Health benefits administrators at companies nationwide are about to face the same challenge: The Cadillac tax on employer health insurance plans.
Even though the tax is more than two years away from taking effect, employers want to know how it will affect their health benefits programs. And the answers are not yet clear. Some federal rules about the tax and what it covers are still undecided. It’s also unclear if the tax will survive, as many in Congress and the 2016 presidential candidates from both parties have called for its repeal.
Amid this cloud of uncertainty, one thing is clear: Employers should be prepared. The FAQs below clarify the Cadillac tax, where it stands, why you’re hearing so much about it in the news, and how Jiff can help your company get ready.
What is the Cadillac tax?
The Cadillac tax was created under the Affordable Care Act (aka Obamacare) and is scheduled to go into effect on Jan. 1, 2018. It imposes a 40 percent penalty on employer-sponsored health benefits plans that cost more than $10,200 for individuals and $27,000 for families. The 40 percent tax applies to the amount above the cost threshold, so for an individual plan that costs $11,000, the tax would be $320, or 40 percent of $800 amount over the $10,200 limit for an individual policy.
The tax was designed to help lower healthcare costs nationally by reducing wasteful spending.
In fact, the Congressional Budget Office estimates the Cadillac tax will reduce national healthcare spending by up to $60 billion by 2024.
How many health plans will be affected?
While the tax got its name because it was intended to only apply to luxury or very high-cost health plans, recent studies indicate a large portion of employer-sponsored health plans will be subject to the tax. In a recent analysis, Towers Watson found that nearly half of all U.S. employers would be hit by the tax in 2018. The Kaiser Family Foundation estimates that 26 percent of employers will have at least one plan above the limits in 2018.
What kinds of health benefits count toward the total cost of the health benefits plan?
The IRS hasn’t detailed exactly what benefits count toward the total cost of the health plan. However, it has said the total cost of the plan includes the following:
- The average cost for the health insurance plan
- Employer contributions to a Health Savings Account (HSA), Archer medical spending account or Health Reimbursement Arrangement (HRA)
- Employee and employer contributions to a Flexible Spending Account (FSA)
- The value of coverage from any on-site medical clinics
- The cost for certain limited-benefit plans if they’re provided on a tax-preferred basis
We also know some benefits will not count toward the total cost, including vision and dental insurance.
Why has the tax become a topic of debate in the 2016 presidential election?
It’s no surprise Republican presidential candidates are suggesting the repeal of the entire Affordable Care Act, and with it the repeal of the Cadillac tax. But Democratic candidates are also calling for the repeal of the provision. Most recently, Hillary Clinton came out against the tax. Senator Bernie Sanders (D-VT) and seven of his Democratic colleagues introduced a bill to repeal the tax.
If all of these politicians are supporting the repeal of the tax, should my company still spend time preparing for its implementation?
Yes. Calling for repeal and getting it done are two different things. Even without the looming Cadillac tax, employers are paying too much for healthcare and getting too little for it. Spending less on health benefits while still improving employee health is a major challenge, and one that won’t be solved overnight.
If you’re already preparing for the Cadillac tax, you’re not alone. A recent report from Kaiser found that 53 percent of large companies and 17 percent of small companies offering health benefits have conducted an analysis to determine if their plans will be subject to the tax.
What can employers do to prepare?
Employers should take action now to ensure their health benefits don’t exceed cost-thresholds. Some common ways to do this include:
- Increasing deductibles and other cost sharing
- Reduce the number and scope of services the plan covers
- Cap or eliminate tax-preferred savings accounts like FSA, HSA, or HRA
- Eliminate higher cost health insurance plan options
But cutting benefits and shifting costs to employees doesn’t make for a happier, healthier workforce. A better approach is to bend the cost curve while offering health benefits that actually help make employees healthier. Moving to a less expensive provider network or offering incentives to employees to choose less costly providers also helps.
But to meaningfully reduce costs and keep healthcare quality high, your health benefits have to become smarter. Jiff can be a valuable asset.
Jiff’s enterprise health benefits platform helps you and your employees make smarter and more cost-efficient healthcare decisions by offering them personalized recommendations and incentives. Instead of offering one-size-fits-all benefits, you can target sections of your employee population, down to the individual, to meet their health needs and goals. This takes direct aim at the services that make health benefits so expensive, like ER visits and chronic disease.
If you have to reduce coverage or eliminate options to meet cost thresholds, you can still offer competitive, high-quality healthcare to employees. Investing a portion of the savings in a more robust incentives program can help mitigate employees’ sense that they have lost benefits. The new personalized benefits they’ll receive will help them meet their health goals and save them money.
There are also several myths circulating about the Cadillac tax. Read our post debunking the four most common Cadillac tax myths to be clear on what’s true and what’s false about the impending exise tax.