As 2015 nears its end, business owners are naturally looking ahead to 2016. When it comes to your company’s health plan, you might want to peer farther into the future, to 2018. That’s when a steep tax on high-cost health insurance under the Affordable Care Act, dubbed the Cadillac tax, will go into effect.
Although some people have described this tax as an effort to rein in lavish health plans offered to top-bracket taxpayers, that may not paint the entire picture. Studies indicate that anywhere from 15% to 40% of employer-sponsored health plans will be affected when the tax is introduced. In the following years, over half of all health plans could generate this tax.
The Cadillac tax is a 40%, non-deductible charge on costs over specific limits. Ultimately, the tax will be borne by employers, so you should know how it works and what to do about it.
As the IRS indicated in a pair of 2015 notices, the impact of the Cadillac tax may go beyond basic health plans. Flexible spending arrangements (FSAs), health savings accounts (HSAs), and health reimbursement arrangements (HRAs) also may be included. For the plans coming under this provision of the law, the cost of coverage will be the total contributions paid by both the employer and employees. However, employee-paid deductibles, coinsurance, and copays will not be considered as costs for the Cadillac tax calculation.
The thresholds for high-cost plans are currently $10,200 for individual coverage, and $27,500 for family coverage. These amounts will be updated for 2018 when the tax kicks in, and indexed for inflation after that.
Example: Assume the current thresholds are in effect in 2018. ABC Corp. calculates its costs at $11,000 for individual plans. That would be $800 over the $10,200 threshold, so the 40% tax would be $320 (40% of $800) per covered employee. Various penalties include a 100% fine for miscalculation.
In many cases, the Cadillac tax will be owed by the insurance company providing the plan, but that cost likely would be passed through to the employer.
As might be expected, the Cadillac tax provisions are complex, with multiple definitions and exclusions. Our office can review your current health plans and determine your exposure, if any, to the Cadillac tax.
If your company is vulnerable to the Cadillac tax, what can you do? Options range from paying the tax, in order to keep providing current health care coverage to your employees, to dropping health insurance altogether, subject to Affordable Care Act requirements.
Another, perhaps more common reaction will be to cut health coverage costs and, thus, avoid the Cadillac tax. Employers might do so by changing their plans to include some combination of higher insurance deductibles, smaller provider networks, and more cost sharing by employees. Such moves effectively would shift health care costs from employers to employees; companies might boost employees’ compensation to make up for some of the higher costs—or they might not.
Even with higher pay, though, employees would be losing tax-free health coverage while adding taxable compensation. Such changes could have considerable economic impact on your employees. By starting now to gauge the potential effect of the Cadillac tax in 2018, you can decide what steps you’re likely to take and establish a schedule for introducing any new developments to your workers.