With the alterations that the Affordable Care Act has brought to health insurance, there’s been a lot of talk about what’s changing and what’s staying the same. One aspect that has been discussed at length is the issue of high value plans.
The ACA preserves tax deduction on health care coverage for employers, but there is an important exception to this rule that will kick in starting in 2020. That’s when employers will become subject to a 40 percent excise tax on high-cost health plans. This so-called “Cadillac tax” will apply to plans that cost more than $10,200 for individual coverage and $27,500 for family coverage. Now is the time to understand how this excise tax works so you can take steps to avoid it as you design your company’s health plan going forward.
Here are a few factors to consider:
- The threshold amounts apply to the employer and to employee contributions. This means that you can’t avoid the tax by shifting costs to employees.
- Employer contributions to health savings accounts (HSAs) are included in the calculation. According to the Society for Human Resource Management, there is still some uncertainty about whether employee contributions will be included, however.
- The thresholds are set nationally. There are no adjustments for regional cost variations. You can gain relief, though, if the age and gender of your plan members differs from the national norm or if employees are engaged in high-risk professions such as construction, law enforcement, mining and agriculture.
- The thresholds will be adjusted over time, but only at the rate of the consumer price index, which has traditionally risen more slowly than the cost of health care. If that trend persists, more employers will face penalties in later years.
- Dental and vision coverage are included in the calculations if they are offered as part of an integrated plan with medical insurance. They are excluded, though, if you offer them as stand-alone products with separate premiums.
- If you are looking for a shortcut to figure out if you will be subject to the Cadillac tax, look at the amount that you charge former employees for COBRA coverage. Compare that number to the tax thresholds. If you are close to or above the benchmarks, then you need to consider taking action to change your plan.
You have a variety of opportunities to avoid the tax:
- Select a benefit design that encourages appropriate utilization so your employees can get the most out of their plan and encourages them to be cost conscious.
- Consider implementing tiered benefits that encourage use of high-value provider networks and facilities that are efficient in their delivery of care.
- Implement workplace wellness programs to improve the health of the employee and dependent population and prevent the onset of illness.
- Examine who is eligible for coverage under your company’s plan and consider adjusting the criteria.
As with many aspects of the Affordable Care Act, the Cadillac tax is complex but important to understand. There is still time to make changes before the tax becomes a reality in 2020.
David E. Williams is president of Health Business Group, a strategy consulting firm serving clients in technology-enabled health care services, pharmaceuticals, biotech, medical devices and software. He is frequently quoted in the media on the business of health care and is the author of the Health Business Blog. David sits on the board of both private health care companies and nonprofits.