03 Apr Accounting for PPACA
Common sense seems to be in short supply these days, especially when it comes to application of the rules under the Patient Protection and Affordable Care Act. Here’s a case in point: we’ve heard that some accountants have made the Act’s so-called Cadillac Tax a focus point of their current accounting protocol for retiree health plans.
Starting in 2018, the Act will impose a nondeductible 40% excise tax on the “excess benefit” provided to an employee or retiree in any month under any employer-sponsored health plan. In general, the “excess benefit” is the premium value above $10,200 for single coverage and $27,500 for family plans (increased by a “health cost adjustment percentage”).
Under PPACA, for an employer plan provided through insurance coverage, the insurer is liable for the tax. For a self-insured group health plan, a health flexible spending arrangement, or a health reimbursement arrangement, the plan administrator must calculate and pay the tax to the IRS. For these purposes, the plan administrator may be a third-party administrator, if engaged by the employer to administer the plan.
This is a 2018 requirement. Now, if you believe my son and the Mayans, we won’t be here after 2012. Even if you aren’t so fatalistic, 2018 is a very long way away. In political terms, it is at least two presidential elections away and three whole Congresses in the future. Whether the Cadillac Tax will be around in 2018 is, at best, debatable. Yet some accountants are demanding that the Cadillac Tax be accounted for today for retiree health purposes.
How’s that? Well, the issue involves the accumulated postretirement benefit obligation (APBO) found in the Financial Accounting Standards Board statement 106, which measures future potential costs for employer-sponsored retiree health plans. Accountants may require their clients to either estimate the APBO attributable to the Cadillac Tax or state what measures they have taken or will take to alert retirees that the cost of the Cadillac Tax will be passed on to them.
This seems far-fetched to some, but it does seem to be an application of the FAS 106 accounting rules.
The accountants will not accept the argument that there is no liability because the law may disappear before 2018 (hey, anything’s possible). The Cadillac Tax is on the books today, so the argument that it might not be here in the future is a non-starter.
Here’s a better argument to consider: tell them the APBO is zero. Don’t perform calculations. Don’t waste time arguing that the Cadillac Tax may never apply. Just say no — just say the APBO is zero. Here’s why: as indicated above, under PPACA, the Cadillac Tax is assessed against either the carrier or the third-party administrator if the self-insured plan is not self-administered, and not the employer. This means that for the Cadillac Tax to materialize as an employer obligation, the carrier or third-party administrator will have to obtain the contractual right to pass the cost of the Cadillac Tax on to the employer. Since in most (if not all) cases that contract may not yet exist, the liability for the employer does not exist. Hence, the argument is that the liability is zero.
If you are required to account for the Cadillac Tax, consult with counsel to see if the APBO liability for the Cadillac Tax can be established as zero. It’s a common sense response.