Employers should evaluate their plans now in order to avoid the Cadillac Tax, a non-deductible excise tax on high-cost employer-sponsored health coverage.
The Cadillac Tax is designed to make the health care system more efficient by encouraging employers to offer higher wages in lieu of high-cost benefit plans. Supporters of the tax believe that those covered by Cadillac-type plans may overuse coverage and contribute to the growing cost of health care. Opponents of the tax argue that it may push employers to offer cheaper insurance products, with employees paying higher deductibles and larger out of pocket costs.
How is the Cadillac Tax determined?
Effective in 2020, the Cadillac Tax will impose a non-deductible excise tax on high-cost employer-sponsored health care coverage. Health and wellness benefits that are excludable from the employee’s gross income are considered high-cost benefits. Tax will be imposed on benefits in excess of $10,200 for employee-only coverage and $27,500 for family coverage. Current limits are subject to a future inflation factor. The annual dollar limits include both employee-paid and employer-paid benefits.
Who pays the tax?
Depending on the plan design, the excise tax may be payable by the insurance companies (fully insured benefits), plan administrators (self-insured), or employers (health savings accounts or Archer Medical Savings Account contributions). In the case of self-insured plans, the plan administrator in most cases will be the third-party administrator that administers claims. There is speculation that the cost of excise taxes may trickle down to the employer and employee. In all cases, the employer determines the amount of the tax owed and must notify each liable entity.
Criticisms of the tax
Opponents note that prescription drug price increases will also increase employees’ overall health care costs. And while the Cadillac Tax is designed to encourage employers to offer higher wages rather than excessive benefits, it would be impossible to compel employers to increase salaries when they decrease benefits.
What should employers do now?
Although there is no formal guidance regarding Cadillac Tax reporting, there are a few things employers should consider to prepare for 2020:
- Analyze plan design and costs. This is particularly important if multiple plans are offered, as the Affordable Care Act only requires applicable large employers to offer one affordable health plan with minimal essential coverage. Additional plans may exceed the coverage limits.
- Consider plan changes if costs are estimated to trigger the excise tax.
- Review IRS Notices 2015-52 and 2015-16 for more guidance.
How we can help
CLA provides information and resources regarding benefit plans to clients of all sizes. We will be watching closely for additional guidance on the Cadillac Tax and will pass on information as soon as it is available from the IRS.