Half Of Employers Expect To Trigger Cadillac Tax In 2018

Nearly half (48 percent) of employers expect to be subject to the Patient Protection and Affordable Care Act’s (ACA) Cadillac tax on high cost health plans in 2018, according to recent research from Towers Watson. In addition, 82 percent believe that they could cross the threshold by 2023.

Excise tax. In 2018, the ACA will impose a 40 percent excise tax on employer-sponsored health coverage that exceeds a threshold amount, otherwise known as “Cadillac” health plans. The tax will be imposed with respect to coverage for a tax period if: (1) an employee is covered under an applicable employer-sponsored plan; and (2) there is any “excess benefit” with respect to the coverage. An excess benefit is defined as the sum of the monthly excess amounts during a tax period. A monthly excess amount is the excess of: (a) the aggregate cost of the applicable employer-sponsored coverage of the employee for the month, over (b) an amount equal to 1/12 of the annual limitation for the calendar year in which the month occurs.

Concern over excise tax. According to Towers Watson, 73 percent of companies are very or somewhat concerned that they will trigger the tax, and 62 percent say it will have a moderate or greater impact on their health care strategy in 2015 and 2016. “Even with conservative projections, the impact of the excise tax on employers is substantial, yet it is often not fully understood,” said Trevis Parson, chief health actuary for Towers Watson. “Each company will need to look at the tax carefully based on its own programs, and we expect a great deal of variation by industry.”

It is important for employers to take action to reign in health care costs now, noted Towers Watson. “For most employers, the excise tax will be a question of when, not if, unless action is taken. The ACA has put a timer on cost management for many employers and unless one cuts benefits or improves program performance, there’s a real risk of triggering it,” said Randall Abbott, senior health strategist at Towers Watson.

In particular, Abbott lists three key factors that are not well known about the Cadillac tax:

• The excise tax is based on both employer and employee premium contributions, not just what the employer pays for coverage.

• The definition of what is included for calculating the tax extends to tax-advantaged health care accounts such as health flexible spending accounts, health reimbursement accounts and pretax contributions to a health savings account. The tax is not determined by the value of the medical plan but rather the value of all affected health benefits elected by an employee or family. Ultimately, the tax is determined by the aggregate value of the programs an employee elects, not just the medical plan value itself.

• Annual increases in the excise tax thresholds are not based on health care cost inflation, but instead on the Consumer Price Index, which was 1.5 percent for 2013—far less than medical cost trend and considerably less than the 4 percent annual health care cost increase that the better performing employer health plans are expected to achieve in 2015 after plan changes.

“With so much at stake, it is critical that companies take a close and comprehensive look at their health programs and understand their projected costs going forward. It also highlights the need for companies to improve their health program performance to achieve or maintain a high-performance health plan,” said Abbott. “The good news is that many have already taken steps and with proper plan management the impact of the tax can be significantly mitigated. In fact, Towers Watson estimates that the number of companies expected to trigger the tax would be considerably higher if not for the variety of actions that employers either have already taken or are likely to take as they better understand the challenge.”

For more information, visit http://www.towerswatson.com.
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