You probably haven’t planned much for the excise tax on high-end health insurance plans that employers will face in 2018, but you certainly know it’s out there. Three whole years, more than 1,000 days, may seem too distant for concern, but it’s imperative that employers start creating a strategy for dealing with the Cadillac Tax now. The alternative is to be hit by a 40% tax on your health insurance spending.
The first thing you need to understand is whether the excise tax will apply to your organization. It appears that a lot of employers will be dealing with it. A report from the American Health Policy Institute says 17% of employers are expected to be impacted by the tax. When it comes to large employers (those with more than 1,000 workers), that number jumps to 38%.1
So this is something that needs to be paid attention to—today.
The Cadillac Tax Defined
The Cadillac Tax is an excise tax scheduled to take effect in 2018 to reduce healthcare usage and costs by encouraging employers to offer group employee benefits plans that are cost-effective, and to engage employees in sharing the cost. This tax is a 40% surcharge on health insurance spending that exceeds $27,500 for a family, or $10,200 for an individual. Those numbers will be indexed for inflation in future years, and include contributions to Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), Health Reimbursement Accounts (HRAs) and certain Employee Assistance Programs (EAPs).2
The theory behind the tax is to make insurance providers, employers and employees more aware of healthcare costs, and to get them to take actions to control these costs.
From an employer perspective, it’s important to understand that the excise tax is not tax deductible to the corporation, unlike the current premium contributions to group employee benefit plans that are tax deductible.
It’s time to begin focusing on what you’re going to do to avoid or minimize the impact of the tax (unless, of course, you’re fine with paying it). There is a danger in waiting three years to address it. Rather than gradually easing employees in to a new way of consuming healthcare and insurance, you’ll be hitting them all at once with a potentially massive change. And that’s not good for anybody.
What’s Your Game Plan?
There are 4 strategies for employers to avoid or minimize the impact of the Cadillac Tax that should be considered, and you should start planning now for how to implement them. They are:
- Plan for higher deductibles for plan participants.
- Establish higher out-of-pocket expenses for employees.
- Provide lower subsidies to spouse and family members.
- Limit contributions to HSAs, FSAs, and HRAs.
With each of these options, employers must be prepared for some level of backlash over the higher out-of-pocket costs from plan participants. It might not happen, but it’s best to plan ahead. To effectively notify plan participants on the path forward (and change employee behavior to take more responsibility for their health) will require significant employee education and communications. This means it will take time – an important reason to not put off your planning any longer.
There are some HR departments and benefits managers that are inclined to cross their fingers and hope a new administration and a new Congress will repeal the Cadillac Tax. Don’t hold your breath. Very simply, the government needs the revenue. The Congressional Budget Office estimates that repealing the Cadillac Tax would add $100 billion to the federal deficit by 2022. It’s possible that the $10,200 threshold could rise and therefore impact fewer employers, but waiting and hoping seems like a very risky bet to make.
When it comes to the Cadillac Tax, 2018 is right around the corner. It’s time to start analyzing and projecting. By beginning this process now, you’ll be positioned to make smarter decisions.
If you’re in charge of health insurance benefits and compliance at your organization, you don’t want to wake up on January 1, 2018, and realize that, depending on the size of your organization, you could face millions of dollars in additional costs; that’s not good business for anyone.
It’s time to think about tomorrow today.
1 American Health Policy Institute, “The Impact of the Health Care Excise Tax on U.S. Employees and Employers”
2 Employee Assistance Programs (EAPs) may qualify as an “excepted benefit,” and if they do, they would not be subject to the Cadillac Tax. However, to the extent that the EAP qualifies as a group health plan, then it would be subject to the Cadillac Tax. See IRC 4980I(d)(B)(ii).
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