Group Health Plans: What Employers Need to Know About Year-End Federal Legislation

The year-end federal spending bill, the Further Consolidated Appropriations Act, 2020 (“FCAA”), was signed into law on December 20, 2019. Although the media spotlight has focused primarily on provisions affecting retirement plans that were included as part of the SECURE Act attached to the bill, other sections of the FCAA significantly impact taxes and fees affecting employer group health plans.

Full, Final, and Complete Repeal of the Cadillac Tax

The most notable change made by the FCAA is an outright repeal of the excise tax on high cost coverage originally passed as part of the Affordable Care Act (“ACA”), informally known as the “Cadillac tax.”  This tax would have imposed a 40% excise tax on the value of coverage that exceeded a threshold amount specified in the ACA. The tax was heavily criticized by many in the employer community because it could have applied to group health plans that provided levels of coverage not much higher than the average employer plan. The tax was also of special concern to governmental plans, collectively-bargained plans, and plans offered in high-cost geographic areas.

Created in 2010 as part of the ACA, the Cadillac tax was initially scheduled to take effect for plan years beginning after 2017, but Congress subsequently delayed it twice. Immediately prior to repeal by FCAA, the tax was slated to go into effect in 2022. Although the effective date for the tax was always a few years away, many employers began considering and implementing strategies prior to the proposed effective dates of the Cadillac tax to allow sufficient time to redesign benefits and minimize cost increases to boost the likelihood that plans would not be subject to the tax. Now that the specter of the 40% excise tax has vanished, employers may want to reevaluate any strategies put into place to avoid the tax.

• A continuing need to unbundle? Some employers took steps to unbundle components of their group health plans because standalone dental and vision plans were excluded from the value of coverage subject to the tax. Although there are still other valid reasons to keep dental and vision plans as unbundled standalone benefits, the Cadillac tax is no longer a reason for unbundling. 
• Retaining precautionary language in collective bargaining agreements? Some employers negotiated language in union contracts addressing the effects the excise tax would have on collectively-bargained group health plans, such as terms obligating the union to reopen negotiations over plan design when imposition of the tax was imminent or specifying that the economic burden for any tax would be shifted to employees who elect higher-cost coverage. While any provisions specifically naming the Cadillac tax may need to be revised, employers might consider retaining general terms such as these as a precaution against future legislation. Both health care reform and the federal deficit remain important issues to Congress and taxpayers, and it is unclear what strategies to reduce health costs or increase federal revenue might gain traction in the future.
• Increasing contributions to account-based plans? Since contributions to general-purpose flexible spending accounts and employer contributions to health savings accounts and general-purpose health reimbursement arrangements would have been included in the value of coverage subject to the excise tax, some employers have been reluctant to make account-based plans a prominent feature of their benefits package. Employers can now consider expanding use of these arrangements without the fear of the Cadillac tax.

Patient-Centered Outcomes Research Fee

In contrast to the repeal of the Cadillac tax, FCAA extended this tax that had ceased to apply to most plans by last year. The Patient-Centered Outcomes Research Fee (“PCOR fee”) was imposed for plan years ending after October 1, 2012 and before October 1, 2019. For calendar year plans, this means the fee was assessed for plan years from 2012 to 2018. FCAA extends the PCOR fee for an additional ten years to apply to plan years ending before October 1, 2029. For calendar year plans, this means the fee will be assessed for plan years 2019 through 2028.

The PCOR fee was imposed by the ACA on applicable health insurance policies and self-insured health plans to fund clinical effectiveness research by the newly created nonprofit corporation, the Patient-Centered Outcomes Research Institute. For fully-insured plans, the fee is paid by the insurer, though many insurers ultimately increased premiums charged to employers to recoup the cost of the fee. For self-insured arrangements, the fee is paid by the plan sponsor.

The cost of the PCOR fee is indexed and announced by the IRS annually. The last annual fee in effect for plan years ending prior to October 1, 2019 was $2.45 per covered life. The IRS has not yet announced the fee for years ending after October 1, 2019. The PCOR fee is filed using Form 720, Quarterly Federal Excise Tax Return, for the second quarter, due no later than July 31 of the calendar year immediately following the last day of the policy or plan year to which the fee applies. For calendar year plans, the fee for the 2019 plan year will be due by July 31, 2020.

Plan sponsors of fully-insured plans may wish to contact their broker or insurer to understand whether or how the insurer may intend to pass along to the plan the cost of the PCOR fee for the current year. Plan sponsors of self-insured plans should make arrangements to pay the fee for the current year, which would not have been included in the current year’s budget. For all plan sponsors, PCOR fees should be considered when budgeting for future plans years ending before October 1, 2029.

Annual Fee on Health Insurance Providers and Medical Device Tax

Two additional tax repeals by FCAA may have indirect effect on employer plans. The first is the repeal of the annual fee on health insurers. This fee was payable by each covered entity—generally health insurance issuers and HMOs—calculated based on each entity’s proportionate share of the aggregate fee for each year as established by the ACA. FCAA repealed the fee for calendar years beginning after December 31, 2020.

The second is the repeal of the medical device tax—a 2.3% tax enacted as part of the ACA on the price of taxable medical devices sold in the United States. A moratorium on this tax was already in place for sales on or after January 1, 2016 through December 31, 2019. FCAA repealed this tax entirely.

In other developments relating to health and welfare plans, in mid-December 2019 the Fifth Circuit Court of Appeals ruled that the ACA’s individual mandate was unconstitutional because Congress had eliminated the related tax penalty in the 2017 Tax Cuts and Jobs Act. The court remanded the lawsuit brought by 20 state attorneys general challenging the constitutionality of the ACA with instructions to the district court to analyze whether Congress intended the remaining provisions of the law to be severable from the individual mandate. Though the holding has little immediate practical effect for consumers and employers, the remand means the decision on the ultimate fate of the ACA may be delayed until after 2020, and the question may again require consideration by the Supreme Court.