When the Affordable Care Act was signed into law in 2010, many analysts predicted that one of the law’s more eyebrow-raising taxes would be altered by the time it was scheduled to take effect in 2018. Dubbed the “Cadillac Tax,” the excise tax called for insurers to pay a 40 percent tax on the overages of employer-based health plans with annual premiums exceeding $10,200 for individuals, or $27,500 for families.
But now, well into 2015 and with the tax’s institution less than three years away, people are starting to get nervous. And rightfully so: Gridlock in Washington, D.C. means the tax has gone unaltered, and companies have already begun to factor in the 40% rate when planning for the future, particularly in contract negotiations. But should your company be one of them?
Many companies take one look at the annual premium numbers and think they’re in the clear. But whether you think those rates are “Cadillac” or not, it’s only a matter of time before they’ll affect your business. And that’s because healthcare inflation is rising at a faster pace — averaging over 3 percent in the past 5 years — than the general inflation rate, to which the premium caps are tied. Even though the Cadillac Tax adds an extra percentage point to the inflation rate, it still falls short of keeping pace with healthcare, as general inflation has only risen an average of about 1.6 percent over the past five years.
If the tax continues to go unaltered, the annual premiums of all companies will eventually be eclipsed, and the 40 percent tax will be imposed on all costs above the premium limit. Companies particularly at risk are those with an aging workforce, who will likely have higher premiums and medical payouts. Risk can also vary by industry, such as those that employ high numbers of young, female employees, and are likely to incur maternity costs. Size of company or industry is also no savior: the Cadillac Tax applies to all employers, regardless of size.
So what can be done? Surely, some employers who feel they’re at minimal risk of exceeding the thresholds might bet that the law changes before it ever catches up to them. More proactive employers can look into plans with higher deductible rates, or plans that cover part of the deductible for employees, in order to avoid higher premium rates. But even the latter method is an exercise in speculation, as the Department of Labor and other related agencies are still working on their interpretation of what the law says about that arrangement.
At the end of the day, companies should be planning for the worst, not hoping for the best. Just how quickly to act, and which strategy to take, varies from company to company. If you’re not sure you’ve adequately accounted for the Cadillac Tax, or want to learn more about it, consultation with a firm such as Creative Benefits, Inc. may help avoid a crisis come 2018.
About the author: Ruth Graham is the President of Creative Benefits, Inc. She founded the company in 1983 and has since overseen its growth into an industry-leader and pioneer in the Employee Benefits marketplace.