WHAT IS THE ‘CADILLAC’ TAX?

The Cadillac tax is a 40% excise tax on high cost employer-sponsored health plans. The Cadillac tax begins in 2020, and is being implemented to help curb the costs associated with health care in the United States. The Cadillac tax attempts to prevent employers from offering health plans with minimal or no deductibles or out-of-pocket expenses. In fact, the Cadillac tax will penalize employers for offering those plans because they are thought to cause higher health costs for everyone.

WHAT IS A ‘HIGH-COST’ PLAN?

Plans that spend more than $10,200 per employee or $27,500 per family will be subject to the tax. The thresholds will be adjusted for inflation after 2020, but could be subject to further change. The tax only affects the amount of the plan that is over the threshold, and it is not tax deductible. Example: If an individual has a health plan that costs $12,000, then the $1,800 that is over the threshold is taxed at 40%, meaning the employer owes $740 towards the penalty.

Cost thresholds may be adjusted based on age and gender or individuals in areas with higher health costs. Individuals in high-risk professions and retirees under the age of 65 (and not eligible for Medicare benefits) have threshold amounts of $11,850 for individuals and $30,950 for family coverage.

WHAT CONTRIBUTES TO THE COST OF A PLAN?

A plan’s cost includes premiums paid by employers, which are considered employer contributions, and premiums paid by employees. Premiums are paid for health, dental, and vision coverage. Costs of Employee Assistance Plans (EAPs) with wellness programs and counseling benefits also contribute to the threshold.

WHAT DOES A TYPICAL CADILLAC PLAN LOOK LIKE?

Oftentimes, these plans have lower co-pays, deductibles and out-of-pocket maximums. But plans with other characteristics may make a plan a high-cost plan, such as age or health status.

HOW TO PREPARE FOR THE 2020 CADILLAC TAX

Final regulations have not been issued by the IRS, but organizations should proactively consult with experts to determine how the tax may or may not affect their unique situation. Experts in benefits administration can be good consultants because of their familiarity with the Cadillac tax and other Affordable Care Act components. Preparation, organization, and plan management will be the most effective ways to prevent your company from experiencing the high costs associated with mismanaging the Affordable Care Act.