News stories recently have been mentioning a new Cadillac Tax, but it’s not a tax on cars. The Cadillac tax is the Affordable Care Act’s tax on high cost health plans, which is set to start in 2018. The tax targets so-called Cadillac health plans, which are plans with the most generous level of benefits and often have low deductibles and little cost sharing from employees. Plans with premiums exceeding $10,200 for individual coverage and $27,500 for family coverage will pay a tax of 40% of the excess above those thresholds.
The tax is likely to affect more employers than originally intended. The law was written several years ago with other components of the ACA, but the cost of health insurance has increased dramatically over that time. The $10,200 threshold for individual coverage breaks down to a premium of just $850 per month. With the speed that health insurance premiums have been growing, it will not be uncommon for plans to hit this maximum premium level by the time the tax is implemented in 2018.
Exceeding the thresholds
What happens if employers choose healthcare coverage that exceeds the thresholds? The tax (or levy, as some are calling it) would be 40% of the premium amount above the threshold. For example, if the health care coverage for an individual employee costs $12,000 per year, this is $1,800 above the threshold. The tax would be $720 ($1,800 x 40%). Multiply that by the number of employees you may have, and you can see why this Cadillac tax is something to be aware of.
Exactly how this tax will be imposed is still uncertain. The tax may be levied on the insurance companies, who would then pass the cost on to the employer, but that would still ultimately come from the employer’s pocket.
What can employers do to avoid this tax?
The way to avoid the tax is to avoid hitting the threshold amounts, which could be difficult. Many are already at or near the thresholds, and would need to reduce the cost of health insurance provided in order to avoid the upcoming tax. This could be done by requiring employees to share the costs in the form of higher deductibles or more co-pays.
Reducing the level of insurance provided to your employees can bring its own set of difficulties for both employers and employees. For this reason, some employers will need to plan for the added cost of the tax. It will be important to keep an eye on this new tax to see how the final rules will affect your company; then plan accordingly.
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