Employers Need to Understand Factors Determining Health Plan Excise Tax

September 24, 2014 (PLANSPONSOR.com) – The time employers have to manage costs of their health programs to avoid an excise tax in 2018 is getting shorter, and Towers Watson warns many may be unaware of all the factors that go into determining the tax.

Implemented as part of the Patient Protection and Affordable Care Act (PPACA), the excise or “Cadillac” tax is a 40% tax assessed on the value of all affected health care programs a participant elects that exceed certain dollar cost thresholds in 2018 ($10,200 single / $27,500 family) and beyond. The tax is non-deductible, and the Congressional Budget Office (CBO) estimates the total liability for companies subject to the tax could be a cumulative $79 billion between 2018 and 2023.

A recent Towers Watson survey found 73% of companies are very or somewhat concerned their employee health benefit arrangements may trigger the tax, and 62% 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,” says 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.”

Randall Abbott, a senior health strategist at Towers Watson, adds: “When all the plans and programs included in the excise tax definition are rolled up, even a Chevy may be affected by the Cadillac Tax. For most employers, the excise tax will be a question of when, not if, unless action is taken. The PPACA 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.”

In particular, Abbott lists three key factors that are not well known about the 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% for 2013—far less than medical cost trends and considerably less than the 4% 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,” says Abbott.