1. What is the Cadillac tax?
Introduced by the Affordable Care Act (ACA), the so-called "Cadillac tax" is an excise tax on employers that offer high-cost health plans to their employees.
The tax's goal is to encourage employers to offer health care plans in which their employees share the costs. By nudging employers to make plan changes--like discontinuing low or nonexistent deductibles and copays--employees will have a better understanding of true health care costs and be more informed health care consumers.
Additionally, the tax will be a major source of revenue for the federal government to help fund other aspects of health care reform.
2. What does this mean for employers?
If employers offer high-cost health plans (defined as health plans with premium costs above $10,200 for individuals and $27,500 for family coverage), they or their insurance company will owe the IRS a 40% tax on the excess amount.
For example, if individual coverage costs $11,000, the tax is calculated on the excess amount ($800). The tax will be $320 per person having individual coverage ($800 x 40%).
It's easy to see how this tax will add up fast for employers, especially larger employers. The latest International Foundation of Employee Benefit Plans' survey 2015 Employer-Sponsored Health Care: ACA's Impact found that 20% of employers believe the Cadillac tax will be the ACA provision causing the most significant future cost increase to their bottom line.
3. When does the Cadillac tax go into effect?
The tax starts in 2018, but many employers are making changes to their health care plans now to avoid the tax in the future.
4. How many employers are affected by the tax?
Although many employers' health care plans currently meet the definition of "high-cost," it seems that few are intending to actually pay the tax. The same International Foundation survey found that although half of employers are on pace to trigger the 2018 tax, only 3% plan to pay it. Instead, these employers are working on changes to avoid the tax.
There are several options available to employers to limit or eliminate exposure to the tax. By far, the most common change is a move to a consumer-driven approach involving high-deductible health plans and lower premium costs. Employers may also reduce benefits, shift more costs to employees or drop higher cost plan options. Some are adopting wellness and preventive initiatives, including incentives. Only 3% report they are avoiding the tax by buying coverage through a private exchange.
5. What does all this mean for the employee?
It might sound like the Cadillac tax is just for employers and won't impact you--but if your employer currently offers health benefits that meet the "high-cost plan" definition and decides to avoid the tax, it's likely you will feel the impact.
You may see fewer plan options to choose from at open enrollment time. And it's likely that you'll see higher costs in the form of increased deductibles, copays or coinsurance amounts. If you have a health flexible spending account (FSA) or health savings account (HSA), your employer may lower how much you can put into your account each year--or they may cut back on the amount they put in the plan for you.
6. Do we know everything there is to know about the tax?
Not yet. The IRS has been gathering feedback as they write proposed rules offering guidance on the tax. A couple of bills have been introduced in the U.S. House of Representatives to eliminate the tax. Some employer groups and unions oppose the tax, and others are calling for more time. And the pending legal case before the Supreme Court, King v. Burwell, is causing uncertainty for ACA as a whole before the decision is announced later this month. Stay tuned.