributions within that bubble.   Additionally you’re including employer and employee contributions as well.

Applicable Coverage Includes:

  • Coverage under any group health plan made available to the employee by an employer which is excludable from the employee’s gross income under Section 106.
  • A group health plan is generally an employer plan that provides health care to employees.
  • It includes any employer-provided health coverage that is excluded from income, including health FSAs, HRA funding, HSA contributions, on-site medical clinics, (providing more than de minimus care), retiree coverage, and specified disease, illness, or hospital indemnity overage), if the premium is excluded from gross income).

A lot of us are used to thinking about the cost of coverage as an employer contribution issue, since we’re all trained at this point to be thinking about affordability in terms of ACA penalties. This is a totally different calculation.  We’re not worried about affordability at all here  All we’re worried about is the total dollars invested in health benefits that don’t fall into these really limited exclusive categories for a particular employee.

“The tricky thing is the amount you use to determine the Cadillac Tax includes everything imaginable. It applies to generally the entire coverage under a group health plan, excluding standalone vision and dental programs.”

Almost everything falls within that bubble, even things such as on-site medical clinics, which is surprising because they’re providing more than de minimus care. Meaning if you have an on-site medical clinic that’s only providing flu shots, it probably will not be included.  However, if you allow your executives to go get physicals, that probably will be covered.  Retiree coverage, specified disease, illness, and hospital indemnity coverage are also included.

Any time the premium is excluded from gross income, under Section 106, (which is a really broad section for health care), it’s going to be included within the definition of the Cadillac Tax. Therefore ultimately the Cadillac Tax is saying any time you get to deduct it, we’re going to be looking at it and figuring out  whether it’s something that we want to include within our calculations.

Applicable coverage DOES NOT include:

As mentioned there are very few things that aren’t included.

    • Accident only or disability income, liability, supplemental liability, workers’ compensation, automobile medical, credit only.
    • Other insurance coverage where medical care is secondary or incidental to what the coverage is actually covering. Hence an accidental death and disbursement plan would potentially fall into that category.
    • Long-term care
    • Stand-alone dental or vision. Right now most employers probably have stand-alone dental and vision. We’ve seen most start to carve off their dental and vision because they don’t want their dental and vision to be part of that affordability determination, (as part of the ACA penalties).
    • Government maintained plans primarily for military and their families
    • Specified disease, illness, or hospital indemnity coverage (if the premium is not excluded from gross income). We have a carve-out where some of those disease and illness plans do fall under the Cadillac Tax and some do not.  Additionally there is the determination as to whether or not it’s excludable from income under 106.  As this comes up, we can certainly analyze your plan to determine actually what needs to fall within that bucket.  However the important takeaway is just understanding that almost everything is going to fall in there, and that you’re looking at employer and employee share of the premiums for medical coverage.

Cadillac Excise Tax—The Determination of the Cost of Coverage

  • Cost is calculated on a monthly basis, based on the coverage in which the employee is actually enrolled.
  • Determined separately for self-only and other-than-self-only coverage

It’s determined differently depending on whether someone has self-only coverage or coverage for the family. Again this is different than what we’re seeing for pay-or-play, because pay-or-play is looking at whether it’s affordable just for an individual.

Regarding the tax calculation on an individual-by-individual basis. Let’s say for example you have a group that has a hundred employees.  Sally is enrolled as a single employee who makes a $500 contribution to her FSA, and who is also pre-tax for a hospital indemnity plan.  Her calculation is going to be based on those three cost components.  Whereas Dave, who sits in the cube next to her, may be enrolled in the family plan, but isn’t pre-tax for any hospital indemnity coverage, and doesn’t participate in FSA.  Consequently his calculation is going to be different than Sally’s calculation.

Ultimately determining the tax employee- by-employee will create a huge cumbersome burden. Smaller employers can calculate it on an Excel spreadsheet, but larger employer groups will probably see some type of software solution.  Hopefully, with a little bit more strength coming out of the gates than some of the ACA reporting software… fingers crossed on that one!

  • IRS intends this process to be similar to the COBRA premium determination process (particularly the concept of “similarly situated individuals”). However, it’s not really that simple, since in the COBRA process you have an individual employee who just checks the boxes. Therefore, you’re really only dealing with one particular person at a time. Whereas this is much more of a global effort where you’re constantly balancing multiple moving parts, and hopefully there will be some simplification.  Tilly is not particularly hopeful, primarily because everything has been too new to spiral to more complicated mechanisms, as opposed to less complicated mechanisms when it comes to the ACA.

In regards to the cost of coverage topic, Friend said “Typically our employer groups have a four tier rate structure, (with the exception of some of our large public employers who have a composite rate). Meaning they have a cost of coverage for: 1. employees-only,  2. employee-and-spouse or domestic- partner, 3. employee-and-family, and 4. employee-plus-child or children.  Consequently it’s really only those employees who are enrolled as employee-only whose cost of coverage is going to be measured against the single threshold.  Anyone enrolled in any of the other three tiers would be measured against the higher threshold.  Therefore your employees who are enrolled as employee-and-spouse, or employee-with-child or children, are going to have more breathing room in the calculation.  Generally those premium rates are lower than the family threshold.”

According to Tilley “It’s a little bit of a silver lining that the law isn’t nuanced enough to call out how these different types of coverage options are actually broken out. A question that I get a lot is what to do with composite rates, and the more recent guidance we’re seeing indicates there will be a special path for composite rates.”  The composite rate question typically arises in a union health benefits trust fund meeting, where under the collective bargaining agreement either the employer will pay a specific amount per month for an enrolled employee to be on the plan, or they’ll pay a dollar amount for each hour that the employee works.  In either situation typically there is only one rate the trust puts out.  You pay the same rate whether one person is enrolled in the plan, or if the employee has 15 dependents and they’re all enrolled in the plan.  Tilley adds “This question initially came out frequently with the groups I worked with…  For example, what do I do if I have an individual who is enrolled in a trust plan with a composite rate?  The more recent guidance has indicated there will be some type of rule to deal with that.  Previously we had been leaning on the trust to create an individual rate, and we’re still doing that just for affordability purposes.”

Friend agreed that has been her experience as well, and said “especially before it was delayed two years because we didn’t have the clarification on what the allowance was going to be for groups with composite rates.  The guidance to just move away from a composite rate seemed to be the more prudent path to insure you don’t trigger the Cadillac Tax just because of the way your rates are structured.

  • Special rules for self-insured plans and various types of account-based plans (e.g., health FSAs, HRAs, HSAs and Archer MSAs). There will be special rules for how to determine the amount that you are including in your Cadillac Tax bucket for self-insured plans and various types of account based plans. Those are your FSAs, your HRAs, and your HSAs.  We have some guidance on that, albeit not really enough. However hopefully we’re going to see a lot more guidance as this moves forward.  The chances are good since we are still missing key regulations on this issue.

Cadillac Excise Tax—Application of Dollar Limits

  • Original dollar limits were set at $10,200 (self-only) and $27,500 (other-than-self-only); however, these limits will be adjusted before 2020 by a specified health cost factor. These original dollar limits were initially set in 2010, so at this point these numbers are not going to be correct. We’re looking at numbers that are really, really old.  They are going to be adjusted up based on the specified cost factor.
  • After 2020 limits will be adjusted going forward for cost-of-living
  • In addition, adjustments are permitted based on:
    • Employee population’s age and gender mix (as compared to the national workforce). We also may see some adjustments based on regions, because health insurance is more expensive based on state laws in some regions than others.
  • The high-risk status of the employee population (i.e. law enforcement, fire protection, out-of-hospital emergency care , etc.) High risk status is specifically called out in the statute.
  • Retiree status.

Cadillac Excise Tax—Who Will be Liable to Pay the Excise Tax?

It Depends…

  • The “health insurance issuer” if the coverage is insured. It’s going to be passed down to the issuer for insured coverage, but that means if you have an insured plan with Cadillac Tax liabilities, you’re going to see it in your rates.  Therefore as an employer it is ultimately going to come down to you in the end.  Just assume that as we get more information, and if the Cadillac Tax stays in effect, you’re going to want to make sure to avoid it since no matter who ends up actually writing the check, it’s going to be your call.
  • “The employer” if the coverage consists of coverage under which the employer makes contributions to an HSA or Archer MSA
  • “The person (most likely an entity) that administers the plan benefits” (plan sponsor) in the case of any other applicable coverage (self funded)
  • More to come on this…

Cadillac Excise Tax—How Will the Tax be Allocated Among the Applicable Taxpayers?

We have a little bit of information on how the tax is allocated among the different taxpayers. We’re still a little ways out from it, but as you’re reading through if you have any questions, please feel free to contact us using the form below and we’re happy to answer those questions as well.

  • IRC 49801 provides that each coverage provider’s applicable share of the total tax on an employee’s excess benefit will be commensurate with its share of the total cost of the benefit.
  • Other details not clear- for instance, what if insurer’s cost is under the threshold but an employer offers other applicable coverage that pushes over the threshold?
  • If a person (other than the employer ) is the coverage provider liable for the excise tax, that person may pass through all or part of the amount of the excise tax to the employer in some instances( i.e. an insurance carrier).

Cadillac Excise Tax—How Will the Tax be Paid?

We know that it’s going to be paid on a calendar year basis. We don’t know anything about the specific mechanisms in which it’s going to be paid.  There is going to be some type of form, probably an excise tax return form, since the Cadillac Tax is considered an excise tax.  However it’s just going to be another tax form that you’ll be informed about, and you’ll be filling it out and paying it if applicable.  We will do our best to insure that it will not apply to you.  That is our goal.

  • At the end of each calendar year, the employer must calculate if any tax applies for each employee
  • Employer must then notify each coverage provider (and the IRS) of the excise tax amount each provider owes on its applicable share of the excess benefits with respect to each employee
  • Each coverage provider is then liable to pay the total excise tax it owes
  • No specifics yet as to the time and manner in which the excise tax is paid
  • IRS and Treasury are considering designating IRS Form 720 (Quarterly Federal Excise Tax Return) as the means to pay the tax

Cadillac Excise Tax—Who is the Employer (Employer Aggregation)?

– Related employers would be aggregated and treated as a single employer, but still much direction is needed:

This does not apply to governmental organizations.  However if you are in a private organization with shared ownership with another entity, (this is where the control group comes into play), there will be some aggregation issues in determining exactly who is responsible for the tax.  Also how it is spread out when you have multiple entities that may or may not be on the same health plan.  That will be something to keep in mind in your continued control groups discussions.

  • What applicable coverage is made available by an “employer”?
  • How are the “employer’s” employees taken into account for the age and gender and high-risk profession adjustments?
  • Who is the “employer” responsible for calculating and reporting the excess benefit?
  • Who is the “employer” who is liable for any penalty for failure to properly calculate the tax imposed under § 4980I.

Cadillac Excise Tax— How is the Cost of Coverage Determined?

  • Cost of coverage to be determined using rules similar to those used to determine COBRA premiums
  • There are potential timing issues for many plans
  • Notice 2015-52 explains these and requests comments on the IRS proposed approaches and safe harbors

Cadillac Excise Tax—The Calculation:

This is basically a summary form that shows you how the cost is calculated where you’re keeping your aggregate premium for coverage to be paid, what you pay, what the individual employee pays, and then you add in and file a reduction contribution for a health FSA, HRA, HSA or MSA. You add all of those together, and then you subtract what the threshold is, (i.e. that number that was $10,200 back in 2010, but we’re hopeful it will be a much higher number if this ever takes effect). Then take that difference and multiply it by the 40%, and that will equal the tax owed.

How to Calculate the Cost:

  1. Add aggregate premiums for health coverage + any salary reduction contributions to:  A health FSA+ any pre-tax premiums for applicable voluntary benefits + employer contributions to an HRA, FSA, HSA or MSA.
  2. Subtract the applicable threshold for the tax year
  3. Multiply by 40%
  4. Equals the tax owed

Calculation examples…

1. Self-only coverage, cost of $12,000 per year:

$12,000 – $10,200 (applicable limit)= $1,800 over limit

$1,800 x 40%= $720 excise tax due

2. Other-than-self-only coverage, cost of $30,000 per year:    

$30,000 – $27,500 (applicable limit)= $2,500 over limit

$2,500 x 40%= $1,000 excise tax due

The two examples below demonstrate this built-in FSA contribution, where you take your cost of coverage and add that FSA contribution. In this case we have an example for self-only and then other-than-self-only, and that would include employee-plus-spouse, or employee-plus-spouse-and-children, or any combination of that.

3. Self-only coverage, insurance premium of $7,200 per year, + $3,000 HRA + $1,000 FSA contribution +$600 pre-tax voluntary benefit premium:

$11,800 – $10,200 (applicable limit) = $1,600 over limit

$1,600 x 40%= $640 excise tax due

4. Other-than-self-only coverage, cost of $25,000 per year +$6,000 + $2,550 FSA contribution +$1,200 pre-tax voluntary benefit premium:

$33,750 – $27,500 (applicable limit) = $6,250 over limit

$6,250 x 40% = $2,500 excise tax due

These above examples show both an HRA and an FSA contribution. Again you’re looking at employer and employee contributions here, i.e. all those dollars that are going in on a tax free basis.

Friend stated “I’ve found this surprises a lot of employers. The FSA contribution used as the example here is about an employee FSA contribution. It is their healthcare FSA election, but this is not limited to only including employer contributions to an FSA.  These are definitely employee voluntary funds, and we get a lot of employers saying, wait a minute, how can that be included?  It is just employees voluntarily participating in a health FSA, and while it is not intuitive, those contributions made by the employees absolutely count on these calculations.”

According to Tilley, “If this tax goes forward I anticipate we’re going to be seeing much lower FSA caps. This is unfortunate since many employers have had to push their deductibles up in order to make the coverage affordable to their employees.  Then you have a situation where there is a huge gap, and then an employee has a major medical issue, they are hopeful they can at least go the pre-tax dollar route.  However this would make it more difficult to go that route.”

Please let us know if you have a burning topic that would add value to you and your team.

*International Foundation of Employee Benefit Plans annual employer survey

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