Roughly half of large U.S. employers will begin to hit the thresholds triggering the Affordable Care Act’s (ACA’s) excise tax on high-value plans in 2018, and the percentage is expected to rise significantly in subsequent years.
The excise or “Cadillac” tax is a 40 percent tax on the value of all participant-elected health care benefits that exceed certain dollar thresholds in 2018 and beyond. The thresholds under the ACA are $10,200 for individual coverage and $27,500 for family coverage. The actual thresholds will be adjusted based on inflation between 2010 (the year of the ACA’s enactment) and 2018, and annually thereafter.
The employer must pay the nondeductible excise tax, although some employers are contemplating charging the tax back to plan participants.
A study of employers with 5,000 or more employees, revealed that:
- In 2018 – 48 percent of large employer plans are likely to trigger the tax.
- By 2023 – 82 percent of large employer plans could cross the threshold.
- The percentage of large employers estimated to exceed the threshold increases by about 10 percent for those offering self-insured dental and vision benefits in addition to medical and prescription drug benefits, resulting in 58 percent hitting the excise tax in 2018 when these elements are added.
A 2014 survey found that 73 percent of companies are very or somewhat concerned that they will trigger the tax, and 62 percent say it will have a moderate or greater impact on their health care strategy in 2015 and 2016.
Unless action is taken, the excise tax will be a question of when, not if, for most employers.
The Broad Sweep of the Value Calculation
Some key factors about the excise tax that are not well known:
- The tax is not just based on what the employer pays for coverage but both employer and employee premium contributions.
- The tax is not determined by the value of the medical plan but rather the aggregate value of all health benefits elected by an employee or family. This includes the value of dental and vision benefits, as well as tax-advantaged health flexible spending accounts (FSAs), health reimbursement accounts (HRAs) and pretax contributions to health savings accounts (HSAs).
- Employee contributions made through a salary-deduction plan to an FSA or an HSA, along with employer contributions, are included when calculating the aggregate value of health benefits.
A Wider Net
In 2018 and 2019, annual increases in the excise tax thresholds will not be based on health care cost inflation, but instead on the Consumer Price Index (CPI) plus 1 percent, and CPI only thereafter. CPI was 1.5 percent for 2013—considerably less than the 4 percent annual health care cost increase that better-performing employer health plans are expected to achieve in 2015 after plan changes. As a result, if health care inflation continues to outpace the general rate of inflation, a growing number of plans will exceed the excise tax threshold.
Companies need to improve their health program performance to achieve or maintain a high-performance health plan. With proper plan management, the impact of the tax can be significantly mitigated.
If you are a current Paypro Benefits client and you need help with your plan management, please reach out to your dedicated Paypro Benefits Specialist.
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