GASB 45, ACA & the “Excise Tax”
Under the Patient Protection and Affordable Care Act (“PPACA”), an excise tax will be imposed for tax years beginning after December 31, 2017 for high cost employer sponsored health coverage. The law specifies a 40% excise tax to be paid by the provider of such coverage of the excess value beyond a basic dollar amount plus an additional “kicker” for qualified retirees or those engaged in a high risk profession. The basic dollar amount for 2018 is $10,200 for single coverage and $27,500 for family coverage and the “kicker” amount for 2018 is $1,650 for single coverage and $3,450 for family coverage.
As a sponsor of a municipal retiree other post-employment benefits (“OPEB”) plan, you will be subject to this tax and it can significantly increase both your cash costs of benefits as well as your GASB 45 liability. While 2018 is still several years away, now is the time to begin negotiations and plan design discussions to get plan costs under these thresholds and avoid the tax. With a 40% marginal tax rate on such benefits, it may make sense to restructure plans and/or offer pension supplements to mitigate the impact of the changes.
Given that the tax only applies on the amounts above the threshold and that threshold will increase with general CPI (medical costs have historically increased at a higher rate), this tax is likely to impact more sponsors over time. So, beyond the need to manage GASB 45 and OPEB plan costs to meet current budget & bonding needs, you will want to be looking to the future to evaluate your premiums vs. the thresholds.
As the PPACA continues to be implemented and more regulatory guidance becomes available, the calculation of the excise tax liability will evolve.