Although the federal Affordable Care Act’s Excise Tax (also known as the “Cadillac Tax”) is more than two years from its effect date (January 1, 2018), that doesn’t stop the heat from rising on HR professionals to start preparing. The tax affects both public and private sector companies, along with unions holding collectively bargained health and welfare plans for their members.
What's the need for the Excise Tax?
While there is speculation that the Cadillac Tax may be repealed before 2018, many have not even heard of the tax or understand its purpose. In short, health economists have argued that there is a strong need for a limitation on the now unlimited tax preference concerning employer-sponsored insurance, or the “exclusion”. This is because unlimited exclusion has been known to encourage workers to purchase plans with overly generous benefits or low/no-cost sharing plans with high premiums. It’s also argued that these high-cost plans bring overutilization of healthcare services that, in turn, increase healthcare spending. This causes inflation to healthcare costs overall. The Cadillac Tax is now being put into place to limit this exclusion to reduce spending on healthcare so workers would begin purchasing less costly coverage.
The Affordable Care Act (ACA) is adding this section to its Internal Revenue Code to impose a 40% excise tax on employer-sponsored healthcare coverage exceeding $10,200 for individuals and $27,500 for families. However, these thresholds will be increased based on age/gender, and for retirees and individuals who work in “high-risk” professions. The Cadillac Tax will be imposed pro-rata on insurance companies, administration of a self-insured major medical plan, and the employer in cases where the employer directly makes HSA contributions on an employee’s behalf or when an employee makes their own HSA contributions through a Code section cafeteria plan.
Who will it affect?
The American Health Policy Institute released a study showing that the Cadillac Tax is expected to affect 17% of all U.S. business and around 38% of larger sized firms. Mercer also found that more than a third of large employers will exceed dollar thresholds of the Cadillac Tax and Towers Watson suggested 48% of large employers would reach the threshold. So what can employers do to prepare for 2018? The key is to transition the benefits structure of your organization.
What can businesses do to prepare?
While it would be cost effective for doing a complete turnaround with employer’s health plans and seek a “full replacement” plan, employers must also consider the effect on employees with that sudden of a shift when traditional HMOs and PPOs are no longer offered. Without adequate up-front support and education, there may be employee backlash since many employees are unfamiliar with HDHPs (high-deductible health plan) and will not have the savings available to cover the higher out-of-pocket expenses. On top of that, talent retention is at risk, and there may be poor health effects for employees that choose to forgo care if it’s not affordable.
To assist employees during the transition, employers must take on the responsibility of educating their company on HDHPs. A gradual shift will supply HR the time needed to instruct employees on the savings and benefits they will receive in the long run. A multi-year approach (about two to three years) will allow for large employers to introduce lower-cost, consumer-driven health plan options in an effort to reduce Cadillac Tax exposure.
Check out Dominion's next blog release to find out what steps your company should take to stay compliant with the ACA's Cadillac Tax.