The post below is a guest blog from Mike Beck who serves as Principal, Health & Welfare Consultant for CAI’s employee benefits partner Hill, Chesson & Woody.
The Cadillac Tax is an excise tax on health coverage deemed to be high cost. The tax begins in 2018, and levies a 40 percent excise on the value of health insurance benefits exceeding the threshold of $10,200 for individual coverage and $27,500 for family coverage (indexed to inflation) on an annual basis. The thresholds increase for individuals in high-risk professions e.g. police officers/fireman and for employers that have a disproportionately older population.
While these thresholds seem high for some, when most evaluate their current premium and apply three years of a trend increase to it, it is easy to see how in 2018 many employers will be close to hitting or even exceeding the thresholds. Industry estimates show that nearly 50% of employers will be impacted in 2018. Making matters worse, it is not just the cost of health insurance that goes into the calculation. Employer or employee contributions to a health flexible spending accounts must be included as well as employer contributions health savings accounts and health reimbursement accounts (HRAs).
The outcome is that employers will likely have to reduce the value of the plan they are offering, reduce the limit of their Flexible Spending Account, and eliminate any employer contributions to an H.S.A. or a combination of these tactics in an effort to avoid the tax.
The tax will apply to employers regardless of plan funding (fully insured or self insured) and is scheduled to begin in 2018 and go into perpetuity. The tax is non deductible for employers so many employers may experience an increased tax burden due to the loss of deductibility. The Congressional Budget Office estimates the tax will raise $80 billion between 2014 and 2023.
Employer reaction has been mixed with many taking a wait and see attitude and delaying a decision as long as possible. In a recent survey of 333 large employers by the National Business Coalition on Health and the Benz Corp, according to the results, “the Cadillac Tax is currently not driving major benefit change.” Of the employers surveyed, 30 percent have not made any decisions around their course of action with 46 percent of employers keeping benefit coverage the same.
Since the inception of the Affordable Care Act (ACA) there has been wide talk that the Cadillac Tax would be repealed. Pundits proclaimed that large employers and unions would not stand for it. As the ACA marches on, the Cadillac Tax is becoming more and more of a reality. Congress is counting on the tax to be a major source of revenue so repealing the Tax could be unlikely. There is a possibility that the Cadillac Tax could be redesigned or some form of compromise reached. The long term impact to employees will most likely be reduced benefits and higher out of pocket costs which may create morale and retention issues.
Employers need to plan now and estimate what the potential costs of the Cadillac Tax to be for their organization and determine a strategy moving forward.