As 2015 draws to a close most employers have their eye on the Cadillac Tax looming over the horizon.
The Cadillac Tax — a provision in the Affordable Care Act — is scheduled to go into effect in 2018. It will enforce a 40 percent, non-deductible, excise tax on employer-sponsored health plans that exceed cost thresholds of $10,200 for individuals or $27,000 for family coverage.
To provide more clarity, here’s an example of what’s taxed: If an individual health plan costs $11,000, the employer would face a $320 tax, which is 40 percent of the amount above the threshold.
However, those limits aren’t set in stone. Beginning in 2019, the limits will be adjusted annually for cost-of-living. Additionally, they may be adjusted for healthcare costs, age, and gender.
How much the $10,200/$27,500 limit will change in the years following 2018 is just one of many unknowns surrounding the Cadillac Tax. There are also a number of myths circulating around the health benefits space about the tax.
Here are four Cadillac Tax myths debunked:
Myth No.1: FSAs are exempt from the tax.
Truth: They are not. Employees can contribute any amount up to $2,500 in 2015, but that limit may increase with inflation by 2018, which can add significant cost to the total health plan. And, since both the employer and the employee contributions to an FSA could add to the total cost of the plan — driving the cost beyond the $10,200 — this could make the FSA subject to the Cadillac Tax.
Myth No.2: The Cadillac Tax only applies to large employers.
Truth: All employers are subject to the Cadillac Tax if they offer high-cost health benefits plans with excess benefits. Although, the tax will not affect the majority of employers, as not all offer these expensive healthcare plans, Kaiser estimates that up to 26 percent of employers that offer healthcare could be subject to the tax in 2018.
Myth No. 3: Employees will possibly get a pay raise as a result of the Cadillac Tax.
Truth: For years, economists have argued that the tax code created a preference for employers to put compensation into larger healthcare benefits and not into cash compensation (since the former is tax-preferred). With a tax on expensive healthcare plans, these incentives would change and lead to employers shifting that compensation to cash.
Myth No.4: You can wait until 2018 to address the 40 percent tax on benefits.
Truth: The Cadillac Tax will begin on Jan. 1, 2018, and if a company’s plan starts on a non-calendar year, then adjustments will need to be made when the 2017 plan year begins. Conversely, Employee Benefit News pointed out that employers can make mid-year changes to plans in 2018, but that may cause more harm than good.
This is not that far away, and it takes time to redesign and deploy new benefit plans. As employers do this, they will consider other benefits not covered by the tax and better ways to manage healthcare costs. Specifically, employers might consider taking steps to curb overall healthcare costs by implementing healthcare management programs that take aim at cost-drivers, like chronic disease and ER visits, outside of traditional insurance plans.
For more information on how employers can cut costs, please visit Jiff’s Resources page.