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The Cadillac Tax

Employers should prepare for the ACA’s approaching Cadillac tax

Pages 28-29

By Edward M. Murphy

Perhaps one of the more controversial and least discussed aspects of the Patient Protection and Affordable Care Act (ACA) has been what is commonly referred to as the Cadillac tax. The reason it has been under the radar is two-fold: One, it doesn’t go into effect until the plan year’s beginning on or after Jan. 1, 2018, and two, to date employers have been more focused on implementing and dealing with the other regulatory requirements of the ACA.

In a nutshell: What is the Cadillac tax?
The Cadillac tax imposes a non-deductible 40 percent excise tax if a medical plan’s premiums (insured)/premium equivalents (self-insured) exceed $10,200 for single coverage and/or $27,500 for someone with family coverage (some exceptions apply). We note that the limits include all employer and employee contributions to a medical Flexible Spending Account (FSA) and/or a Health Savings Account (HSA) when such contributions are made through a Section 125 Cafeteria Plan.

All amounts above the limits, whether paid by the employer or employee, are subject to the 40 percent excise tax. For insured plans, the insurance company pays the tax. For self-insured plans, the employer/plan sponsor pays the tax.

The real impact: What does this mean for employers?

From an employer perspective, the tax actually creates a “race to the bottom.” Essentially, whether a plan is insured or self-insured, the responsibility for paying the tax will trickle down to the employee. No insurance company of which I’m familiar will benevolently pay the tax without expecting compensation from the plan sponsor. The same is true of employers with self-funded plans. Ultimately, cost increases beyond some predetermined threshold get passed along to the employee. As a result, the impact on employer and employee are inextricably linked.

As the dollar limits are either trigged or get closer to current premium/premium equivalents, a cascade of changes will likely surface. The first and most obvious is to reduce benefits in an attempt to lower premiums and avoid the tax. From that point, subsequent changes come from multiple directions. They include:

  • Employers begin to lose their ability to attract and retain employees, leading to a potential talent drought.
  • Productivity is impacted, driven by increased costs being passed on from employer to employee.
  • Employees may attempt to demand increased “cash compensation.” With lesser benefits aimed at avoiding a tax comes a shift in medical expenses to the employee in the form of high deductibles, copays and coinsurance. Employees won’t sit still forever while absorbing greater costs, and as such, inflation is fueled.
  • The equivalent of benefit plan “gridlock” that occurs due to no longer being able to reduce benefits enough to avoid the tax and still meet the minimum essential coverage requirements imposed by the ACA. Remember, the ACA also charges non-compliance penalties for employers that either don’t offer a plan, or the plans they do offer don’t meet certain minimum standards.

Ultimately, an employer may decide to no longer provide any medical benefit plan, and instead opt to pay the ACA-imposed Shared Responsibility penalty ($2,000 for each full-time employee).

  • Once enough employers opt to exit providing medical benefits, we will likely see swift macroeconomic changes impacting individual and corporate taxes, total compensation, overhaul in health care purchasing and delivery systems, etc.

Overall, the Cadillac tax will likely produce a downward spiral that with each step produces ever more restrictive efforts to lower premiums and shift costs, so that medical plans remain below the limits before the Cadillac tax applies

What’s the prescription?

Employers and employees should:

  • Educate employees that medical care is not free and increased consumption drives increased premiums.
  • Understand the links between lifestyle, medical care consumption and cost. This includes a focus on eliminating the things we can change that directly impact cost, such as smoking, obesity, diet and exercise. Changes here impact costs; costs that are left unchecked will only go up. As they go up, the 40 percent excise tax becomes more likely.
  • Finally, understand that once the tax hits, someone has to pay it. The cost of the tax will either be direct – employers will likely pass the tax on to the employees in the form of increased premium contributions – or indirect, as employers modify plans with higher employee deductibles, copays and coinsurance. At the end of the day, unless we communicate and understand the economics of the situation, the direct or indirect cost increases will simply be passed on to employers who will, in turn, pass them along to employees. Your best choice is to begin to make changes now and extend the time before the tax applies. Unfortunately, either way, it’s change now and pay me later.