Copyright © 2015 by The Segal Group, Inc. All rights reserved.

ACA EXCISE TAX What’s the Point & Can Plans Avoid This Tax? Food & Drug Conference

Las Vegas, Nevada

Joseph M. Sweeney

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Ø Economists’ perception that the tax exclusion for employer-sponsored health care is inequitable and a major driver of health care costs

Ø Largest tax break: $250 billion/year

Ø Intention to produce lower-cost insurance products

Ø Excise tax was codified at IRC §4980I in the Affordable Care Act

Where did the Tax Come From?

Source: Ezekiel Emanuel, Reinventing American Health Care: How the Affordable Care Act will Improve our Terribly Complex, Blatantly Unjust, Outrageously Expensive, Grossly Inefficient, Error Prone System, 2014

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Excise Tax on High-Cost Plans: IRC Section 4980I

•  $10,200 Single, $27,500 Family for 2018 •  Increased by $1,650 Single, $3,450 Family:

–  For retired individuals age 55 or older and not eligible for Medicare

–  If majority of employees covered by the plan are: »  Engaged in a high-risk profession

(list in statute), or »  Employed to repair/install electrical or telecommunications

lines •  Multiemployer plans use family threshold

•  40% tax on excess over threshold •  Based on total cost of coverage –

employer plus employee premium share

Cost threshold for tax

(indexed after 2018)

Effective in 2018

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Ø Cost threshold based on COBRA cost of plan •  The value of the plan must be lowered to avoid reaching the threshold— shifting of premium

cost to participants does not lower the value of the plan • Unclear if COBRA cost used to determine value for retirees

Ø Health cost adjustment increases thresholds if the actual growth in the cost of U.S. health care between 2010 and 2018 exceeds the projected growth for that period

Ø Age/gender adjustments

Ø Many “excepted benefits” not counted

Ø On-site medical clinic value counted

Cost Threshold

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Ø Starting in 2019, the base thresholds and the $1,650/$3,450 adjustment amounts will increase based on general inflation (i.e., the Consumer Price Index for All Urban Consumers), not medical trend

Ø For 2019, the adjustment will be based on CPI-U plus one percentage point

Ø For 2020 and beyond, the adjustment will be based on CPI-U

Ø These adjustments are rounded to the nearest multiple of $50

Indexing

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Ø Insurance Company for insured plan

Ø Plan administrator (i.e., Board of Trustees) for self-insured group health plan, Health FSA or an HRA

Ø Where the employer acts as plan administrator to a self-insured group health plan, a Health FSA or an HRA, the excise tax is paid by the employer

Ø Where an employer contributes to an HSA or an Archer MSA, the employer pays

Who Pays?

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Employee Only Employee + Family

2015 Monthly Cost $750 $2,025 Annual Cost (x12 months) $9,000 $24,300 8.0% Annual Trend – 3 yrs. to 2018 1.2597 1.2597

Total Plan Cost 2018 $11,337 $30,611 2018 Multiemployer Excise Tax Threshold

$27,500 $27,500

Amount over Threshold $0 $3,111

40% Annual Excise Tax $0 $1,244

How Does the Calculation Work? Illustration assuming 8.0% annual trend increase in overall plan cost

In this illustration, projected excise tax of $1,244 would be paid by the plan for each participant with family coverage.

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Employee Only Employee + Family Composite 2015 Monthly Cost $750 $2,025 $1,515 Annual Cost (x12 months) $9,000 $24,300 $18,180 8.0% Annual Trend – 3 yrs. to 2018 1.2597 1.2597 1.2597

Total Plan Cost 2018 $11,337 $30,611 $22,901 2018 Multiemployer Excise Tax Threshold

$27,500 $27,500 $27,500

Amount over Threshold $0 $3,111 $0

40% Annual Excise Tax $0 $1,244 $0

Multiemployer Illustration Illustration assuming 8.0% annual trend increase in overall plan cost

In this illustration, the ability to use composite rating is projected to eliminate the excise tax for 2018.

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Parameter More Favorable Less Favorable

Benefit Packages

Combine all together

Combine some together

Calculate for each benefit package

Coverage Tiers

Composite Two Tiers (self-only & all other tiers)

Multiple Tiers (more than 2)

Dental/Vision

All “Excepted Benefits” excluded

Only separately insured dental/vision excluded

Retiree Coverage

Combine all

Combine Actives and

Pre-Medicare

Combine Medicare and Pre-Medicare

Separate all

Calculation Parameters Green Reflects Notice/Law

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Percent of Active Employee Plans With ACA Excise Tax—All Plans

31%

4% 2% 5% 3% 2% 2% 6% 6% 9%

31%

35% 37%

42% 45%

48% 50%

56%

61%

70%

0%

10%

20%

30%

40%

50%

60%

70%

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Total Percent of Plans Projected to Pay Tax Each Year Percent of Plans Projected to Hit Tax for the First Time (subset of total)

SEGAL’S ACA EXCISE TAX FORECASTER All Methods

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Percent of Active Employee Plans With ACA Excise Tax—Multiemployer

7% 2% 2%

7% 7% 8% 15% 9% 12%

19%

26% 26% 26% 26%

33%

49%

0%

10%

20%

30%

40%

50%

60%

70%

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Total Percent of Plans Projected to Pay Tax Each Year Percent of Plans Projected to Hit Tax for the First Time (subset of total)

SEGAL’S ACA EXCISE TAX FORECASTER Tiered

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Percent of Active Employee Plans With ACA Excise Tax—Multiemployer

3% 4% 4% 4% 3% 3% 3% 3% 3%

7% 11%

15%

0%

10%

20%

30%

40%

50%

60%

70%

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Total Percent of Plans Projected to Pay Tax Each Year Percent of Plans Projected to Hit Tax for the First Time (subset of total)

SEGAL’S ACA EXCISE TAX FORECASTER Composite

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Trend’s Impact on Excise Tax

$27,500

$34,700 $24,300

$30,611

$61,192

$1,244

$10,597

$0

$4,000

$8,000

$12,000

$16,000

$20,000

$24,000

$28,000

$32,000

$36,000

$40,000

$44,000

$48,000

$52,000

$56,000

$60,000

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Tax Free Threshold Family Cost Per Year Excise Tax (Family)

ILLUSTRATION—MULTIEMPLOYER BASIS (Family)

In this example, Family Costs Exceed the Threshold in 2018

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Trend’s Impact on Excise Tax

$27,500

$30,650 $34,700

$18,180 $22,901

$31,157

$45,779

$0 $203

$4,432

$0

$4,000

$8,000

$12,000

$16,000

$20,000

$24,000

$28,000

$32,000

$36,000

$40,000

$44,000

$48,000

$52,000

$56,000

$60,000

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Tax Free Threshold Composite Cost Excise Tax (Composite)

In this Example, Composite Costs Exceed the Threshold in 2022

ILLUSTRATION—MULTIEMPLOYER BASIS (Composite)

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Managing the Baseline Cost

Retiree Strategies

Cost Control Strategies

Calculation Strategies

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1. Do not plan on a delay or repeal of the tax

2. Measure the potential tax exposure now (if this has not already been done)

3. Continue to generate options to manage plan costs and long-term cost trend rates

4. Model the impact of possible plan, network, provider contract and other design changes

Get Started

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Ø U.S. House of Representatives •  The Middle Class Health Care Tax Repeal Act (H.R. 2050), sponsored by Rep. Joe Courtney (D-

CT) •  Ax the Tax on Middle Class Americans' Health Plans Act (H.R. 879) sponsored by Rep. Frank

Guinta (R-NH) –  The Guinta bill has only Republican co-sponsors; the Courtney bill has bi-partisan sponsors; Together, the number of

co-sponsors of the bills is more than a majority of House members –  The only substantive difference is that the Courtney bill retains the W-2 reporting requirement for health coverage

and the Guinta bill does not. Neither bill has a revenue offset

Ø U.S. Senate •  Senators Dean Heller (R-NV) and Martin Heinrich (D-NM) introduced full repeal bill on September

17, 2015, the Middle Class Health Benefits Tax Repeal Act of 2015 •  Senator Sherrod Brown (D-OH) introduced full repeal bill on September 24, 2015, the American

Worker Health Care Tax Relief Act of 2015 (S. 2075) with 10 Democratic and 1 Independent co-sponsors –  The Brown bill includes a sense of the Senate regarding revenue offsets for repeal, stating that “the revenue loss

resulting from the repeal of the excise tax on high cost employer-sponsored coverage under section 4980I of Internal Revenue Code should be offset to ensure that the [ACA] continues to reduce the deficit while improving coverage for millions of Americans”

Legislative Activity

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Thank you!