The Cadillac tax is an unofficial term used to describe an excise tax penalty imposed on employers who offer health insurance plans that are too expensive according to the Affordable Care Act’s guidelines. Starting January 1, 2020, the IRS will tax companies offering a plan that exceeds the prescribed cost limits. However, by reviewing their insurance plans ahead of time, employers can make any adjustments needed to avoid this penalty.
Creating this Cadillac tax is the ACA’s way of encouraging cost control for health care coverage. Although this excise tax’s details are still undergoing adjustments, employers should generally expect to pay 40 percent of any health insurance costs that exceed the federal cost index. Be aware that the excise tax will not be a deductible expense.
Numbers to Know
To help employers prepare, the ACA has released threshold amounts using today’s dollar: $10,200 per year for an individual plan and $27,500 per year for a family plan. These amounts will be adjusted for inflation, and by 2018, the actual threshold amounts may be higher.
The threshold amounts come with some variation in case your particular workforce falls outside the demographic average. The ACA will adjust the thresholds to account for gender variations, age and certain types of employment such as construction or law enforcement.
Calculating the Future
To figure out if the health plans you provide may exceed the threshold, you’ll need to look at the full cost of coverage, including what employees pay and the company pays for coverage. One way to estimate this total cost is to look at the COBRA rate for your plan — the cost that an individual pays to continue coverage after leaving the company.
Some employers offer employees several health plan options, ranging from low-cost HMO plans to high-cost plans with few restrictions. Each plan will need to be reviewed for potential Cadillac tax risk. Some of those plans may differentiate further by offering plans for couples with no children or families with more than five or six members. All of these fall under the “family” category for purposes of calculating the excise tax.
The threshold levels are only meant to measure the regular monthly cost per employee. Out-of-pocket costs, such as co-pays and co-insurance, are not calculated as part of the employee’s cost.
Some options to consider for avoiding the tax include:
– changing plans to options that have a lower overall cost
– encouraging employees to use the appropriate level of care for their needs — for example, for non-emergenices use urgent care instead of going to the emergency room
– reviewing who your plan covers, such as spouses who have coverage available through their own employer
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.
Dylan Murray has an MBA from San Diego State University and a bachelor’s degree in communication from Boston University. He is a licensed insurance agent in California, but he works as a professional researcher and writer reporting on business trends in estate law, insurance and private security. Dylan has worked as a script analyst with the Sundance Institute and the Scriptwriters Network in Los Angeles. He lives in San Diego, California, and Marseille, France.