QUESTION: The Patient Protection and Affordable Care Act (see Internal Revenue Code section 4980 I) places a so-called “Cadillac tax” on high-cost employer-sponsored plans. Starting in 2018, there’s a nondeductible 40% tax on benefits in excess of $10,200 for individuals and $27,500 for families, increased by a “health cost adjustment percentage” in future years. Even plans that are well below these thresholds could be projected to exceed them in the future if the plan’s medical trend exceeds the health cost adjustment percentage. Therefore, it may be necessary to determine the impact on APBO resulting from this tax. How can I do that?

ANSWER: The steps below outline an approach to measure this in ProVal. Please consult the law to determine the actual thresholds, as they may vary by factors including age, Medicare eligibility and whether the plan covers individuals engaged in a high risk profession.

 

Example 1: Valuing claims that have explicit aging factors applied

Suppose you have Plan Definition A with the following benefits (repeated for actives and inactives) before reflecting the Cadillac tax.

Bft	Formula	Payment Form	Annual Cap	Notes
a.	Claims	Life Annuity to Member	<none>	Benefits without tax
b.	Claims	Life Annuity to Spouse	<none>	Benefits without tax

Follow these steps:

1. Set up Plan Definition B with the following benefits and annual caps (repeat for actives and inactives) to measure the plan as if it were limited by the thresholds specified in the law.

Bft	Formula	Payment Form	Annual Cap	Notes
a.	Claims * (#pmtyear < 2018)	Life Annuity to Member	<none>	Benefits before tax hits in 2018
b.	Claims * (#pmtyear < 2018)	Life Annuity to Spouse	<none>	Benefits before tax hits in 2018
c.	Claims * (#pmtyear >= 2018)	Joint Life Annuity to Member	27,500 Family coverage threshold* w/increases	Family coverage starting in 2018 while both member & spouse are alive
d.	Claims * (#pmtyear >= 2018)	Joint Life Annuity to Spouse	27,500 Family coverage threshold* w/increases	Family coverage starting in 2018 while both member & spouse are alive
e.	Claims * (#pmtyear >= 2018)	Life Annuity to Member	10,200 Single coverage threshold * w/increases	Individual coverage for the member starting in 2018 after the spouse dies
f.	(-Claims) * (#pmtyear >= 2018)	Joint Life Annuity to Member	10,200 Single coverage threshold * w/increases	Individual coverage for the member starting in 2018 after the spouse dies
g.	Claims * (#pmtyear >= 2018)	Reversionary to Spouse	10,200 Single Coverage threshold* w/increases	Individual coverage for the spouse starting in 2018 after the member dies

2. Run Valuation A (or Core Projection A) with Plan A.

3. Run Valuation B (or Core Projection B) with Plan B.

To get results (liabilities, cash flow, etc.) for just the Cadillac tax:

4. (If you want total results, skip to step 5.) View results for Valuations A and B (or Core Projections A and B) and apply the formula [0.4 * (A – B)] to get results for just the Cadillac Tax. (You may wish to gross up the 0.4 to reflect the fact that it is nondeductible, e.g., 0.6 if you use a 33.3% gross up.)

To view results (liabilities, cash flow, etc.) for the total (plan benefits + Cadillac tax):

5. Apply a scaling factor of 1.4 to Valuation A (or Core Projection A) and (- 0.4) to Valuation B (or Core Projection B). [A + 0.4 (A - B) = 1.4 A – 0.4 B.] See the “Excess Plans” FAQ for guidance on setting up negative scaling factors to subtract two runs without double counting demographic items (e.g., head count). (You may wish to gross up the 1.4 to reflect the fact that it is nondeductible, e.g., 1.6 if you use a 33.3% gross up.)

6. (If you want to run a Valuation Set, Deterministic Forecast or Stochastic Forecast, skip to step 7.) View output for Valuations A and B (or Core Projections A and B), checking the boxes to Aggregate Results and Apply Scaling Factors.

To run a Valuation Set (or Deterministic or Stochastic Forecast) based on the total (plan benefits + Cadillac tax):

7. Run a Valuation Set (or Deterministic or Stochastic Forecast) that includes Valuations A and B (or Core Projections A and B) with scaling factors as described in step 5. Be sure to check the box to Apply Scaling Factors.

Notes:

• The “Formula” above encompasses the Gross Benefit Definition and Participant Contribution in a ProVal Benefit Definition.

• Benefits c. and d. have a combined family cap applied so that the total cost while both the member and spouse are alive does not exceed the family coverage threshold.

• Benefits e. and f. also have a combined benefit cap applied. Since ProVal does not have a payment form option for a reversionary annuity payable to the member, we can value the portion of the benefit payable to the member after the spouse’s death by offsetting the joint life portion (payable only while both spouse and member are alive) from the single life annuity payable to the member. Therefore, Benefit e. is positive and Benefit f. is negative and we are effectively valuing the reversionary annuity ax - axy.

• Simplifications to the number of benefits may be possible depending on actual plan provisions. For example, if the Formulas (and all other aspects) are the same for Benefits a. and b., they may be combined into a single benefit. Similar logic applies to Benefits c. and d.

• Increases on the annual caps can be specified in Valuation Assumptions.

 

Example 2: Valuing premiums that do NOT have explicit aging factors applied

Suppose you have Plan Definition A and are valuing average age premiums with the following benefits (repeated for actives and inactives) before reflecting the Cadillac tax.

Bft	Formula	Payment Form	Notes
a.	Family premium (FP)	Joint Life Annuity to Member	Family coverage while both are alive
b.	Single coverage premium (SP)	Single Life Annuity to Member	Individual coverage for the member after the spouse dies
c.	-Single coverage premium(-SP)	Joint Life Annuity to Member	Individual coverage for the member after the spouse dies
d.	Single coverage premium (SP)	Reversionary to Spouse	Individual coverage for the spouse after the member dies

Add the following Benefit Definitions to your Plan Definition to get total plan cost in a single run:

Include the following benefits in Plan Definition A to get the results for total plan costs (plan benefits + Cadillac tax) in a single Valuation or Core Projection. The coverage thresholds are offset from the gross cost directly in the benefit definition formula to capture the excess cost which is then multiplied by the excise tax rate.

Bft	Formula	Payment Form	Notes
a.	[FP #zminus Family Coverage Threshold with increases] * (#pmtyear >= 2018) *.4	Joint Life Annuity to Member	Excise tax for family coverage starting in 2018 while both member & spouse are alive
b.	[SP #zminus Single Coverage Threshold with increases]* (#pmtyear >= 2018) *.4	Life Annuity to Member	Excise tax for individual coverage for the member starting in 2018 after the spouse dies
c.	-[(SP #zminus Single Coverage Thresold with increases)] * (#pmtyear >= 2018)*.4	Joint Life Annuity to Member	Excise tax for individual coverage for the member starting in 2018 after the spouse dies
d.	[SP #zminus Single Coverage Threshold] * (#pmtyear >= 2018)*.4	Reversionary to Spouse	Excise tax for individual coverage for the spouse starting in 2018 after the member dies

Notes:

• You may wish to adjust the 0.4 shown in the formulas above to reflect the fact that the tax is nondeductible (e.g., use 0.6 assuming a 33.3% gross up).

• For benefits b. and c., since ProVal does not have a payment form option for a reversionary annuity payable to the member, we can value the portion of the benefit payable to the member after the spouse’s death by offsetting the joint life portion (payable only while both spouse and member are alive) from the single life annuity payable to the member. Therefore, Benefit b. is positive and Benefit c. is negative and we are effectively valuing the reversionary annuity ax - axy.

• To isolate results for the Cadillac tax, use the Details button of Valuation or Core Projection output to view results by Benefit Definition.

 

Disclaimer

This document may contain inaccurate, incorrect or incomplete information. Its purpose is to describe software functionality and not to provide tax or legal guidance. Please consult the relevant law, code and regulations for such guidance.