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Although it will be several years before an excise tax on “high-cost” health care plans takes effect, concern about the tax provision is already on the minds of many employers and HR professionals.
The so-called “Cadillac” plan tax becomes effective on Jan. 1, 2018, and will be a 40 percent nondeductible excise tax on health care plans that are valued at more than $10,200 for individual coverage and $27,500 for family coverage. The initial cost thresholds for Cadillac plans will be adjusted annually for inflation. They will be based on the annual premium costs of the health plans plus reimbursements under flexible spending accounts for medical expenses, employer contributions to health savings accounts and coverage for supplemental health insurance. The costs of dental and vision benefits are excluded under the law.
The excise tax will be 40 percent of a health plan’s annual cost that exceeds the threshold. For example, an individual plan that is valued at $12,200 would be $2,000 above the threshold, and the issuer of the health policy would be taxed 40 percent of $2,000 or $800 for the high-cost plan.
According to supporters of the provision, the goal is to help pay for health care reform programs. The tax is designed to raise federal government revenues by imposing a tax on insurance companies that provide high-cost plans. Insurers will be required to pay the levy. However, employers with self-insured health care plans would technically be the issuer and, therefore, required to pay the excise tax on the value of any plan that exceeds the thresholds. In addition, insurers subject to the tax might pass on the additional financial burden to employers, who in turn might pass it on to covered employees.
The amount of revenue that the tax will generate is debatable, some analysts say. An analysis, by the Congressional Budget Office (CBO) predicts that businesses will respond by trying to avoid the excise tax with cost-reduction changes such as higher deductibles and co-payments for employees. In addition, many employers likely will consider terminating contributions to their employees’ health and flexible spending accounts, the CBO analysis concluded.
If employers and plan sponsors reduce substantially the number of Cadillac plans through cost-cutting measures, then the amount of tax revenue raised could be less than expected. CBO officials estimate that it would generate $12 billion in revenue for the federal government in 2018 and $20 billion in 2019.
The law increases the threshold for the cost of health insurance plans for “high-risk” professions, such as firefighters, police and mineworkers. The increase in the threshold for workers in high-risk professions is $1,650 for individual coverage (or $11,850) and $3,450 for family coverage (or $30,950). The thresholds could change before the excise tax takes effect in 2018; they could be adjusted upwards if health care costs rise more than projected.
The law allows adjustments to the thresholds for employers that pay higher insurance premiums because of the age or gender of their workforces. Multiemployer union plans have more lenient rules, including a $27,500 thresholdfor any coverage, whether family or single.
Bill Leonard is a senior writer for SHRM.
For U.S. Employers, Health Care Excise Tax Is the "X-Factor," SHRM Online Benefits Discipline, November 2010
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