Taxes are big headlines in the news these days, with individual Americans wondering what will happen next in Congress’s attempts to reconcile the House and Senate’s tax reform bills. 2018 is approaching quickly, with all the changing regulations it brings, but one change that tax companies won’t have to worry about quite yet is the so-called “Cadillac tax” (or High-Cost Plan Excise Tax), a 40-percent tax on high-cost health care plans offered by employers. Instead of taxing employees with these plans, employers offering them would be taxed on any amount over the annual limitations (known as employees’ “excess benefit”).
An original part of the Affordable Care Act (ACA), enacted into law in 2010, the Cadillac tax was set to take effect in 2018. A budget deal in December 2015 pushed it back to 2020, and passing or repealing the tax is still a point of debate between Democrats and Republicans. In spite of doubt over whether or not the tax will ever really be enacted, the repercussions if it are are serious enough that, short of an outright repeal, employers need to prepare as if the tax will go into effect in 2020.
Understanding Who Will Be Affected
The reasoning behind the Cadillac tax is rather simple: The current setup regarding employer-sponsored health insurance (ESI) has only created a significant amount of wasteful spending. Proponents of the tax see it as a way to fund other areas of the ACA while incentivizing employers to spend less on healthcare plans (at the same time they spend more on actual wages for employees). With approximately 150 million Americans covered under ESI plans, whatever tax replaces the current ESI structure would have a significant effect on the U.S. healthcare system, as well as the ways employers construct their benefits packages.
The types of companies that would be affected most and by how much varies. According to analysts at the Tax Foundation, the effective rate of the Cadillac tax, now tax deductible, would be reduced for for-profit corporations with higher percent marginal tax rates. In contrast, companies that typically do not face income tax liabilities – such as nonprofits and government organizations (local as well as state and federal) – would still feel the full brunt of the 40-percent rate.
Employers’ Current Dilemma
Since the tax’s announcement, employers have been concerned. The Cadillac tax would apply to all ESIs with premium thresholds over $10,200 for individuals and over $27,500 for families. For employees in professions considered “high-risk,” those numbers would be higher – around $11,850 for individuals and $30,950 for families. It’s still unclear if those threshold amounts would be adjusted for inflation, causing concern among employers regarding how much exactly they should change their healthcare offerings.
When making adjustments, employers basically have two main options: change their health care plan offerings significantly to avoid the tax, or keep things as they are and risk having to pay it. According to a 2016 survey by the International Foundation of Employee Benefit Plans, 27.6 percent of organizations surveyed had already begun implementing changes intended to avoid the tax. Of course, it’s possible that the Cadillac tax will never be implemented, so employers should assess their risks accordingly.
Alternatives to Facing the Tax
In the midst of all the uncertainty, the good news for employers is that there are still a couple of other options to avoid paying the tax while meeting employees’ needs. While the tax would affect most health savings accounts (HSA), flexible spending accounts (FSA) and health reimbursement accounts (HRA) in addition to their main health insurance plan, in its current form the tax would not apply to certain supplemental insurance paid with after-tax dollars, such as:
- Disability insurance
- Dental insurance
- Vision insurance
- Life insurance
- Specified disease insurance
- Hospital indemnity insurance
Employers should keep in mind, however, that by the time of its implementation, IRS interpretations of what’s included and what’s not may have changed.
Given that employers may switch to offering more healthcare plans with higher deductibles and limiting the selection of health benefits, by expanding the use of the supplemental insurance options above, companies can still look out for their employees’ well-being and their own bottom lines: Companies could increase their employee wellness programs with the hope that improved overall wellness would mean less utilization of health insurance.
Preparing for the Unknown
The fate of the Cadillac tax is currently uncertain. According to analysts at The Hill, the issue is still contentious enough between Republicans and Democrats that it’s impossible to know yet if the tax will ultimately be repealed, delayed or enacted. Companies should consider the costs they’ll incur if the tax does go into effect, and devise any modifications in their benefits packages accordingly. After all, this is one tax employers definitely can’t afford to ignore.