Planning for the “Cadillac Tax”

cadillac tax

By George Tzinas, Chief Experience Officer

You may have heard about the “Cadillac Tax” a few years ago when the Affordable Care Act (ACA) was passed. Officially called the Excise Tax, this tax is a permanent, non-deductible, annual tax beginning in 2018 on high-cost employer-sponsored health coverage.

When the ACA was passed in 2010, 2018 was a long time away, and many thought the Supreme Court would strike down the law. Now that the ACA seems here to stay, it’s important to understand the impact of this tax on employers.

How Much and Who Pays?

First, the most important questions – how much is the tax and who pays it?

The tax is 40% of the cost of health coverage premiums that exceed $10,200 for individual coverage, and $27,500 for family coverage. This includes total contributions from employee and employer. These thresholds will be updated for 2018 when final regulations are issued and thereafter indexed for inflation in future years. There are slightly higher thresholds for pre-65 retirees and individuals in high-risk professions.

So who pays this tax? Employers and Health Plans. Self-Insured Employers are responsible for calculating and paying the tax directly, while fully-insured employers are responsible for calculating the tax and their insurers pay. According to a recent study by Accenture, this tax will impact 38 percent of large employers and 17 percent of all American businesses.

Individual coverage
A $12,000 individual plan would pay an excise tax of $720 per covered employee:
$12,000 – $10,200 = $1,800 above the $10,200 threshold
$1,800 x 40% = $720

Family coverage
A $30,000 family plan would pay an excise tax of $1,000 per covered employee:
$30,000 – $27,500 = $2,500 above the $27,500 threshold
$2,500 x 40% = $1,000

Keep in mind, these numbers are for each employee who have coverage exceeding the thresholds outlined above, so the total tax owed is the number of employees above the threshold x the calculated rate. In other words, if you are an employer with 100+ employees who all have coverage exceeding the thresholds, you or your insurance company could be looking at six figure, non-deductible tax bill.

Bottom Line

It’s easy to see how this tax can significantly impact employers, especially larger employers or those providing rich benefits. In fact, a 2015 survey conducted by the International Foundation of Employee Benefit Plans’ found that 20% of employers believe the Cadillac tax will be the ACA provision causing the most significant future cost increase to their bottom line.

There are several options available to employers to limit exposure to the tax: moving to lower costs plans is the simplest approach, while buying coverage through a private exchange is another. These options will inevitably impact employees, however.

Employees are expected to feel the pinch in 2018 with fewer plan options to choose from at open enrollment time and higher costs in the form of increased deductibles, copays or coinsurance amounts. Employers may also reduce employee contribution limits for health flexible spending accounts (FSA) or health savings accounts (HSA), or cut back on the amount they put in the plan for employees.

What’s Next?

While the final regulations are still being drafted, there have been increasing calls for at least a legislative review or even a repeal of the Excise tax. But with the Congressional Budget Office estimating that the tax will generate $5 billion in revenue in 2018 and up to $34 billion by 2024, an outright repeal of the tax will require significant budget offsets elsewhere.

Regardless of the legislative debate and the evolving regulations, your best course of action as an employer is to consult your broker, review your options, and communicate to your employees well ahead of 2018.