If you haven’t already considered how the Affordable Care Act’s (ACA) provision for Cadillac plans could affect your business, read on. Set to take effect in 2020, the Cadillac tax discourages overpriced health plans. Your business may yet be affected, even if you haven’t had to make changes.
The 40 percent excise tax applies to employer-sponsored health plans in excess of $10,200 in premiums annually for individuals, and $27,500 for families. The Cadillac tax was supposed to take effect in 2018, and employers now have two more years to phase in changes or face the consequences. Insurers are responsible for paying the tax on fully insured plans, while the administrator of the plan — you or the coverage provider — is responsible for taxes on self-funded plans.
Many economists co-signed a letter to Congress asking them to keep the Cadillac tax in place. Economists support the tax because when companies limit their coverage, copayments go up. This discourages people from getting care for frivolous concerns. Considering the health care tax exclusion reduces federal revenue by more than $250 billion each year, you can see why the economists pegged high-cost health care plans for cost reduction.
The IRS provided some guidance on how the tax will work as recently as July 2015. More guidance will follow as the effective date nears. It’s a complicated process, as these benefits represent a major shift in tax policy. Employers have traditionally written off the cost of providing health care coverage to employees; this is already changing.
The Cadillac tax, Obama administration officials wrote in The New York Times in 2013, will help combat the “hugely regressive” federal subsidy for employer-backed health insurance. They explained that the rich receive nearly triple the financial benefits from the tax exclusion than those with lower incomes because they’re taxed at a higher rate and tend to have more expensive health insurance.
On the Other Hand
According to the nonpartisan Kaiser Family Foundation, the tax will hit more than just traditional health insurance. It also applies to:
- Health savings accounts
- Flexible spending accounts (Includes money workers save tax-free for medical expenses)
- Supplemental insurance plans
- On-site clinics set up for workers may also be included
Looking to the Future
While many employers have already been making changes to their health care plans, it may be only a temporary reprieve. Congress linked the tax threshold to the consumer price index plus 1 percent, even though medical costs typically grow much faster. Medical costs are expected to grow an average of 5.6 percent over the next decade, while inflation will increase by about two percent per year.
This means that over time, more companies will be subject to the Cadillac tax. This has raised concern, likening the Cadillac tax to the alternative minimum tax. Originally aimed at the very wealthy, the excise tax could trickle down the income ladder opponents say.
Many look at overly generous insurance as shielding beneficiaries from costs, which encourages them to use more services and drives up prices for everyone else. It’s also a matter of fairness, some say, because forgoing taxes on health care benefits amounts to a major break for those with jobs offering coverage.
No matter how you look at this, it bears further consideration: Your employees are watching as well. Whatever changes you make to your employer-sponsored coverage, it’s wise to phase in changes gradually. Know where you stand now and in the future so you’re prepared, and your employees won’t be caught off guard by a substantial jump in premiums one year.
Be sure to stay in touch with your CPA and financial adviser, who can keep you updated on changes. In the meantime, contact us with your questions.