auto-788747_1280Many employers are starting to look ahead to see how they can adapt their health plans, starting with 2016 open enrollment, to avoid triggering the ACA’s high-cost plan tax (HCPT), often called the “Cadillac plan” tax.

This tax takes affect in 2018 and was designed to discourage business owners from offering exceedingly generous health care plans in order to help cut health care spending.

Many employers have already made some changes, but even more are expected to act as the tax’s implementation date approaches.  By starting early, they hope to be able to phase these changes in slowly to avoid a drastic upheaval at the last minute.  Here are a few things others are doing to help reduce their exposure:

  • Increasing deductibles
  • Eliminating certain covered services
  • Limiting or eliminating tax-preferred savings accounts like HSAs and FSAs
  • Narrowing their provider networks

The obvious pattern here is that employers are shifting more of the cost burden to employees who will end up paying more out-of-pocket for their care and coverage.

How the Cadillac Tax Works

The HCPT will tax employers offering plans that exceed certain cost thresholds annually, currently $10,200 for singles and $27,500 for everything else.  The tax amount is 40% of the difference between the threshold and the total cost of the benefits an employee receives in a year.

It’s calculated for each employee individually and can vary among an employees working for the same employer.  The details are still getting ironed out, but basically that total cost per employee will include the following:

  • The average cost for the health insurance plan (no matter who pays it)
  • Employer contributions to a health savings account
  • Contributions by anyone (employee included) to a flexible spending account
  • The value of coverage in any on-site medical facilities
  • The cost for limited-benefit plans (if provided on a tax-preferred basis)

 

Here’s a great example, from The Henry J. Kaiser Family Foundation that shows exactly how the tax is calculated.

How the High-Cost Plan Tax Works

Let’s take an employer that, in 2018, offers employees an HSA-qualified health plan with a total annual premium of $7,800 ($650 monthly) for single coverage.  The employer makes an annual contribution of $780 to HSAs established by its employees, and offers a FSA plan where employees can elect to contribute up to $2,700 (the estimated legal maximum) for the year through payroll deduction.  Employee A enrolls in single coverage under the plan for all 12 months but does not elect to contribute to an FSA while employee B enrolls in single coverage under the plan for all 12 months and elects to make the maximum FSA contribution.  For employee A, the monthly health benefit cost would be the sum of $650 for the health plan premium and $65 (one-twelfth of the annual HSA contribution by the employer), or $715. Because this is less than the monthly threshold amount for single coverage of $850 (one-twelfth of $10,200), no HCPT would be owed for employee A.  For employee B, the monthly health benefit cost would be the sum of $650 for the health plan premium, $65 (one-twelfth of the annual HSA contribution by the employer) and $225 (one-twelfth of the annual FSA contribution), or $940. Because this is more than the monthly threshold amount for single coverage of $850, there would be a HCPT for employee B for the month equal to 40 percent of the health benefit cost in excess of the threshold. The excess amount in this case is $90 ($940 – $850), and 40 percent of the excess is $36. The annual HCPT owed for employee B would be $432.

How Far-Reaching is its Impact?

To show how many companies might be affected by the implementation of the HCPT, the organization also created helpful several illustrations.

The first shows the percentage of employers who would have at least one health plan that would exceed the self-only threshold in the first year of the tax and in five year increments thereafter.  As you can see, more plans are likely to meet the definition of “high cost” with time.

Figure 1: Percent of Employers Offering Health Benefits with Plans that Would Exceed HCPT Threshold With 5% Premium Growth

The size of the business is often a factor, since larger companies (those with 200+ workers) are often much more likely than smaller ones to offer benefits like an FSA.  This table shows the likelihood for small vs. large firms.

Table 2: Share of Employers with At Least One Plan Hitting Threshold By Firm Size
Year HCPT Self-Only Threshold Premium, HSA, HRA & FSA
Small Firms (3-199 workers) Large Firms (200 or more workers)
2018 $10,200 25% 46%
2023 $11,800 29% 56%
2028 $13,500 41% 68%
SOURCE: Kaiser Family Foundation analysis

The charts are based on an assumed rate of premium growth, so any variation could have an impact on those estimates.  You can read more about how these estimates were calculated and find even more info about the proposed tax and its implications by clicking here.