Congress Repeals the ACA’s Cadillac, HIT, and Medical Device Taxes and Enacts the SECURE Act
On December 20, 2019, President Trump is expected to sign the Further Consolidated Appropriations Act of 2020 (HR 1865) into law. The main purpose of this legislation is to continue funding certain government operations. However, the bill also includes a number of employee benefits-related provisions. Specifically, the bill repeals the tax on high cost health coverage (aka the Cadillac tax), the health insurance tax (HIT), and the medical device tax. The bill also adopts the Setting Every Community Up for Retirement Enhancement (SECURE) Act relating to retirement plans.
ACA Tax Repeals
Cadillac Tax: The Cadillac tax was introduced by the ACA and would have imposed a 40% excise tax on employer-sponsored coverage that exceeded a certain threshold. The tax was originally set to become effective in 2018, but had been delayed through 2022. HR 1865 completely repeals the tax, meaning it will never be imposed on any employer plan.
HIT: The Health Insurance Providers Fee, also known as the HIT, is a tax imposed on insurers that was meant to help fund the cost of ACA implementation and the exchanges. Although the tax applied to insurers, insurers were allowed to push those costs through to group health plans through increased premium rates. HR 1865 repeals the tax effective January 1, 2021. However, the tax will still be due for the 2020 plan year.
Medical Device Tax: The medical device tax was a 2.3% excise tax on manufacturers and importers of certain medical devices. The tax was originally set to become effective in 2013, but has been delayed multiple times. HR 1865 repeals the tax entirely.
The repeal of these taxes is welcome news to the health and welfare industry and employers, as the taxes have been widely opposed since the adoption of the ACA.
SECURE Act
HR 1865 adopts the SECURE Act, which is the most comprehensive retirement legislation passed since the Pension Protection Act of 2006. The law includes sweeping changes that will affect how retirement plans are offered.
Some of the highlights of the legislation are as follows:
- Traditional IRA contributions can continue past age 70.5
- Open multiple employer plans can be offered, allowing employers with no connection to join together to offer retirement benefits to their collective employees
- Relaxed 401(k) safe harbor rules
- Increased credits for small businesses that start a retirement plan
- Eligibility for long-term part-time employees
- Penalty-free distributions for birth or adoption
- Increase in age for minimum required distribution (from 70.5 to 72)
- Portability of annuity investments
- Fiduciary safe harbor for employers that select a lifetime income provider
- Lifetime income disclosure requirements
- Elimination of the stretch IRA strategy, requiring non-spouse IRA beneficiaries to deplete inherited IRAs within 10 years
The SECURE Act enjoys widespread bipartisan support, as many in Congress and in the retirement plan industry believe that it will make retirement plans more accessible to those who don’t have them. The life insurance and annuity industries are also looking forward to the opportunities presented given the ability to fund 401(k) plans with annuities and the option to use life insurance as an inherited stretch IRA alternative. As the law is enacted and regulations formulated, we’ll continue to keep you updated.