Possibly one of the most closely watched and anxiously anticipated provisions of the Affordable Care Act (ACA) is the Cadillac tax. The tax implementation date of 2018 seemed like a distant future when ACA was signed into law in March 2010, but as we draw closer, many questions still linger. Here’s what you need to know now.
- What is the Cadillac tax?
Introduced by the ACA, the so-called “Cadillac tax” is an excise tax on employers that offer high-cost health plans to their employees.The tax’s goal is to encourage employers to offer health care plans in which their employees share the costs. By nudging employers to make plan changes—like discontinuing low or nonexistent deductibles and copays—employees will have a better understanding of true health care costs and be more informed health care consumers.Additionally, the tax will be a major source of revenue for the federal government to help fund other aspects of health care reform.
- What does this mean for employers?
If employers offer high-cost health plans (defined as health plans with premium costs above $10,200 for individuals and $27,500 for family coverage), they or their insurance company will owe the IRS a 40% tax on the excess amount.For example, if individual coverage costs $11,000, the tax is calculated on the excess amount ($800). The tax will be $320 per person having individual coverage ($800 x 40%).It’s easy to see how this tax will add up fast for employers, especially larger employers. Our recent survey report, 2015 Employer-Sponsored Health Care: ACA’s Impact, found that 20% of corporate employers believe the Cadillac tax will be the ACA provision causing the most significant future cost increase to their bottom line.
- When does the Cadillac tax go into effect?
The tax starts in 2018, but many employers are making changes to their health care plans now to avoid the tax in the future.
- How many employers are affected by the tax?
Although many employers’ health care plans currently meet the definition of “high-cost,” it seems that few are intending to actually pay the tax. Our survey report found that although half of employers are on pace to trigger the 2018 tax, only 3% plan to pay it. Instead, these employers are working on changes to avoid the tax.There are several options available to employers to limit or eliminate exposure to the tax. By far, the most common change is a move to a consumer-driven approach involving high-deductible health plans and lower premium costs. Employers may also reduce benefits, shift more costs to employees or drop higher cost plan options. Some are adopting wellness and preventive initiatives, including incentives. Only 3% report they are avoiding the tax by buying coverage through a private exchange. Some employers are focusing less on plan design and are instead exploring increased efficiency in care or increased purchasing power. To lower costs, some employers are turning to performance-based networks, affordable care organizations (ACOs), direct contracting or collective purchasing.
- How will employees be impacted?
If an employer offers health benefits that meet the “high-cost plan” definition, employee benefits may certainly be changed. Employees may see fewer plan options to choose from at open enrollment time. And it’s likely that they’ll see higher costs in the form of increased deductibles, copays or coinsurance amounts, in an employer’s attempt to lower overall costs. If health flexible spending accounts (FSAs) or health savings accounts (HSAs) are involved, the employer may decide to lower how much employees can contribute each year—or it may cut back on the amount it puts into the accounts for employees.
- Do we know everything there is to know about the tax?
Not yet. The IRS has been gathering feedback as they write proposed rules offering guidance on the tax. The first round of comments began in February and ended in May. Just two weeks ago, the IRS issued a second notice requesting additional comments by October 1. The agency plans to release proposed regulations after it has considered both sets of comments, likely in 2016. Two bills have been introduced in the U.S. House of Representatives to eliminate the tax, one by a Democrat and one by a Republican. Both have numerous cosponsors. Some employer groups and unions oppose the tax, and others are calling for more time. This may well become an issue on the presidential candidates’ radar. Stay tuned.
Get an overall look at the main components of ACA and how they interact from our new one-hour Overview of ACA e-learning course.
Julie Stich, CEBS
Director, Research at the International Foundation