As a part of the Affordable Care Act (ACA), there is a major vehicle for change hurtling into view in the not too distant future. Beginning January 1, 2018, an excise tax will take effect with potentially profound consequences on the benefits industry. This “Cadillac” Tax will act as a cap on the unlimited tax preference for employer-sponsored benefits with coverage exceeding $10,200 for individuals and $27,500 for families, making them subject to a 40 percent excise tax.
Why the tax?
Healthcare costs have been rising dramatically for years and show no signs of slowing significantly on their own accord. Plans with extremely generous coverage (Cadillac Plans) encourage beneficiaries to use these benefits more frequently and potentially frivolously. This increased, and often unnecessary, usage leads to rising health costs, while those using these plans don’t feel the effects in their own wallets. Although the businesses that sponsor these plans are footing the bill, many of these companies have relied on offering extremely generous benefits as a way of recruiting and keeping top talent. However, costs have risen not only for those with Cadillac plans – they’ve risen for everyone. The idea behind the Cadillac Tax is that by capping the tax preference for employer sponsored health insurance, a few employees will lose more generous plans but more people will have access to cheaper healthcare.
An Indirect Tax
There are multiple ways healthcare reform could have placed a limit on tax preferences for employer-sponsored health insurance. The most simple and direct would have been a cap on plans that exceeded a certain limit. However, a direct cap would have appeared to be penalizing the employee directly. To avoid this perception, the Cadillac Tax was developed as an indirect means to place a cap on rich medical benefits. Employers can still offer them, but there will be a 40 percent excise tax placed either on the insurance carrier for fully insured plans or on the plan sponsor for self-insured plans. The insurance carriers and plan sponsors will then pass this tax along to the employer who may also pass it on to the employee.
The effect of the excise tax is fundamentally the same as a direct cap – the indirect method makes the cap seem less onerous for the employee while making it more convoluted to administer. Because of this complexity, employers and insurance carriers need to start planning now so they are able to address the tax from an administrative perspective. Notifications and calculations will be complex and the mechanisms to exchange information with insurance carriers, TPAs and others must be in place by January 1, 2018.
Will the Cadillac Tax Go Away?
Considering both its administrative complexity and the political climate surrounding healthcare reform, there is considerable discussion around the Cadillac Tax being repealed. If the excise tax were removed from the ACA, how significant would the effect be? The prospect of implementing the Cadillac Tax is already affecting behavior among employers and insurance carriers by having the intended effect of changing how people approach the design of health plans. The way the industry is moving with more consumer-driven plans and adoption of private exchanges is reducing healthcare spend. However, if the Cadillac Tax was removed from healthcare reform, the situation could return to business as usual with rampant overspending on healthcare and renewed vigor for the trend of premium increases year over year.
However, limiting the tax preference for employer-sponsored healthcare is not a single party political issue. Politicians in both parties accept what many health economists have been saying for decades: placing a cap on the employer sponsored tax preference will reduce healthcare costs. Even if the Cadillac Tax goes away, many in both political parties recognize that the trend towards rising healthcare costs has to be addressed. There is a significant likelihood that if the Cadillac Tax was repealed, it would return in another form such as a direct cap. Effectively, then, the Cadillac Tax will probably be implemented in one form or another. Companies need to act now to avoid a collision.