Although it’s still over three years away, the implementation of the “Cadillac Tax” under the Affordable Care Act already has many employers scrambling to come up with a strategy to avoid it – or at least soften the blow.
Beginning in 2018, employers who are still offering these benefit-rich, high-cost health plans – a.k.a. “Cadillac” plans – will be hit with a 40% excise tax on every dollar spent on annual health plan premiums in excess of $10,200 for individuals, $27,500 for families. That includes employer and employee-paid premiums and employer contributions to Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs).
How hard will your business get hit?
According to a recent survey by consulting firm Towers Watson, about half of large employers in the U.S. will likely get stuck paying the Cadillac tax if they don’t start looking for alternatives now – and that number could nearly double by 2023. And according to the Congressional Budget Office, the total tax liability for businesses is projected to be around $80 billion between 2018 and 2023, with some experts estimating tax revenues as high as $200 billion by 2023.
So depending on how your health plans are structured, it could be a costly blow. And with medical and healthcare costs continuing to skyrocket, and with the Cadillac tax tied to the general rate of inflation, more and more companies could find themselves crossing the threshold and getting hit with the tax.
How will it impact your employees?
For years there’s been a growing trend toward having employees shoulder a greater share of their healthcare costs through higher deductibles, copayments, and coinsurance charges. The Cadillac tax will likely accelerate that trend. Companies surveyed by Towers Watson expect their employees’ healthcare costs to increase an average of 4 percent in 2015 if they make some changes to their plans; without any changes, employees’ costs are expected to go up an average of 5.2 percent.
How are businesses preparing?
Many business owners are probably tempted to “trade in the Cadillac” – get rid of their high-cost plans – to avoid the tax. In fact, forty-three percent of mid- and large-sized companies surveyed by Towers Watson say that avoiding the tax is a top priority for their healthcare strategy in 2015.
But that’s not happening, at least not in great numbers. Instead, companies are finding other ways to adapt:
- Encouraging the use of telemedicine services and incentivizing employees to visit certain medical providers
- Offering incentives for reaching certain health outcomes to reduce chronic conditions and improve overall company health before the Cadillac tax hits to reduce exposure
- Significantly reducing the subsidizing of health benefits for employees’ spouses or dependents
- Limiting FSA, HSA, and/or HRA contributions
- Limiting buy-up options for employees
- Moving to a private health exchange
Aon Hewitt’s recent Pulse survey of 317 U.S. employers found that 40 percent expect the Cadillac tax to affect at least one of their current health plans when 2018 rolls around. And 68 percent expect the tax to affect at least one, if not the majority of, their current health plans by 2023.
Bottom line: If you don’t take action, sooner or later you’ll get hit.
So before the Cadillac comes barreling down the road in 2018, take a comprehensive look at your health insurance programs, understand their projected costs going forward, and be aware of how the tax might affect you. With proactive plan management, you can significantly soften the blow and avoid getting hit head-on.
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