Six in 10 Large Co. Health Plans Vulnerable to ‘Cadillac’ Tax

May 19, 2010 (PLANSPONSOR.com) – A new study finds that more than 60% of large-sized employers’ health plans will likely be hit in 2018 by the excise tax levied against “Cadillac plans” provided for in the recently approved health reform bill.

A Towers Watson news release said the figure is based on the 2010 average $5,184 and $14,988 costs of medical coverage for single and family plans, respectively.

As a result of the excise tax provision, a plan with single coverage costs of $11,200 in 2018 would exceed the limit by $1,000 and be assessed a tax of $400, Towers Watson said. If 10,000 employees were enrolled in that plan, the total tax bill would be $4,000,000.

The tax is paid by the employer either through increased premiums on an insured plan, or a surcharge levied by the administrator of a self-funded health plan, the analysis said. Employers will be forced to either absorb the additional tax or pass some, or all, of it back to employees in the form of higher premiums.

“The original concept of the excise tax was to penalize employers with excessively rich health benefit plans,” said Randall Abbott, a senior consultant for Towers Watson, in the news release. “Assuming even reasonable annual plan cost increases to project 2018 costs, many of today’s average plans will easily exceed the cost ceiling primarily directed at today’s ‘gold-plated’ plans.”

The excise tax levies a 40% nondeductible tax on the annual value of health plan costs for employers that exceed $10,200 for single coverage or $27,500 for family coverage in 2018.

The study found wide variations by industry. For about half of the industries examined, more than seven out of 10 employers will have at least one plan that will exceed the excise tax threshold in 2018, including the aerospace, chemicals, energy and utilities, health services, and pharmaceutical industries, Towers Watson said.

The Towers Watson study pointed out that more efficiently run plans will benefit from a longer time frame before hitting the excise tax ceiling. These companies will experience about a five-year buffer.

“There is some good news: Employers have a long runway to plan for 2018, so there is time to approach the issue strategically and thoughtfully. But reform and the excise tax may have unintended consequences,” Abbott said. “As employers strive to preserve the affordability of core health coverage, there will be difficult decisions to change or eliminate ancillary benefits like dental coverage and health flexible spending accounts, which are included in the excise tax definition.”  

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