On December 18, 2015, President Obama signed into law the Consolidated Appropriations Act, 2016 ("Appropriations Act" or "Act"), which, among its many budgetary provisions, delays both the Cadillac tax and the medical device tax by two years and provides for the deductibility of the Cadillac tax. These legislative changes are welcome news to employers and medical device vendors, and are expected to provide significant savings to each over the next several years.
The Patient Protection and Affordable Care Act ("ACA") imposes an "excise tax on high cost employer-sponsored health coverage" through Section 4980I of the Internal Revenue Code ("Code"). This so-called "Cadillac tax" imposes a 40 percent tax on the "excess benefit" of "employer-sponsored coverage," and applies to both insured and self-insured health plans, as well as federal and state governmental plans. For purposes of the tax, employer-sponsored coverage is the aggregate of not only group health plans, but also flexible savings accounts, pre-tax contributions to health savings accounts, on-site medical clinics, and many other forms of coverage. Statutory thresholds define when the aggregate coverage becomes "excess" and thus subject to the Cadillac tax. These thresholds are indexed annually from the base values of $10,200 (for self-only coverage) and $27,500 (for other than self-only coverage) and adjusted to reflect the age and gender composition of an employer's population. While the thresholds are expected to affect only about 5 to 10 percent of employer-sponsored coverage nationally in 2018, growth in health care costs is also expected to outpace the indexing of the statutory thresholds, subjecting a greater portion of employer-sponsored coverage to the tax each year.
As first proposed, the Cadillac tax would have applied beginning in 2013. The Health Care and Education Reconciliation Act of 2010 delayed the implementation of the tax from 2013 to 2018. Now, following the revisions of the Appropriations Act of 2016, the Cadillac tax will not apply until 2020.
The Appropriations Act also provides a second significant change to the Cadillac tax: the deductibility of the tax when finally imposed. This substantially reduces the real cost of the Cadillac tax to employers. Although the tax itself is imposed at a rate of 40 percent, employers are not always directly liable for paying the tax. Instead, health insurers and third party administrators are often required to pay the tax, and it is expected that these third parties will generally demand reimbursement from employers. Reimbursements for the non-deductible Cadillac tax would have constituted taxable income to the health insurers. Insurers had already indicated that they expected employers to reimburse them for these additional taxes on the Cadillac tax reimbursements, ultimately costing employers 50 to 60 percent, rather than 40 percent, of the value of excess benefits provided. Now that the Cadillac tax is deductible, the tax's burden on employers should actually approximate the size of the tax.
Finally, the Appropriations Act provides a two-year moratorium for the ACA's medical device tax. Section 4191 of the Code currently imposes a 2.3 percent tax on the sale of any taxable medical device. This tax will not apply for the years of 2016 and 2017.
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