Who Pays: The Cadillac Tax & the ACA

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November 25th, 2014

Cadillac TaxEmployer Sponsored Health Insurance is cued to hit a number of obstacles in the near future of the ACA, baring any legislative changes. The number one fear on employers’ list is the arrival of the Cadillac Tax in 2018.

The Cadillac Tax is a tax provision put in place to help regulate high-cost health insurance plans and recoup much of the subsidized funds being distributed under the new health law. While it was introduced under the PPACA, the tax has a delayed rollout of 2018. It is calculated as “40% of the excess of a total employee per year PEPY healthcare costs above the statutory threshold limits of $10,200 for individual coverage and $27,500 for family coverage.”

Who's Subject to Taxation?

While incurring the tax depends significantly on the composition of the employees covered under the plan, the following remain subject to the Cadillac Tax:

  • Employer and employee contributions
  • Flexible Spending Accounts (FSAs)
  • Employer Contributions to Health Savings Account (HSAs) or Health Reimbursement Arrangements (HRAs)
  • Benefits obtained at worksite clinics

For Self-Funded employers, the "COBRA equivalent" will be used to determine the cost of coverage – in other words, what would the employer charge individuals on COBRA. The exact rules for determining the COBRA rate and how the tax will be paid are still to be determined. The plan sponsor will remain responsible for paying the tax, pending any further clarification from the IRS.

Forecasting the Cadillac Tax's Impact

Industry analysts have raced to forecast the impact of the Cadillac Tax, with many reporting that by 2018 over 15% of active employee plans in the US would incur the tax and rising to 19% in 2020. These amounts translate to almost $364 per employee. Even higher taxation is expected for covering older workers.

Many employers have begun implementing a combination of benefit plan changes, premium contributions, and health risk interventions with the hope to mitigate the impact of the new tax. While self-funded employers may still be subject to the tax, the self-funded option enables greater control over the cost and benefits included in your plan allowing employers to steer clear of the Cadillac tax almost entirely.

It is vital for employers to begin discussing their options prior to the Cadillac Tax’s rollout in 2018. PayerFusion’s Benefit Advisors offer free consultation for employers interested in the option of Self-Funding their employee health plans and can provide guidance in complying with the more strenuous ACA provisions. For more information on breaking news surrounding healthcare reform and employer sponsored health, subscribe to our newsletter here.


One Comment

  • We hear complaints about employers providing very minimal health insurance for their employees, which may create an additional burden to the employee and possibly to the taxpayer, when the larger society must fill that gap for various reasons. This "Cadillac" concern is a mystery to me--the employer pays for terrific health insurance, protecting both the employee, probably benefits the company by keeping happy employees, and avoids the burden on the taxpayer. What is wrong with this picture?

    This type of plan should be the example of what a generous health insurance program can do, offered by an employer with concern for his employees.

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