December 08, 2017

Burning compliance questions answered: Cadillac tax, auto-IRAs and tax reform

Jim O'Connell

With more than 30 years of experience in federal legislative and regulatory affairs, Jim O’Connell focuses on HR and PAYROLL POLICY ISSUES, keeping customers informed about fast-changing and complex compliance regulations and workforce trends. Follow him on Twitter JOCWashDC

During a Nov. 7 compliance webinar, Ceridian subject matter experts discussed congressional consideration of once-in-a-generation tax reform legislation, Capitol Hill efforts to repeal and replace the Affordable Care Act, and emerging state government initiatives to require employers to offer state “Auto-IRA” plans to employees not eligible for employer retirement plans.

The Q&A segment gave attendees an opportunity to ask their compliance-related questions and below we provide answers to a few of them.

Missed the webinar “Top Compliance Issues Every U.S. Employer Should Know: November 2017 Update”? Watch it here.

Affordable Care Act Cadillac Tax

What is a premium health plan to qualify for the Cadillac tax?

The Affordable Care Act (ACA) “Cadillac Tax” is a 40% excise tax on the value of an employer-sponsored health plan that exceeds a certain statutory threshold.

The ACA specified the tax trigger threshold at $10,200 for single coverage plans, and $27,500 for family coverage plans. Health plan costs that exceed these dollar limits are subject to the 40% excise tax. These thresholds are to be indexed according to the Consumer Price Index plus one percentage point annually.

The tax originally was to have taken effect in 2018 but Congress postponed the effective date to January 2020.

The Cadillac Tax is a funding mechanism. If it’s delayed or repealed, where would the money come from?

The ACA Cadillac Tax is indeed a funding mechanism for ACA subsidies to help those who enroll in federal or state insurance exchanges afford premiums and out-of-pocket costs. The nonpartisan Congressional Budget Office estimated that between 2016 and 2025 the Cadillac Tax would raise some $87 billion, primarily from employers reducing the value of health coverage and offsetting that with higher taxable wages.

Presumably, if the 40% excise tax is delayed or repealed, Congress will have three options:

  • Roll back the ACA premium subsidies
  • Identify another revenue source
  • More Treasury borrowing

On the other hand, U.S. Treasury costs for subsidies have turned out to be much lower than the CBO forecast, with only about 10 million enrollees in 2017, half the original CBO forecast of 20 million.

State Government Auto-IRAs

If an employer offers a 401(k) to a subset of the population, would the IRA program need to be rolled out for those not eligible?

This is the key question for employers that already offer a defined contribution or defined benefit retirement plan. The American Payroll Association and others have recommended that employers who currently offer an IRS tax-qualified retirement plan be eligible for a permanent employer exemption from state auto-IRA requirements. Employer organizations await clarifying guidance from these states on the exemption question.

If an employer offers a 401(k), do they also have to offer the three state programs to employees living in those states?

This is a similar question and the answer is the same. If the employer offers a tax-qualified retirement plan under the provisions of the Internal Revenue Code the employer should be exempt from the new state auto-IRA mandate. In it’s initial roll-out, Oregon does not require employers who already have a qualified plan to offer the state plan. California and Illinois have yet to address this question, answers may come in the form of the regulatory guidance.

Does the auto-IRA for the three states mirror Canada’s RRSP, where the employer is treated as Agent/Facilitator, reducing their fiduciary responsibility?

Yes. Under the state auto-IRA programs that have been introduced, the employer’s role is to collect payroll deductions, remit funds to the state government retirement plan, provide information to employees and maintain records of deductions and remittances. The state laws appear to impose no fiduciary responsibility on employers.

Tax Reform and Small Business

Could you please elaborate a little bit more on how this tax reform would help small business, especially on payroll and health benefits?

To reiterate, no final decisions have been made on small business tax cuts or any other tax reform provision. The House of Representatives has approved a bill and the U.S. Senate Committee on Finance has favorably reported a separate bill. Once the Senate has approved a tax reform measure, the next step is expected to be a House-Senate Conference Committee to reconcile differences between the two bills. That final bill will contain the tax reform provisions that must then be approved by both Houses and signed into law by the president.

That said, a key issue is the tax treatment of what is called “pass-through” business income from typically smaller businesses like partnerships and sole proprietorships that is now taxed as ordinary personal income at present law tax rates.

Smaller businesses have been concerned that pass-through income is taxed at ordinary income tax rates as high as 39.6%, while tax reform legislation would establish a new 20% tax rate on corporate incomes. Both the House and Senate bills would establish more favorable tax rates for these pass-through entities, e.g., taxing a portion of their net income at 25%, but no final decisions have been made.

As far as payroll and health benefits for small businesses are concerned, lawmakers continue to be concerned about the ability of smaller employers to comply with Affordable Care Act employer mandates. A bipartisan compromise bill has been in development for several months in the U.S. Senate that could roll back some ACA mandates, possibly providing relief from employer-shared responsibility penalties. While the outcome remains uncertain, it’s possible that compromise legislation to stabilize ACA could be merged with the tax reform bill.

Ceridian is closely following Capitol Hill legislative activity on both tax reform and ACA stabilization and will provide updates on the latest developments.

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