If you’ve been putting off preparing for the Cadillac tax because the task seems overwhelming, now is the time to start giving it some thought. Yes, 2020 is still a ways away (after the provision was changed to take effect two years later than originally planned), but you’ll be more helpful to your employees if you start planning now. This new tax might have a pretty big impact on your company. In fact, it’s very possible that you’ll have to adjust your health plan, which may have a domino effect across your workforce.
But don’t worry. Getting prepped for this new tax doesn’t have to be as large of a chore as you may be picturing it. Let’s break down what you need to know to start prepping.
What Is It?
Essentially, the Cadillac tax will tax extra-expensive health insurance plans by 40 percent. Now, this is the part where we have to throw in some very specific numbers. The excise tax, which takes effect in 2020, applies to employer policies that cost more than $10,200 per individual or $27,500 per family, as Forbes details. These costs don’t just refer to the part of the premium that employers pay. They also include the tax-free portion of employee premiums, flexible spending account (FSA) reimbursements, employer contributions to health savings accounts (HSAs), on-site medical clinics, some supplementary health coverage and more. The Congressional Budget Office estimated that the tax will generate billions: up to $34 billion in 2024.
Why is the tax even being implemented? Well, it’s supposed to discourage employers from selecting expensive policies that don’t provide any extra health benefits. Unfortunately, however, some believe that the tax will eventually affect most employer health care plans — not just the most expensive ones.
Who Exactly Will the Tax Affect?
The tax is indexed to match the inflation rate. The problem is that medical inflation is often at least double regular inflation, according to Forbes and a study by the American Health Policy Institute (AHPI). This means, considering regular health plans cost more because of medical inflation, that they might eventually fall under the bracket that the new tax covers — even if they weren’t intended to ever be taxed this way. AHPI estimated that the tax would affect only 17 percent of businesses and 38 percent of large employers during its original starting year of 2018, but regardless of start date, it will only grow from there: By 2031, AHPI forecasts that every average family medical plan will be subject to the excise tax.
What Are Employers Doing to Avoid the Tax?
Four out of five large employers are changing their health plans in order to avoid the tax, according to Forbes. They are either removing high-cost plans altogether, moving to higher deductibles, requiring employees to pay a higher percentage of their premiums, or removing extras such as vision and dental coverage. Other companies are considering dropping health insurance altogether, though any company of 50 or more full-time-equivalent employees that goes this route will have to pay a penalty. Companies considering this option should weigh which path will end up costing more.
Will the Cadillac Tax Change the Way Employers Approach Medical Benefits?
Employers currently view health benefits as a component of the total compensation package, but the Cadillac tax will limit the value attributed to the benefits portion of that package. Employers will most likely take action to avoid the additional tax, which will result in other offsets to benefit offerings in order to mitigate the financial impact to employees. Employers that span geographies will face an even greater challenge because the cost of health care varies by region; a higher-cost region in the employer’s service area may trigger the Cadillac tax, whereas a lower-cost region may not. This will create additional complexity for employers in multiple geographies.
Companies that still want to attract top talent despite reducing health benefits have a few options. They can increase wages to help offset the loss of coverage, or they can offer alternate benefits that won’t be taxed, such as flexible schedules, telecommuting or extra vacation days. Some businesses, rather than cutting health benefits, may choose to increase the price of their goods and services to help offset the incoming tax.
How Can Anthem Help?
Here’s what Anthem can do to help your business adjust to the Cadillac tax’s regulations while still offering a valuable health plan:
- Implement consumer-driven health plans to reduce the total plan value.
- Assist in reducing overall plan value to under the taxable level, and offer voluntary buy-ups; salary can be supplemented by the reduction in plan value to allow for these buy-ups.
- Implement a private exchange and offer plans that are under the taxable level as choices.
- Offer plans with strong provider collaboration, or provide programs that follow a model similar to accountable care organizations in order to reduce medical costs and the resulting premium.
Although the tax doesn’t start until 2020, you’ll be better off if you start planning for it now. However, we’re not completely sure what’s going to happen. The IRS is still putting together proposed rules for the tax, according to the Huffington Post, and congressmen are introducing bills in an attempt to eliminate it altogether. Business owners should plan for the tax, but keep an ear to the ground concerning any changes that might occur between now and 2020.
This content is provided solely for informational purposes. It is not intended as and does not constitute legal advice. The information contained herein should not be relied upon or used as a substitute for consultation with legal, accounting, tax and/or other professional advisers.
Stephanie Dwilson has extensive experience providing expertise on topics including health, law and marketing. She’s a science journalist published by Fox News, a marketing expert and an attorney with expertise in personal injury law. She’s also a small business expert featured by Businessweek and Millionaire Blueprints magazine and has worked as a marketing consultant for ministries and as a PR lead for one of the largest churches in America.