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Study estimates expanding impact of Cadillac excise tax on health plans that takes effect in 2018

Almost half of large employers are expected to be subject to the Code Sec. 4980I health care “Cadillac tax” in 2018, according to a Towers Watson analysis of large employer health care programs. By 2023, the study found, the percentage of large employers to be hit by the tax is expected to rise to 82%.

Background. For tax years beginning after Dec. 31, 2017, insurers will be subject to a nondeductible excise tax if the aggregate value of employer sponsored health insurance coverage for an employee (plus any former employee, surviving spouse and any other primary insured individual) exceeds a threshold amount. (Code Sec. 4980I) The tax, which was added by the Affordable Care Act, is equal to 40% of the aggregate value of the health insurance coverage that exceeds the threshold amount, calculated by way of a complex formula.

RIA observation: Unusually expensive health insurance plans are sometimes referred to as “Cadillac plans.” Thus, this excise tax is sometimes referred to as a “Cadillac tax,” or “tax on Cadillac plans.”

The excise tax is imposed pro rata on the issuers of the insurance. For a self-insured group health plan, a health flexible spending arrangement (health FSA) or an health reimbursement arrangement (HRA), the excise tax is paid by the entity that administers benefits under the plan or arrangement (the plan administrator ). The excise tax is paid by the employer if it acts as plan administrator to a self-insured group health plan, a health FSA or an HRA. Where an employer contributes to a health savings account (HSA) or an Archer MSA, the employer is responsible for payment of the excise tax, as the insurer. (Code Sec. 4980I(c))

Report on Cadillac health plan. 48% of large employers are expected to be subject to the health care “Cadillac tax” in 2018, according to a Towers Watson analysis of large employer health care programs. By 2023, the study found, the percentage of large employers to be hit by the tax is expected to rise to 82%. According to estimates prepared by the Congressional Budget Office, the total liability for all companies subject to the tax could be a cumulative $79 billion between 2018 and 2023.

Towers Watson noted that the 40% Cadillac excise tax is imposed on the value of all affected health care programs that a participant elects, when certain dollar thresholds are exceeded. The tax is non-deductible, and must be paid by employers, some of whom are considering charging the tax back to plan participants, said Towers Watson.

With proper plan management, the impact of the tax can be lessened. In fact, Towers Watson estimated that the number of companies expected to trigger the tax would be much higher if not for the various actions that employers have already taken, or are likely to take, as they better understand the tax.

Towers Watson added that many employers are not aware that the tax:

…is based on both employer and employee premium contributions, not just what the employer pays for coverage;
…is calculated using the value of all tax-advantaged health care accounts elected by each employee, including health flexible spending accounts, health reimbursement accounts, and pre-tax contributions to health savings accounts; and
…thresholds are increased annually based on the Consumer Price Index, not on health care cost inflation.

References: For Excise Tax on High-Cost Employer-Sponsored Health Coverage After 2017, see FTC 2d/FIN ¶  H-1225  ; United States Tax Reporter ¶  49,8014 ; TaxDesk ¶  133,101  .