Health Policy Brief
Are employers prepared for the Cadillac tax?
Although much of the Affordable Care Act has been implemented, some major provisions are not yet in effect, including the “Cadillac” tax—an excise tax on high-cost, employer-sponsored health coverage. How might implementation in 2018 impact employers and the health care industry? What steps have organizations taken in anticipation of the Cadillac taking effect?
Are employers prepared for the Cadillac tax?
Although much of the Affordable Care Act (ACA) has been implemented, some major provisions are not yet in effect. Among these is the “Cadillac” tax, an excise tax on high-cost, employer-sponsored health coverage. Beginning in 2018, the Internal Revenue Service (IRS) will assess a 40 percent tax on the value of certain health benefits above the threshold amounts of $10,200 for individual coverage and $27,500 for family coverage. Health insurance issuers and self-funded group health plan sponsors must pay the tax on any dollar amount beyond the caps that is considered "excess" health spending. After 2018, the IRS will adjust the premium thresholds based on the consumer price index.1
As the Administration moves forward with the regulatory process, employers across all industries should consider whether and how the tax will affect their health benefit offerings; their ability to attract, retain, and motivate employees; and their regulatory compliance. Health insurance plans and other health care industry players should analyze the potential implications and options for product offerings and other impacted aspects of their business. Deloitte’s 2015 Survey of US Employers finds that most employers expect the Cadillac tax to influence their benefits strategy. Despite this finding, 63 percent of surveyed employers have not calculated their exposure to the tax or modeled what year the tax will apply, and most employers (68 percent) have not begun reducing the generosity of health benefits to move away from higher-cost packages.
This Health Policy brief presents findings from Deloitte’s 2015 Survey of US Employers to highlight steps organizations have taken in anticipation of the Cadillac tax taking effect.
1 Internal Revenue Code Section 4980I
What is the Cadillac tax?
The excise tax on high-cost, employer-sponsored coverage–popularly called the “Cadillac” tax–was included in the ACA in lieu of changes to longstanding tax preferences for employer-sponsored health benefits for employees. The Cadillac tax is intended to help fund the ACA’s health coverage expansion and control the growth of health care costs in the private health insurance market by creating a disincentive for employers to offer more robust health benefits.
The Cadillac tax applies to all employer-sponsored coverage, whether self-funded or fully insured, including retiree coverage and employer-sponsored group health plans purchased under the Small Business Health Options Program (SHOP Exchanges) and on private exchanges.
It is important to understand that the excise tax applies to both employer and employee premium contributions for certain health benefits. The tax also generally applies to tax-preferred contributions to certain health savings vehicles (e.g., health care flexible spending arrangements, health savings accounts). Because the excise tax is calculated based on employer and employee contributions to health benefits, companies will not be able to reduce potential excise tax liabilities simply by increasing employees’ contributions to premiums.
Employers are responsible for calculating the total value of health benefits subject to the Cadillac tax for each employee on a month-by-month basis and determining whether that value exceeds set thresholds, which in 2018 are $10,200 for self-only coverage and $27,500 for all other types of coverage. The value of benefits exceeding the thresholds is subject to a 40 percent non-deductible excise tax. Employers are responsible for apportioning the Cadillac tax among applicable coverage providers (e.g., health insurers and other entities responsible for administering health care benefits subject to the tax).2
The Cadillac tax takes effect for tax years after December 31, 2017. The Congressional Budget Office (CBO) projects that the tax will increase federal revenue by $91 billion from 2018 through 2025.3 CBO expects most of the increase in revenue to result from employers shifting employee compensation away from more generous health benefits to other forms of compensation that are subject to federal income and payroll taxes.
2 Internal Revenue Code Section 4980I
3 Joint Committee on Taxation, 9/28/2015, JCX 130-15
Employers should consider acting now. The Cadillac tax is scheduled to take effect in 2018 and is likely to have a considerable impact on employers. Companies that offer health benefits to their employees should assess how the tax might affect their benefit offerings. In addition, they should determine whether they are prepared to calculate the value of their employee health benefits and to apportion any tax liability among the various benefit providers. Companies have limited time to make changes to avoid any unexpected tax liabilities and put in place the processes needed to comply with these significant new administrative requirements. Importantly, it could take several years to realize the impact of initiatives that have the potential to reduce longer-term health care costs. Employers should consider starting now to be positioned to potentially achieve a reduction in health care costs before the tax takes effect.
Hospitals, health plans, and life sciences companies should take heed. In addition to the impact the Cadillac tax will have on health care organizations as employers, the tax could affect them in areas beyond their employee benefit offerings. For example, demand for some products and health care provider services could be lowered if employers reduce the generosity of health care benefits offered to employees. Also, any shift in the employer-sponsored market towards less-generous plans with lower premiums may drive health plans to significantly adjust or limit their insurance product offerings, which could translate to even greater revenue and competitive pressures for health plans. In addition, if the tax further accelerates the move towards consumer-driven health care and drives greater utilization of public and private exchanges to purchase health benefits, plans may need to evaluate their strategy to compete effectively in this arena.
Hospitals, health plans, and life sciences companies should consider incorporating the tax’s potential on service utilization and revenue generation into their future business plans and strategies, as companies make changes to hold the overall premium for employee health benefits below the thresholds for the tax and seek to control the administrative complexity of compliance.