For the millions of Californians with job-based health coverage, this one’s for you.
And it’s a doozy.
Don’t be fooled by the 2018 start date. Some employers are taking steps now to avoid the tax.
That means some of you soon may see your plan benefits reduced and/or “you’re going to be forced into plans that have higher deductibles and co-pays,” says Bill Hammett, an insurance broker near San Diego who works with employers across California.
Q: The Affordable Care Act seems to penalize companies that offer generous health plans as a means to attract and keep talent. Could you explain the reasoning behind the excise tax?
A: The Cadillac tax is a 40 percent levy on the portion of your health coverage that exceeds certain thresholds. The Congressional Budget Office projects it will raise $87 billion over the next decade to help pay for other Obamacare benefits, such as federal tax credits for income-eligible people who buy plans on exchanges.
It also aims to encourage policies that have higher out-of-pocket costs, thus discouraging you from overusing the health care system and perhaps reducing health costs overall.
“Five-dollar co-pays disconnect us from what it costs to have health care in this country,” Hammett says.
At the same time, it will erode the long-standing tax break that employers have received for providing health insurance.
“The ACA is saying, ‘that’s nice that you want to give employees this extra benefit, but we’re not going to subsidize it above these levels’,” says Dean Forman, a Roseville broker who works primarily with Northern California employers.
The IRS has not yet issued regulations on the tax, so many details remain unresolved. But we do know that the thresholds are set at $10,200 for individual coverage and $27,500 for family coverage in 2018.
The health care benefits that are counted include:
- Your employer’s contribution to your premium.
- Your share of the premium.
- Employer contributions and pre-tax employee contributions to tax-advantaged health care accounts such as flexible spending accounts (FSAs), health reimbursement accounts (HRAs) and health savings accounts (HSAs).
- Use of on-site medical clinics that provide more than minimal care.
A Towers Watson analysis in September found that about half of employers with at least 5,000 employees have benefits that would trigger the tax in 2018. By 2023, that estimate rises to 82 percent.
It won’t matter if you work in the private or public sector or at a small or large business.
“The Cadillac plan tax does not discriminate,” says Liliana Salazar, a senior vice president at Wells Fargo Insurance. “It applies to employers of all sizes.”
Among the first plans expected to be hit are generous union, corporate and public-sector plans.
Brian Marshall is superintendent of the La Mesa-Spring Valley School District near San Diego, a K-8 district with about 1,600 full-time employees.
The district won’t be able to pay the excise tax without cutting into students’ educational budget, he says.
As a result, Marshall says his only realistic choices will be to pass the tax along to employees or reduce the cost of their benefits. “That means raising co-pays, raising prescription drug costs for employees, and changing what’s covered and what’s not,” he says.
One of the district’s health plans already would trigger the excise tax and the others would trigger it “in short order,” he says, due to the quickly rising cost of heath care.
The increases to the excise tax thresholds are pegged to the Consumer Price Index, not to the rise in health care costs. As a result, more plans will hit the excise tax each year if health care inflation exceeds overall inflation.
“Health insurance companies have a tradition of jacking up our rates at two, three, four times the rate of inflation,” says Ian Lewis, research director for UNITE HERE! Local 2, a union that represents about 13,000 hotel and hospitality workers in San Francisco and San Mateo Counties.
“It’s just a matter of time before the cost of people’s health plans triggers that tax.”
There also are no adjustments for geography in the law, so plans in regions with high health costs – such as the Bay Area – will be more likely to be hit by the tax “simply because of where they’re located,” says Laurel Lucia, an ACA expert at UC Berkeley’s Center for Labor Research and Education.
Same goes for the health of your coworkers. “If someone is part of a workplace that has sicker employees, premiums are likely to be higher and the plan is more likely to be taxed,” she says.
If you work for a company that might be subject to the tax, talk to your human resources department to learn more. And don’t be surprised if you’re asked to assume a larger share of your health care costs in the next couple of years.
Businesses already are requiring workers to pay more, but the excise tax will accelerate that trend. “The Cadillac plan tax has been a catalyst to encourage employers to implement high-deductible health plans,” Salazar says.
Meanwhile, companies, unions and others are uniting to fight the tax and calling on Congress to repeal it.
Opposition to the tax crosses party lines, but getting Congress to act on anything related to Obamacare is a tall order.
Even if lawmakers decide to act, they face a daunting question:
“If you eliminate that revenue source, what would you do to cover the gap?” Salazar asks.
Provided by the Center for Health Reporting at the University of Southern California.