In 2018, the federal government will start a new tax on high-cost employer-sponsored health plans. It’s informally known as the Cadillac tax. According to a recent survey from Towers Watson, many companies are already concerned about the impact the tax could have on their businesses.
“The Cadillac tax doesn’t take effect until 2018, but it’s getting a lot of attention right now,” says Veronica Hawkins, Medical Mutual Vice President, Government Accounts. “Many employers have multiyear agreements with their insurance carriers, so they are understandably concerned.”
Smart Business spoke with Hawkins about how the Cadillac tax is expected to work in terms of thresholds and calculations, what exactly is considered a high-cost health plan and what companies can do to figure out if, or how much, they might have to pay.
What is the Cadillac tax?
The Cadillac tax is a provision of the Affordable Care Act (ACA), which Congress passed in 2010. Essentially, it’s a 40 percent, nondeductible tax on high-cost employer-sponsored health plans. The tax is applied to the amount each employee’s coverage exceeds the annual threshold, which is determined by the IRS. All employers are subject to the tax, regardless of size or grandfathered status. The idea is to reduce the demand for high-cost health insurance plans and encourage carriers and consumers to better control their health care costs.
What does high-cost coverage mean?
Currently, the 2018 threshold for a high-cost plan is $10,200 for individuals and $27,500 for families. Those amounts, however, are subject to change before the tax actually takes effect. In 2019, the threshold will increase by 1 percent plus inflation. After that, it will increase based solely on inflation.
In addition, there are higher thresholds for retired individuals ages 55 and older and for plans that cover employees engaged in high-risk professions. In both of these examples, the threshold can be $1,650 higher for individuals and $3,450 higher for families.
What benefits are included in the threshold?
The amounts combine the values of several different types of health benefits. First, you have the premiums for medical and prescription drug coverage, plus certain types of vision and dental benefits. Then there are certain contributions to health savings accounts, flexible spending accounts and health reimbursement arrangements. Those contributions are included regardless of whether they are made by the employer or their employees. The value of wellness programs and on-site medical clinics can also count as part of the calculation.
Who calculates the tax?
According to current information, companies will be responsible for calculating the tax for themselves. That’s because in many cases, employees can choose from more than one group health plan and insurance carriers may not have enough information to do the calculations. Insurance carriers collect the tax from their customers and pay it on their behalf. Self-funded groups are responsible for calculating the tax and submitting payment. The federal government is expected to give more details about how payments should be submitted.
What do companies need to know right now?
Understandably, companies want to know two things — if they will have to pay the tax and, if so, how much it will be. Unfortunately, there are far too many variables right now to give realistic estimates.
The best advice we can give is for companies to consult with their tax adviser, who can provide additional guidance and help make sure they are in the best possible position once 2018 rolls around. Then talk to your insurance carrier and develop a plan for adjusting your benefits, or your multiyear contract, if the need does arise.
Insights Health Care is brought to you by Medical Mutual
