Cadillac Tax Reviewed

As we posted this article, the IRS had just ended a comment period on the so-called Cadillac tax. The tax, part of the Affordable Care Act, is scheduled to go into effect in 2018 unless the law changes. Some Republicans have promised to do just that.

Created by Section 9001 of the Affordable Care Act, the Cadillac tax will apply to “high-cost” health plans. Section 9001 defines a high-cost plan on the basis of total premiums (or costs, for a self-insured plan). Starting in 2018, plan sponsors will have to pay an excise tax on these plans.

The Good

The tax has two purposes. First, it will raise some $80 billion over the next 10 years, estimates the Congressional Budget Office. Funds will help pay for tax credits that will subsidize health insurance coverage for lower- and middle-income Americans.

Second, the tax will discourage high-cost health plans. High-cost health plans, which often feature low or no deductibles and copayments, can insulate individuals from the true cost of their healthcare and encourage wasteful spending. And although it’s true that rich health plans have become popular benefits for executives, many rank-and-file employees, particularly union workers, also have high-cost health plans. Rather than eliminating or capping the deductibility of high-cost employer-provided health plans, the Cadillac tax does an end-run around them.

So what’s a high-cost plan? The law sets the “high-cost” threshold at $10,200 for single-only coverage and $27,500 for families for 2018. The threshold will adjust for cost of living increases in following years. The annual limits increase for retirees not entitled to Medicare benefits and individuals engaged in high-risk professions. For self-only coverage, the limits increase by $1,650. For self and spouse coverage and family coverage, limits go up by $3,450. The tax applies to any premium (or contribution) amount over the threshold, calculated on a monthly basis.

The Bad

Several problems arise with this. First, we don’t know what healthcare inflation will look like by 2018, but already it can cost pretty close to five figures per year to buy a good—but not extravagant—health plan in some high-cost geographic regions.

Second, Section 9001 of the Affordable Care Act does not apply only to health insurance premiums. It lumps in all employer-sponsored health coverage that is excludable from the employee’s gross income under section 106, whether insured or not. This includes contributions to an employee’s HSA (health savings account), health FSA (flexible spending account) or Archer MSA (medical savings account). For insured plans, it applies regardless of a plan’s grandfather status. It does not include standalone dental or vision benefits, plans that cover only specified diseases (such as cancer insurance or “dread disease” insurance) or indemnity plans, such as hospital indemnity plans, that pay benefits according to a schedule.

The law specifically states that “coverage shall be treated as applicable employer-sponsored coverage without regard to whether the employer or employee pays for the coverage” and that “coverage includes [the] employee-paid portion.”

The Ugly

When used as an adjective, “Cadillac” has come to mean something luxurious or extravagant. But by these standards, many pretty ordinary plans will meet the definition of a Cadillac plan in 2018. About one-third of employers expect to be hit with the tax, found a 2014 survey by Mercer LLC.

The law allows for cost of living increases to the threshold over time. However, those increases will be less than the rate of healthcare inflation, if current trends hold. The result? More employers will end up paying the tax. Did we mention that it’s 40 percent on amounts over the threshold?

The law requires the “coverage provider” to pay the tax. This means…

• For coverage under a group health plan: the health insurance issuer.
• For HSAs and MSAs: If the employer makes contributions, the employer.
• Other applicable coverage: the person that administers the plan’s benefits.

In addition, employers will be responsible for determining whether the Cadillac tax will apply. They must “calculate for each taxable period the amount of the excess benefit subject to the tax” and notify the IRS and “each coverage provider.” (In the case of a multi-employer plan, the plan sponsor will handle calculations and reporting.)

Employers can take steps to control employee healthcare spending and keep health plan costs under the threshold. Strategies include:

• Adopting a high-deductible health plan (HDHP). High-deductible plans generally cost less than other medical plans. They also make employees more aware of their health expenditures, encouraging them to spend more wisely.
• Adopting wellness and disease management programs. Disease management programs can help control the cost of treating chronic disease, while wellness programs might prevent them.

Employers with collective bargaining agreements may need time to negotiate major changes to their health benefits, so they should begin planning now. Please contact us for more information.