So what is this Cadillac Tax?
The Cadillac Tax is an excise tax that will be imposed on high cost employer-sponsored health coverage. The term Cadillac Tax is used to describe health plans that offer rich benefits. This tax will come in to effect in 2018.
Who pays the Cadillac Tax?
- Fully Insured: Employers calculate and insurers pay (will likely be passed on to the insured)
- Self-Funded: Employers calculate and pay
When is the Cadillac Tax implemented?
- An employee is covered under any “applicable employer-sponsored coverage” at any time during a taxable period, and
- There is any excess benefit with respect to the coverage
So what exactly does Applicable Employer-Sponsored Coverage mean?
Coverage under any group health plan made available to the employee by an employer which is excludable from the employee’s gross income.
And what about Excess Benefit?
If a health plan offers benefits that have costs exceeding $10,200 for self-only coverage and $27,500 for family coverage, it will be considered an excess benefit. In turn, the Affordable Care Act will place a 40% excise tax on the benefit exceeding the amounts above.
How is the value of a health plan determined?
Any amount of the health plan that exceeds the Excess Benefit thresholds, described above, will be taxed. The items included in the cost are (Cadillac Tax Fact Sheet, 2015):
- Premiums paid by employers and employees
- Employer and employee contributions to FSA’s, HRA’s, and HSA’s
- Additionally, the cost of any Employee Assistance Plans that are available to employees
Self-Only Coverage and Family Coverage Example (Cadillac Tax Fact Sheet, 2015)
The name of this Tax can be deceiving for many, as it refers to a high quality, expensive, luxury car. Only richer, more expensive plans will likely be affected in the first couple years after 2018. In the long-run, however, more and more health plans will be subject to the Cadillac Tax; making it seem like more of a “Chevy or Ford” Tax rather than a Cadillac Tax.
As time progresses, more and more health plans will be considered to have excess benefit because the thresholds index according to the CPI, which has averaged a little under 2.5 percent for the past ten years. Whereas, the cost of the health plans are indexed according to rising healthcare costs, which as we all know increase at a rate significantly higher than 2.5 percent.
Another interesting facet of the Cadillac Tax is the HSA component. HSA’s have become more prevalent in the group setting due to their tax benefits. Employees’ are able to put away money, pre-tax, in to an HSA account to pay for qualified and affordable healthcare expenditures. Here’s the kicker: the Cadillac Tax includes the value of employers and employees contributions to their HSA account, potentially increasing the value of the health plan even further.
A survey done by Mercer estimates that about one third of employers are currently at risk for the Cadillac Tax for 2018; if they make no changes to their health plans moving forward (Newsroom, 2014). As the tax considers more and more health plans to be in “excess,” this percentage of employers will likely increase.
As the Cadillac Tax is implemented, many business will likely begin to cut back the benefit packages offered to their employees, potentially resulting in higher deductibles and higher out of pocket costs for employees. In addition, employers may decide to compensate their employees more to offset the rising cost in health insurance premiums, in turn increasing their taxable wages.
2018 may seem like quite a ways off, but employers need to begin planning for this tax now.
If you have questions, concerns, or comments regarding the Cadillac Tax, The Accel Group can help. Email Brittany Groe at firstname.lastname@example.org for more information.
Cadillac Tax Fact Sheet. (2015, January 1). Retrieved April 23, 2015, from http://www.cigna.com/assets/docs/about…on…/cadillac-tax-fact-sheet.pdf
Knebel, Kristen. Cadillac. 2015. Web. 23 Apr. 2015.
Newsroom. (2014, November 14). Retrieved April 23, 2015, from http://www.mercer.com/content/mercer/global/all/en/newsroom/modest-health-benefit-cost-growth-continues-as-consumerism-kicks-into-high-gear.html