Despite continuing efforts to rein in rising health care costs, roughly half of large U.S. employers will begin to hit the thresholds triggering the Affordable Care Act’s (ACA’s) excise tax on high-value plans in 2018, and the percentage is expected to rise significantly in subsequent years, according to an analysis by consultancy Towers Watson.
The excise or “Cadillac” tax is a 40 percent tax on the value of all participant-elected health care benefits that exceed certain dollar thresholds in 2018 and beyond. The thresholds under the ACA are $10,200 for individual coverage and $27,500 for family coverage, but the actual thresholds will be adjusted based on inflation between 2010 (the year of the ACA’s enactment) and 2018, and annually thereafter.
The nondeductible excise tax must be paid by the employer, although some employers are contemplating charging the tax back to plan participants.
The analysis, based on a study of employers with 5,000 or more employees, revealed that:
- 48 percent of large employer plans are likely to trigger the tax in 2018.
- 82 percent of lare employer plans could cross the threshold by 2023.
- The percentage of large employers estimated to exceed the threshold increases by about 10 percent for those offering self-insured dental and vision benefits in addition to medical and prescription drug benefits, resulting in 58 percent hitting the excise tax in 2018 when these elements are added.
A 2014 survey by Towers Watson found that 73 percent of companies are very or somewhat concerned they will trigger the tax, and 62 percent 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,” said Trevis Parson, chief health actuary for Towers Watson, in a statement accompanying the analysis. “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.”
“For most employers, the excise tax will be a question of when, not if, unless action is taken,” added Randall Abbott, a senior health strategist at Towers Watson. “The ACA 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.”
Value Calculation’s Broad Sweep
The consultants pointed to key factors they said are not well known about the excise tax:
- The tax is based on both employer and employee premium contributions, not just what the employer pays for coverage.
- The tax is not determined by the value of the medical plan but rather the aggregate value of all health benefits elected by an employee or family. This includes the value of dental and vision benefits, as well as tax-advantaged health flexible spending accounts (FSAs), health reimbursement accounts (HRAs) and pretax contributions to health savings accounts (HSAs).
- Along with employer contributions, employee contributions made through a salary-deduction plan to an FSA or an HSA are included when calculating the aggregate value of health benefits.
A Wider Net
Annual increases in the excise tax thresholds will not be based on health care cost inflation, but instead on the Consumer Price Index (CPI) plus 1 percent in 2018 and 2019, and CPI only thereafter. CPI was 1.5 percent for 2013—considerably less than the 4 percent annual health care cost increase that better-performing employer health plans are expected to achieve in 2015 after plan changes. As a result, a growing number of plans will exceed the excise tax threshold if health care inflation continues to outpace the general rate of inflation.
All of which highlights “the need for companies to improve their health program performance to achieve or maintain a high-performance health plan,” said Abbott. “The good news is that many have already taken steps and with proper plan management the impact of the tax can be significantly mitigated.”