By Lauren Bikoff, J.D.
The Patient Protection and Affordable Care Act (ACA) will impose a 40-percent excise tax on high-cost employer sponsored coverage (also known as the Cadillac tax). The tax would be imposed when an employee’s annual cost of coverage exceeds an established dollar limit. This limit could be adjusted upward if, based on its age and gender characteristics, it is likely to have higher health care costs than the national workforce, on average. The ACA specifies that this adjustment would be made based on the premium costs of the Blue Cross and Blue Shield (BCBS) Standard plan under the Federal Employee Health Benefit Program. According to the Government Accountability Office (GAO), the IRS should consider taking steps to mitigate the limitations of the BCBS Standard premium cost data, such as by combining data from multiple FEHBP plans (GAO Report, No. GAO-17-661, September 6, 2017).
Cadillac tax. The ACA created the Cadillac tax to act as a revenue offset provision to help pay for the cost of the law. Beginning in 2020, a non-deductible excise tax will be imposed on the cost of employer-sponsored health programs that exceed an aggregate value of $10,200 for individual employee-only coverage and $27,500 for family coverage. Each tax period, employers will be responsible for calculating the amount of excess benefit subject to the tax for any applicable employer-sponsored coverage offered to employees. The excise tax must be paid by the employer.
The limit could be adjusted upward if an employer’s workforce—based on its age and gender characteristics—was likely to have higher health costs than the national workforce, on average. This adjustment, known as the age and gender adjustment, is based on the premise that older individuals and younger females tend to have higher health care costs than other individuals. It is designed to lower the tax burden so that taxes are owed based on the plan design and not based on the health care costs of its members.
Some stakeholder groups have questioned the use of the BCBS FEHBP Standard plan premium costs as the basis of the age and gender adjustment, as stipulated by the ACA.
GAO report. The GAO report examines: (1) the benefits and limitations of using FEHBP BCBS Standard plan data as the basis of the age and gender adjustment, and what alternatives to these data could be considered; and (2) how any limitations to BCBS Standard plan data could be mitigated.
The GAO recommends that, in implementing the age and gender adjustment, the IRS consider taking steps to mitigate the limitations of the BCBS Standard premium cost data, such as by combining data from multiple FEHBP plans. The GAO found that using combined data from two FEHBP plans could result in a different adjustment for some employers—in particular, for those with older employees. Standards for internal control suggest that effective information is vital for an entity to achieve its objectives. Relying on BCBS Standard plan data alone does not provide IRS with the comprehensive information it may need to determine an adequate age and gender adjustment, the GAO asserted.
The IRS neither agreed nor disagreed with the GAO’s recommendation, but stated that it would consider the recommendation as it works to implement the age and gender adjustment.
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