Close
Close

Consider Cadillac tax before signing on dotted line for M&A

RFP
Organizations involved in an acquisition need to pay special attention to the Cadillac tax before they sign on the dotted line. The tax can cause complications ― and cost considerable money ― if its effects are not thoroughly vetted before an agreement is signed.

So what are special considerations?

If an inherited workforce is to keep its current health care benefits — a scenario often written into the purchase agreement and applicable for a certain period of time — you really need to know what that means in terms of your financial exposure from the Cadillac tax. Are plans close to hitting the tax?

Understand the demographics of the workforce and its claims history. Look at the premiums, the overall cost of the plan currently and cost increases over the past five years. Is a plan averaging a single-digit increase or a double-digit, and what is the figure ― 3%, 8%, 15%? (Plan-cost increases have averaged 6% to 9% annually.) Also review whether an increase may have been manipulated through plan design changes. Was the employer changing copays, deductibles and so on to get what would have been a 9% increase down to 4%?

Understanding those types of dynamics is important to determine “true costs” and how healthy the population is. You may need to ensure your ability to change plans down the line, under the purchase agreement, which may call for a modification of the agreement language.

Any agreement to keep benefits the same should be viewed in light of the Cadillac tax. Don’t let this consideration slip through the cracks, lest you find yourself in an uncomfortable position after an agreement is signed.

Contact
Carl Mowery
+1 312 602 9147
carl.mowery@us.gt.com

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.