- The Cadillac tax will be delayed until January 1, 2020, and will be a deductible expense for employers.
- The medical device tax will receive a moratorium within calendar years 2016 and 2017.
- There is a suspension of the health insurance tax for one year.
- The delay was introduced by Congress to President Obama as part of a $1 Trillion ++ omnibus spending bill/budget deal.
- President Obama signed the Congressional legislation into law on December 21, 2015.
On December 21, 2015, President Obama signed into law the Consolidated Appropriations Act of 2016 that included provisions to delay the excise tax on high cost health plans (“Cadillac tax”) until 2020 and the 2.3 percent medical device tax until 2018.
Included with the Affordable Care Act (ACA), the excise tax and medical device tax have been of significant concern as these taxes result in increased costs to employers and reduction in benefits to employees working for employers with high cost health plans.
Congressional voting statistics:
- House: 316 to 113
- Senate: 65 to 33
Although the legislation’s most significant accomplishment for employers is the delay in the excise and medical device tax, even more significant is the ability for employers to include the tax as a deductible business expense.
Considering the negative consequences to employers with above average age demographics, the legislation included a requirement to study this issue and determine the best solution to adjust the base threshold for older groups.
Excise tax/Cadillac tax: The excise tax, dubbed the “Cadillac tax,” was passed in 2010 as a permanent, annual tax on employer-provided health care benefits that exceed specified threshold amounts. This very controversial provision levies a tax on benefits that have been exempt from classification as taxable income for decades; employers were encouraged to offer workers coverage and enjoy a tax write off.
A 40 percent tax will be assessed on every dollar of total premiums paid by employers and employees above the $10,200 threshold for individual health benefits and the $27,500 ceiling for family coverage; however, these thresholds will be adjusted for the revised effective date of 2020. For pre-65 retirees and individuals in high-risk professions, such as law enforcement, first responders, longshore, mining and forestry, the threshold amounts are $11,850 for individual coverage and $30,950 for family coverage.
Proponents of the Cadillac tax like the idea of doing away with the tax benefit for employer-sponsored health insurance. When very generous plans, or the Cadillacs of health insurance plans, make it easy for participants to seek medical services without any financial liability for out-of-pocket copays or deductibles, there is no real incentive for enrollees to weigh the necessity for, or cost of, services. Cost sharing – whether between employers and their employees, patients and their physicians, or hospitals and their staff – lies at the very heart of most of the ACA’s reforms.
The second goal of the tax is to raise revenue to fund other components of the ACA law, in particular the generous subsidies put in place to help low- and middle-income individuals and families purchase coverage through the health insurance marketplaces. Initially, the Joint Committee on Taxation and Congressional Budget Office estimated that the new tax would raise $30 billion in additional federal revenue in 2020 and 2019 alone. The tax is currently projected to generate a total of $80 billion over a decade. Eventually, the goal is to raise enough money through the tax to fully fund all of the low-income insurance subsidies provided through the exchanges.
Medical device excise tax: This legislation also included a provision to suspend the 2.3 percent excise tax on medical devices until December 31, 2017. However, there was no clarity regarding the retail exception, which applies when patients can purchase the device over-the-counter or through a retail arrangement, like clinics that provide eye exams and offer a selection of eyeglass frames.
New notices clarified this issue: Taxable devices include those that fall under Section 510(J) of the Federal Food, Drug, and Cosmetic Act and 21 CFR part 807 unless the device falls under the retail exemption. It further explains that eyeglasses, contact lenses and hearing aids are not taxable as they frequently fall under this exemption.
Health insurance tax: This legislation also included a one year delay of the health insurance tax (HIT), which will be effective for 2017 and will result in lower premiums. The Health Insurance Tax was forecasted to produce $145 billion from imposing taxes on health insurance premiums. According to section 9010, this fee is imposed on a covered entity engaged in the business of providing health insurance for health plans within the United States. The first filings were due from covered entities by April 15, 2014, with fees paid by September 30, 2014.
This health insurance provider’s fee subjects the tax to covered entities, including the following:
- Health insurance issuer
- Health maintenance organization
- Insurance company
- Insurer providing Medicare Advantage, Medicare Part D or Medicaid
- Non-fully insured multiple employer welfare arrangement
Specifically excluded from the health insurance tax are the following:
- Self-insured employer
- Government entity
- Certain nonprofit corporations
- Certain voluntary employee beneficiary associations
The original Internal Revenue Service (IRS) forecast for collection of taxes was the following:
|Fee Year||Applicable Amount|
|2019+||The applicable amount in the preceding fee year increased by the rate of premium growth|