Keeping an Eye on the Cadillac Tax

While the ACA’s excise tax, scheduled to become effective in 2018, may seem like a soft cloud in the distant horizon, some employers have targeted 2015 as the time to look for ways to avoid the tax imposed on high value health plans.

Understanding the Tax

Beginning in 2018, health plans with values exceeding a threshold of $10,200 for individuals and $27,500 for families, will be hit with a 40% tax on the amount exceeding the thresholds. Since the tax will be based on the value of all coverage an employee may have, including dental, vision, FSA contributions and employer HSA contributions in addition to health care, the thresholds could be within reach for a great number of people.

While the tax is technically on employer-sponsored plans, it will impact employees if their employer looks for ways to pass it along. If the employer lowers the value of their health plan by reducing benefits, a boost in compensation would be the only way to oset the loss. Even if pay increases, higher taxes will likely diminish the impact, with the employee still feeling some pain.

As an example, if a plan is self-funded and a member has overall family coverage valued at $30,000, the employer would owe a Cadillac tax of $1,000 (40% of $2,500 – the amount exceeding the family threshold of $27,500).

HSAs to the Rescue

Because the tax applies to the total value of coverage, regardless of the amount the employer pays, the only safe approach seems to be offering lower cost plans. Many are looking at high deductible health plans with HSAs as a viable option because the higher deductible lowers the value of the plan and participants are generally able to contribute to an HSA. With a maximum annual contribution of $6,550 and a catch-up provision for those 55 or older, HSAs can provide a very attractive, tax advantaged way to save for future health-related expenses.

As long as funds deposited into an HSA pay for qualifying expenses, they can be used at any time, including in retirement. Another thing to note is that a high deductible health plan option with an HSA does not have to be the only plan offered. More generous plans can be made available, as long as any Cadillac tax that may apply is built into the overall cost of the plan.

With the Cadillac tax just a few years away, this may be a good time to review your plan designs and discuss a strategy that everyone can afford to drive – today and down the road.