The tax man cometh – and in 2018, he’s coming for your Cadillac health plan

By Higginbotham on November 19 , 2014


Beginning in 2018, the “Cadillac Tax” under the Affordable Care Act kicks in, and if you’re still offering these high-cost plans when that time comes, it’s going to cost you. How much? There’ll be a 40 percent excise tax on the cost of health plans above $10,200 for individuals and $27,500 for family coverage – and that includes any premiums you pay or contributions you or your employees make toward Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs) and Flexible Spending Accounts (FSAs).

The Cadillac Tax is supposed to help reign in skyrocketing healthcare costs by pressuring employers to offer less expensive health plans. As the theory goes, if people see more of the direct costs of their healthcare, they’re more apt to use their insurance more conservatively.

Of course, the tax is also a source of revenue to help Uncle Sam pay for the Affordable Care Act. The Congressional Budget Office estimates that the Cadillac Tax will put $120 billion in the federal government's coffers from 2018 to 2024. Roughly 25 percent of that is expected to come directly from employers, health plan administrators, and plan issuers, with the remaining 75 percent expected to come from higher taxable wages on employees. The CBO's estimates assume that many employers will cut healthcare benefits to avoid the tax, and boost wages to offset the effect on their employees.

So how hard will the new tax hit you?

According to a new report by the American Health Policy Institute, 17 percent of all U.S. businesses are expected to be hit by the tax starting in 2018, and more than 38 percent of large companies with more than 1,000 workers will be hit by the tax unless they make changes to their healthcare plans.

And how big is the tab? Larger companies subject to the tax will pay an average of $2.1 million per year from 2018 to 2024, or about $2,700 per employee.

What are businesses doing to prepare?

According to a recent survey by consulting firm Towers Watson, avoiding the tax is a top priority for 43 percent of mid- and large-sized companies. But rather than doing away with Cadillac plans altogether, most are finding other ways to adjust, such as:

  • Considering plans with higher deductibles and other out-of-pocket expenses
  • Reducing subsidies for employees’ spouses and dependents
  • Offering employees incentives for reaching specific goals to improve overall company health and reduce exposure to the tax
  • Limiting HSA, FSA, and/or HRA contributions
  • Moving to a private health exchange

A recent Pulse survey by Aon Hewitt found that 40 percent of employers expect at least one of their current health plans to be impacted by the tax in 2018, and 68 percent expect the tax to affect at least one, if not most of their plans by 2023.

If you do nothing, the tax will get you sooner or later.

It’s clear the Cadillac Tax is going to impose substantial costs on both employees and employers. So before 2018 rolls around, thoroughly review your healthcare plans and find out how the tax might impact you. By taking time now to formulate a strategy, you can soften the impact of the tax and avoid any nasty surprises.

For more information about group health plans, contact the experts at Higginbotham Insurance.

Tags: Employee Benefits


Follow us on Twitter