A provision of the Affordable Care Act is known as the “Cadillac tax.” This tax, which is set to go into effect in 2020, is an excise tax on what are considered high-cost health insurance plans. It is important for you to understand the types of plans that you offer to your employees that could be considered a “Cadillac” health insurance plan under the ACA as well as the tax implications for these plans. You can start making decisions now to anticipate this excise tax while still providing your employees with valuable health insurance benefits.
Will Your Plan Qualify as a “Cadillac” Health Insurance Plan?
Plans whose health care costs exceed $10,200 for individuals or $27,500 for families in 2020 will be subject to an annual excise tax of 40 percent, as explained by the Society for Human Resource Management. Some plans may pass that threshold because they cover a wide range of services, and some may pass it because the people they cover have high costs due to health conditions or where they live. According to The New York Times, the purpose of the tax is in line with the Obama administration’s plan to scale back the cost of health care for everyone and to provide the broadest amount of coverage, particularly to those who were previously uninsured.
What Are the Tax Implications for “Cadillac Plans”?
“Cadillac-type” plans have been offered by both public and private employers for years, in some industries as a way to attract and retain top talent, and in some cases as a way to compensate for wage freezes and other wage concessions that certain types of employees have been making since the recession of 2008, as the Washington Policy Center explains. The tax is already affecting company planning, according to Mercer’s National Survey of Employer-Sponsored Health Plans: Almost a third (31 percent) of surveyed employers said that avoiding the excise tax is influencing current health plan decisions.
Ways Companies Are Addressing the “Cadillac Tax”
We do not offer tax advice and would recommend you speak with a tax professional in relation to your best options. Below are actions employers reportedly took to manage the “Cadillac Tax,” according to a recent Mercer survey. Employers who were concerned about the effects of the excise tax scheduled for 2020 have taken the following steps to reduce or avoid the levy:
- Introduced a consumer-driven health plan, or CDHP or made efforts to increase employee enrollment in a CDHP (19 percent of those surveyed).
- Added or expanded a health management program (12 percent).
- Dropped a health that could trigger the excise tax (11 percent).
- Unbundled a nonmedical benefit plan from their health insurance offering, such as a dental plan (4 percent).
- Made other changes to avoid the effects of the tax (12 percent).
It is important to evaluate your current employer-sponsored group offering and determine if you have plans that may qualify as a high cost health insurance plan. Taking action today may help you avoid a large tax levy in the future.
Donald Parker has more than 20 years of experience in the insurance and financial services industry with several Fortune 500 companies. He holds a life, accident and health insurance license in Virginia. He has been FINRA Series 7, 24, 63 and 65 registered and specializes in the areas of long-term care, senior needs, retirement and employee benefit planning.