The Cadillac Tax: What it is and why you should care
July 11, 2015
By Scott Lyon, SBAM Senior Vice President
At its core, the Cadillac Tax is another gem of the Affordable Care Act that goes into effect in 2018. With the Cadillac Tax, employers will pay an excise tax of 40 percent on the cost of health coverage costing more than $10,200 for self-only coverage or exceeding $27,500 for any two-party or family plans. If your plan is fully-insured, your carrier is responsible, but you know where they will get the money to pay the tax – from you. If your plan is self-insured, you are responsible for the payment. Remember an excise tax cannot be written off.
Here are the parts that maybe you are not so familiar with:
First, the excise tax applies to the overall aggregate cost – the total premium (including co-premiums that your employees pay) for fully-insured plans; the COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) rate for the self-insured, and contributions to flexible spending accounts, health savings accounts, and health reimbursement accounts.
Second, the Cadillac Tax is not based upon on the relative level of the benefits offered – platinum, gold, silver or bronze plan. Again, it is based upon the premiums paid. It is therefore possible that a small employer purchasing a silver-level plan who happens to have an older workforce (remember the age of your employees and their dependents are a key factor in the rate) and is in the wrong geographical location could find themselves paying an excise tax. Another employer, maybe even a competitor, with a younger workforce in a different location could be offering a higher level plan, but not be subject to the tax. How is that for your competitive position or interest in hiring that older candidate (even if he/she has the experience you need)?
Third, it’s a 40 percent excise tax beginning in 2018 on the cost of coverage for health plans that exceed $10,200 for individual coverage and $27,500 for two-party or family coverage. It is indexed to inflation, but the first change in that rate does not come until 2020.
You may be asking, well, how bad could it be? According to the Congressional Budget Office (CBO), the tax is expected to generate $5 billion in 2018, then $34 billion by 2024 as more employers meet that minimum threshold. It seems to me that a 40 percent penalty is a pretty good incentive to avoid doing something but, at the same time, the CBO is clearly expecting a lot of employers to pay the tax to help fund the ACA. Hmmmmm.
So, what can you do between now and 2018? It starts with doing the math. Take a look at the health benefits you offer and the overall costs including premiums, contribution to flexible spending, health reimbursement and health savings accounts to determine whether your plan is at or approaching the premium threshold. If your plan is, work with your broker to reduce your risk of paying the tax.
Next, pay attention to the efforts in Washington to either repeal or fix the Cadillac Tax. There are already bills being introduced to do both. SBAM will watch these closely and be in communication with our delegation in Washington, but the time will come for you to reach out to your representative. When that time comes, please do so.