ACA: Employers, Non-Discrimination Rules And The ‘Cadillac Tax’

by Pepper Hamilton LLP

A version of this article was originally published in the January 2014 issue of The HR Specialist. It is reprinted here with permission.

For most employers, the substantive provisions of the Patient Protection and Affordable Care Act (the PPACA) have been implemented. Almost all plans cover an employee’s child until that child reaches the age of 26, fully cover preventive services, and have eliminated pre-existing condition exclusions. Perhaps it’s finally time to sit back, relax with friends and family and begin planning for the employer mandate that will become effective January 1, 2015.

If only life was that simple.

Starting this year, in addition to plans that may be offered by an employer, all individuals will have the ability to shop for health care coverage through newly formed health care exchanges, also referred to as health insurance marketplaces. The exchanges are organizations set up to facilitate the purchase of health insurance as required by the PPACA and are designed to offer government-regulated and standardized health care plans for individuals to purchase (with certain individuals eligible for federal subsidies in connection with that purchase).

The economic viability of the exchanges depend on a critical mass of individuals receiving coverage through the exchanges. If only those individuals who were prevented previously from securing coverage for their medical issues enroll in the exchanges, the cost of coverage in 2015 and later years will need to increase, significantly. Increases will be inevitable because this group of enrollees are likely to consume more health care than their collective premiums cover. Insurance carriers can’t be required to participate in the exchanges and can’t sustain losses indefinitely. At some point, someone must cover the cost.

To that end, there are two lingering requirements of the PPACA rules that have yet to be implemented: (1) the non-discrimination rules for fully insured health care plans and (2) the “Cadillac tax” for all health care plans.

The Non-Discrimination Testing Issue

Historically, and for the moment, employers sponsoring health plans that are insured (as opposed to self-insured) have enjoyed broad discretion in fashioning the way that health care benefits are provided. Until the enactment of the PPACA, only self-insured health care plans had been subject to the onerous non-discrimination rules imposed by Section 105(h) of the Tax Code. The PPACA seeks to impose the Section 105(h) rules to insured plans as well.

The problem is that is the existing Section 105(h) regulations are unclear at best, to say the least. It’s difficult to imagine how the IRS will interpret these existing “rules” to regulate insured arrangements. Take a simplistic example: Imagine an employer that sponsors a health care plan with two choices for employees – a very expensive point-of-service option (low co-pays and no referrals for specialists) and a low-cost HMO – and subsidizes 50 percent of the monthly cost for each employee. On the one hand, if all employees are eligible for either form of coverage and receive the same subsidy percentage (e.g., each employee must pay 65 percent of the cost of the premium of the coverage he or she selected), the plan would appear non-discriminatory.

But, consider an employer with two distinct groups – a high-paid group and a low-paid group. Under this plan, it would not be unusual for the high-paid group to choose to enroll in the much more expensive option. Because the cost of that program is higher, the subsidy results in the employer paying more, in the aggregate, for coverage for each high-paid employee. Can employee choice result in the failure of the yet-to-be issued non-discrimination rules? It remains unclear.

Now, step back and compare (A) the simplistic example of only having two distinct employee populations and two health care coverage choices against (B) the more typical, complex employee demographic and multiple health care offerings. The more complex the employee and plan demographic, the harder it may be to understand, let alone satisfy, the pending non-discrimination rules.

Cadillac Tax Issue

Assuming that the PPACA isn’t modified, beginning in 2018, all employer plans (whether fully insured and self-funded) will be assessed a 40 percent excise tax on the dollar amount of the cost of coverage that exceeds annual limits of $10,200 for individual employee coverage and $27,500 for family coverage. As a practical matter, the excise tax will present employers who wish to sponsor plans with two alternatives: (a) incorporating the tax into their pricing – by increasing employer and/or employee contribution – or (b) by cutting benefits to avoid the tax – by increasing co-payments or co-insurance paid by the employees.

Starting in 2015, abandoning coverage altogether costs an employer who is subject to the PPACA rules $2,000 per year per full-time employee. Most employees can’t purchase coverage on an exchange on a tax-free (meaning deductible) basis. Thus, for any given employer, solving the problem of dropping coverage without disadvantaging the employees is, at a minimum, complex algebra.

Math is difficult enough. But, when you add to that the unknown of the non-discrimination rules and the applicability of the Cadillac tax, it is not surprising that some employers are considering abandoning the traditional employer-plan model in favor of the exchanges.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pepper Hamilton LLP | Attorney Advertising

Written by:

Pepper Hamilton LLP

Pepper Hamilton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.