‘Cadillac’ Tax Looms Large for Employers

December 1, 2015

More than one in four employers will be affected by the so-called “Cadillac” tax, a nondeductible 40 percent excise tax set to take effect on high-cost healthcare benefits in 2018, according to The Kaiser Family Foundation.

The “Cadillac” Tax, How Will It Impact You?

A survey by the International Foundation of Employee Benefit Plans puts the percentage much higher – at nearly 60 percent.

The tax has become a hot potato issue in Congress and among presidential candidates as calls for repeal gain momentum on both sides of the aisle. Several bills to repeal the tax have been introduced in Congress.

The question of how to fill the $87 billion revenue gap through 2025 if the tax is repealed, however, has become a major sticking point. Even if legislation should get passed that repeals the excise tax, many politicos believe that President Obama would veto the bill.

How it works

Designed to pay for the cost of expanding healthcare benefits under the Accountable Care Act, the Cadillac tax also is an incentive to rein in comprehensive health plans that encourage healthcare spending.

It is levied on the difference between the total cost of health benefits for an employee and an established threshold for the year, currently set at $10,200 for individuals and $27,500 for families. It is slightly higher for those age 55 and older and individuals in high-risk professions – $11,850 for individual coverage and $30,950 for family coverage. Thresholds are expected to be updated in 2018 when final regulations are issued.

Included in the calculation are employer and employee contributions to health insurance premiums, health saving accounts (HSAs), Archer medical savings accounts (MSAs) and flexible spending accounts (FSAs). It also covers onsite medical clinics and certain wellness and employee assistance plans. The threshold will be indexed annually based on the Consumer Price Index.

Health insurers will pay that portion of the excise tax attributable to health insurance coverage, and third-party administrators will pay for self-funded plans. Employers will pay for the portion of benefits attributable to HSAs, MSAs and FSAs. They also are responsible for calculating the tax burden for each service provider. Ultimately, they are expected to end up paying the tax as insurers, and service providers are sure to pass the cost on to their corporate clients.

To avoid exceeding the forthcoming thresholds, employers have several options, all of which pass the burden on to employees. Employers can increase employee cost-sharing, cap or eliminate tax-preferred savings accounts or eliminate higher-cost health plan options.

Other options include limiting, excluding or adding a surcharge on spousal coverage. Some companies may choose to offer health insurance through the private exchanges.

Employers aren’t waiting

Many employers have already begun to make changes to their benefit offerings. Slightly more than half of large firms with 200 or more workers (53 percent) and 17 percent of small firms, with three to 199 workers, have already conducted an analysis of their benefit plans, a recent Kaiser Family Foundation survey found. Of those 19 percent of large firms and 12 percent of small ones, acknowledge that their plan with the largest enrollment would exceed the 2018 threshold.

And, 13 percent of large firms and 7 percent of small firms have already made changes to their plans’ coverage or cost-sharing requirements, while 8 percent of both large and small firms have switched to a lower cost plan.

Among large firms in the Kaiser survey that have made changes to their plans, 64 percent have increased employee cost-sharing. Under the tax provision, the calculation of plan costs excludes out-of-pocket expenses.

A casualty of the excise tax could be FSAs, which allow employees to contribute tax-free dollars into an account to be used for paying healthcare expenditures not covered by insurance. Many employers also contribute to these accounts, and the Kaiser study indicated that those companies offering FSAs may be more likely to be affected by the tax than those that do not.

The IRS has issued a notice stating that it and the Treasury Department anticipate future proposed regulations will exclude employee after-tax contributions to HSAs and Archer MSAs from the excise tax calculation. As such, some experts suggest implementing a high-deductible health plan and eliminating pretax employer and employee HSA contributions.

Whatever strategies are put in place, however, may not keep pace with the growth of healthcare costs. The Alliance to Fight the 40, a coalition of companies, unions, insurers and other stakeholders lobbying for repeal, notes that healthcare spending is projected to grow more than twice as fast as the Consumer Price Index over the next decade.

This insufficient indexing of the thresholds, the group contends, “means more and more plans will trigger the tax, and to a greater extent, over time.”