As originally conceived, the Cadillac tax was supposed to affect only particularly generous, or “luxury,” health care plans. But many analysts believe it will, either immediately or eventually, impact quite a few “nonluxury” plans as well.

For employers, the immediate road ahead is now free of a particularly looming threat. But, before you get too excited, tap the brakes: There are still plenty of health care challenges with which to contend.

Deductibility of the Tax

Most Cadillac tax opponents hope that, when the delayed 2020 effective date draws near, Congress will do away with it entirely. And they just might get their wish. There’s much opposition in Congress to the provision, and now opponents outside of government have two more years to press for full repeal.

But, even if the Cadillac tax isn’t fully repealed, the 40% excise levy will now be a pretax expense when it goes into effect. This change was folded into the Consolidated Appropriations Act of 2016.

Threshold Index Reform

Another bit of good news is that the indexing of the Cadillac tax triggering thresholds will continue, even as the effective date of the provision itself is delayed. Critics of the original indexing formula complained that it wouldn’t have reflected the actual increases in the cost of health care benefits. And this disparity was highlighted in an analysis by the Kaiser Family Foundation last year.

As background, the value of employer-sponsored coverage for Cadillac tax purposes includes not only the health care plan itself, but also:

• Employer and employee contributions to Flexible Spending Accounts,

• Employer (and possibly employee; this question is unresolved) contributions to Health Savings Accounts,

• On-site medical clinics, and

• Many other forms of coverage.

The Kaiser study projected that, by 2018, when Cadillac tax thresholds were scheduled to be $10,200 for self-only coverage and $27,500 for other than self-only coverage, 26% of employers would have faced Cadillac tax penalties if they didn’t make substantial plan design changes. This percentage was projected to rise to 42% by 2028.

So, in addition to pushing back the effective date to 2020, Congress authorized the Comptroller General of the United States and the National Association of Insurance Commissioners to analyze whether the indexing formula can be made more accurate.

Cost-saving Opportunities

For now, employers still face the same pressure that they would have faced even if Congress hadn’t acted: keeping their health care costs from escalating ever higher. Many forward-looking organizations are focusing on the following cost-saving opportunities:

Redoubling efforts to improve employee health. Newer plan designs — such as integrated health care models that tie together basic medical services with dental, vision, behavioral health and disability management — hold promise for cutting costs through improved care coordination.

Imposing spousal surcharges. By applying higher cost-sharing formulas, many employers are discouraging spousal coverage when a spouse can be covered under another employer’s plan.

Exploring defined-contribution plan design. Some employers are looking to set fixed limits on their shares of employees’ health costs, as they do in the retirement plan realm with 401(k) plans. The challenge, of course, is doing so without violating the ACA’s minimum value requirements.

Emphasizing employee engagement. Many employers are bolstering efforts to motivate employees to assume greater responsibility for choosing their health care providers on the basis of quality data and reasonable costs.

The Necessity of Balance

The delay of the Cadillac tax’s imposition gives you some breathing room in evaluating and designing your health care plan. And the possibility of its permanent repeal should give you some hope.

But, in the meantime, the burden of staying compliant with a myriad of other ACA provisions remains heavy. Work closely with your financial and benefits advisers to balance the necessity of providing meaningful benefits to your employees with the business imperative of managing the costs of doing so.

IRS Notice 2015-87 Addresses Many Aspects of the ACA

The IRS issued Notice 2015-87 late last year to provide guidance on how various provisions of the Affordable Care Act (ACA) apply to employer-sponsored health plans. The guidance, which includes 26 questions and answers, is generally applicable to plan years beginning on or after December 16, 2015, though it can be relied on for earlier periods. Let’s look at some highlights.

Employer Contributions

When required employee contributions to buy employer-sponsored coverage aren’t “affordable,” as defined under the ACA, employees are potentially eligible for premium tax credits and applicable large employers (ALEs) may face liability under the “play or pay” provision. The guidance explains how employer contributions affect employees’ required contributions for the purposes of the affordability requirement.

Generally, employer contributions reduce employees’ required contributions as long as they can be used only for medical expenses (including coverage under an employer-sponsored health plan). They can’t reduce the required employee contributions if they can be received as taxable benefits or used to buy non-health benefits. (However, the guidance includes a special rule for employers subject to certain federal prevailing wage laws.)

Transitional relief allows employers to treat certain employer contributions not satisfying the general principle as reducing an employee’s required contribution for purposes of the play-or-pay provision for plan years beginning before 2017 if requirements set forth in Notice 2015-87 are met.

Unconditional Opt-out Payments

Future proposed regulations are expected to address unconditional opt-out payments. These are available to employees declining employer-provided coverage if not conditioned on satisfaction of other requirements (such as proof of coverage from a spouse’s employer).

The guidance stipulates that unconditional opt-out payments will likely be treated as increasing employees’ required contributions for employer-sponsored coverage. The IRS generally anticipates that this rule will apply only after final regulations are issued, except that it will apply on adoption to unconditional opt-out arrangements adopted after December 16, 2015.

Until the rule applies, employers aren’t required to treat opt-out payments as increasing employees’ required contributions for purposes of reporting or complying with the play-or-pay provision. Because employers using the transitional relief may report on IRS Form 1095-C a lower required employee contribution than applies for determining eligibility for premium tax credits, employees enrolled in coverage via a Health Insurance Marketplace may be found ineligible for advance payment of premium tax credits even though their household income is within the eligibility range.

Thus, Notice 2015-87 encourages employers using the transitional relief to notify employees that they can obtain pertinent information about their required contributions using the employer contact telephone number on Form 1095-C.

Adjustments to Affordability Standard

Under the ACA, “affordability” is determined by whether the coverage offered costs an employee more than 9.5% of his or her annual household income. But there have been some adjustments to this standard.

In 2015, the IRS began indexing the percentage of household income that employees may be required to pay for employer-sponsored coverage when determining affordability under the play-or-pay provision. The guidance indicates that indexing applies to all provisions under the ACA that reference the 9.5% standard — including the three affordability safe harbors of the play-or-pay provision. The IRS intends to amend the associated regulations but, in the interim, employers may rely on the indexed percentages (9.56% for 2015 and 9.66% for 2016).

Penalty Amounts and Relief

Notice 2015-87 confirms the indexed penalty amounts for ALEs under the play-or-pay provision. For 2015 and 2016, here are the penalty amounts:

$2,080 and $2,160, respectively, for failure to offer minimum essential coverage to at least 95% of all full-time employees. This penalty is per full-time employee in excess of 30 full-time employees.

$3,120 and $3,240, respectively, for offering coverage that isn’t deemed affordable or doesn’t provide at least minimum value to at least one full-time employee. The penalty is per full-time employee receiving a premium tax credit. However, the penalty is also calculated under the method for failure to offer minimum essential coverage. If the calculation under that method results in a lower penalty, the employer pays that lower amount.

Adjustments for future years will be posted on the IRS.gov website.

Regarding penalty relief, the guidance states that, for returns filed or statements furnished to employees in 2016 (relating to 2015 coverage), penalties for incorrect or incomplete returns or statements won’t be imposed on ALEs that can demonstrate good-faith efforts to comply with the reporting requirements. This relief isn’t available to ALEs that fail to timely file (or furnish a statement) or cannot show a good-faith effort to comply. But the regular IRS rules allowing penalty relief upon a showing of reasonable cause may apply. Similar relief applies to coverage reporting.

Definition of “Hour of Service”

Notice 2015-87 explains how the “hour of service” rules under the Department of Labor’s regulations apply when determining full-time status under the play-or-pay provision.

For example, an hour of service doesn’t include hours after termination of employment or hours paid solely to comply with a workers’ compensation law. But short- or long-term disability leaves generally result in credited hours of service for periods during which the recipient retains employee status and receives disability benefits directly or indirectly funded by the employer.

Notably, the guidance states that disability benefits from coverage bought with after-tax employee dollars won’t give rise to hours of service. Moreover, the Department of Labor’s 501-hour limit on crediting paid, nonworked hours doesn’t apply under the play-or-pay provision. The IRS intends to propose these clarifications as regulations under the play-or-pay provision, effective as of December 16, 2015.

Notes on HRAs

According to Notice 2015-87, Health Reimbursement Arrangements (HRAs) and other employer payment plans generally can’t be used to buy individual health insurance policies, with narrow exceptions. The guidance affirms that retiree-only HRAs can be used to buy individual coverage — even if the HRA balances include amounts credited when the account holders were current employees covered by integrated HRAs.

Similarly, Notice 2015-87 affirms that HRAs and other employer payment plans can satisfy the ACA’s mandates if they limit the purchase or reimbursement of individual coverage to policies that provide only excepted benefits (for example, dental coverage). But HRAs other than retiree-only plans will fail to be integrated — and, thus, fail to comply with the ACA — if they can be used to buy individual coverage that isn’t limited to excepted benefits. This is the case even if, in practice:

• Employees use the HRAs only to buy policies that provide only excepted benefits, and

• The HRA provides that the individual policy purchases are authorized only when the account holder has other group coverage or after the other group coverage is lost.

The guidance confirms that, if a cafeteria plan reimburses the cost of individual coverage (whether through salary reductions, flex credits or other employer contributions), the arrangement is an employer payment plan. Therefore, it can’t be integrated with the individual coverage and will fail to comply with the ACA unless the plan limits reimbursements to coverage that provides only excepted benefits.

Last, Notice 2015-87 indicates that, if an HRA can reimburse family members’ expenses, they, too, must be covered by the employer’s other group health plan for their HRA benefit to be considered integrated. A transitional rule waives the coverage requirement for family members for plan years beginning before 2017 if requirements set forth in the guidance are met. The IRS doesn’t mention integration with the group health plan of another employer, which presumably remains available to satisfy the integration requirement for HRAs that reimburse family members’ expenses.

Health FSA Carryovers

Qualifying Health Flexible Spending Accounts (FSAs) need not offer COBRA coverage unless the qualified beneficiary’s account is “underspent” when a COBRA-qualifying event occurs. In other words, the amount available for reimbursement for the remainder of the plan year must exceed the COBRA premiums for that period. The guidance explains that Health FSA carryovers are included when determining the amount available for reimbursement.

In contrast, Notice 2015-87 also states that carryovers aren’t included when determining the COBRA premium, which is based solely on the employee’s salary reduction election and any additional employer contributions. The guidance provides that, even though qualifying Health FSAs aren’t obligated to provide COBRA beyond the end of the plan year, if a Health FSA allows carryovers for non-COBRA beneficiaries, it must allow them on the same terms for similarly situated COBRA beneficiaries.

Thus, at the end of the plan year, a qualified beneficiary could potentially carry over up to $500 of unused amounts until the end of the applicable COBRA maximum coverage period, with no premium due. But Health FSAs may limit carryovers to individuals who have elected to participate in the Health FSA in the next plan year and may require that carryover amounts be forfeited if not used within a specified period of time, such as one year.

Review the Guidance

As you can see, Notice 2015-87 goes into great detail about many aspects of the ACA. It’s particularly important for any employer that’s currently subject to the play-or-pay provision — or that could be in the future — to review the guidance with its health care benefits adviser.

Can We Incentivize Employees With High Claims Costs to Opt Out?

Question: Our company offers coverage under a self-insured major medical plan to full-time employees. Can we offer cash incentives to those with a history of high claims costs to opt out of our plan and buy individual policies instead?

Answer: In a word, no. This idea was addressed in guidance jointly issued just last year by the IRS, the Department of Labor and the Department of Health and Human Services. The agencies stated that offering a choice between cash and enrollment in an employer’s standard group health plan constitutes prohibited health status discrimination under the Affordable Care Act (ACA) and the Health Insurance Portability and Accountability Act (HIPAA) — if the offer is made to only employees with high claims risk.

It may seem like you’re treating high-claims employees more favorably by giving them a choice between cash and coverage — especially now that the ACA guarantees availability of individual coverage without pre-existing condition exclusions. But the agencies don’t view this choice as permitted discrimination in favor of individuals who have adverse health conditions.

In fact, according to the agencies, these employees have a greater effective cost of coverage because their cost is deemed to include the cash they’ll forgo if they elect to enroll in your plan. In addition, the cash-or-coverage offer is considered to be an eligibility rule that discourages plan participation based on a health factor.

Additional Points of Concern

Indeed, the agencies view these arrangements as discriminatory, regardless of whether:

• The cash payment is pretax or after-tax to the employee,

• The employer is involved in the selection or purchase of individual insurance policies, or

• The employee obtains any individual coverage.

And because choosing between cash and tax-favored health coverage requires a cafeteria plan election, the agencies assert that imposing an additional cost to elect health coverage could result in prohibited discrimination under Section 125 of the Internal Revenue Code.

Note also that you couldn’t condition availability of any financial incentive (whether or not based on health or claims history) on the employee’s actual purchase of an individual insurance policy. Doing so creates an employer payment plan that violates the ACA’s prohibition on annual dollar limits, as well as the requirement to provide coverage of preventive services. Violating these provisions can result in substantial excise taxes.

Moreover, the proposed incentive might raise concerns under HIPAA’s privacy rule if you’re considered to be using protected health information (in this case, health or claims history) for a purpose unrelated to plan administration (that is, to identify employees eligible for the cash incentive). Other federal laws, such as the Americans with Disabilities Act or the Age Discrimination in Employment Act, could also be implicated.

Wrong Way

When considering going this route with your health care plan, it’s best to imagine one of those “wrong way” signs you see while driving. Despite your good intentions, you’ll quickly find yourself headed straight for some serious compliance issues.