Worried about the Cadillac Tax already?

One provision of the ACA that seems to be causing more and more employers to lose sleep is the so-called “Cadillac Tax” on high cost health plans, even though this tax isn’t scheduled to take effect until 2018. Sixty-eight percent of respondents to The Chelko Group’s Employer Survey, conducted from July 2d through July 9th to measure plan sponsors’ reactions to the U.S. Supreme Court’s decision, are concerned about its impact on their plans. The topic also came up at recent Webinars conducted by the law firms of Drinker, Biddle & Reath (Health Care Reform & the Supreme Court Decision, July 12, 2012) and Trucker Huss (Health Care Reform After The Decision – What Should Employers Be Doing NOW?, July 11, 2012).

Why are employers so concerned about this tax this early in the game, especially since many of them have been sitting on their hands and failing to comply with the ACA’s other assorted provisions in advance, in the hope that the Supreme Court would find the individual mandate, and perhaps the whole law, to be unconstitutional?

Perhaps it's the potential high cost (40% on certain excess benefits), and the fact that the tax applies to both grandfathered and non-grandfathered plans, so employers who were hoping to escape some of the ACA’s more onerous provisions can’t get out of paying this. Also, since employers will have to start disclosing the cost of employer provided health insurance on their employees’ W-2 forms starting in 2013, for the 2012 tax year, the government is going to be able to fairly easily ascertain who owes the tax, and how much is owed.

The Cadillac Tax is an excise tax that will be imposed on health coverage providers starting in 2018 to the extent that the aggregate value of employer-sponsored health coverage for an employee exceeds a threshold amount (see IRS Code Sec. 4980I, as added by Act Sec 9001(a) of the ACA (P.L. 111-148), and amended by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152)).

Here are the specifics of the tax:
The tax will be 40% of the excess benefit, determined by adding up the 12 monthly excess amounts during the relevant 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. The limitations are to be adjusted for inflation.

Annual limitation. The annual limitation for any calendar year is the statutory dollar limit for that year as adjusted for inflation. Starting in 2018, the dollar limits for initially determining the tax thresholds are:

$10,200 multiplied by the health cost adjustment percentage for an employee with self-only coverage, and

$27,500 multiplied by the health cost adjustment percentage for an employee with coverage other than self-only coverage.

Excess is subject to tax. Therefore, for 2018, if employer-sponsored family coverage for an employee has an annual value amount of $28,500, the excess ($28,500 minus the $27,500 limit) of $1,000 is subject to the 40% excise tax, and that would total $400.

For more detailed information on the Cadillac Tax, and for a comprehensive analysis of the ACA, along with additional information on health reform and other developments in employee benefits, just click here.