Nearly Half of U.S. Employers Expected to Hit the Health Care “Cadillac” Tax in 2018 with 82% Triggering the Tax by 2023
September 23 2014 - 8:05AM
Business Wire
Companies may not be aware of all factors determining
tax
Despite continuing efforts to rein in rising health care costs,
roughly half of large U.S. employers will begin to hit the excise
tax in 2018 and the percentage is expected to rise significantly in
subsequent years, according to an analysis of large employer health
care programs conducted by global professional services company
Towers Watson (NYSE, NASDAQ: TW). Further, the size of the tax
burden is expected to be substantial as the Congressional Budget
Office (CBO) estimates the total liability for companies subject to
the tax could be a cumulative $79 billion between 2018 and
20231.
Implemented as part of the Patient Protection and Affordable
Care Act (PPACA), the excise or “Cadillac” tax is a 40% tax on the
value of all affected health care programs a participant elects
that exceed certain dollar thresholds in 2018 and beyond. This
non-deductible excise tax must be paid by the employer (although
some employers are contemplating charging the tax back to plan
participants). A recent Towers Watson survey2 found that 73% of
companies are very or somewhat concerned they will trigger the tax,
and 62% say it will have a moderate or greater impact on their
health care strategy in 2015 and 2016. The survey revealed that 48%
are likely to trigger the tax in 2018 and 82% could cross the
threshold by 2023.
“Even with conservative projections3, 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. “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.”
“When all the plans and programs included in the excise tax
definition are rolled up, even a Chevy may be affected by the
Cadillac Tax,” said Randall Abbott, a senior health strategist at
Towers Watson. “For most employers, the excise tax will be a
question of when, not if, unless action is taken. The PPACA 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.”
In particular, Abbott lists three key factors that are not well
known about the tax:
- The excise tax is based on both
employer and employee premium contributions, not just what the
employer pays for coverage
- The definition of what’s included for
calculating the tax extends to tax-advantaged health care accounts
such as health flexible spending accounts, health reimbursement
accounts and pretax contributions to a health savings account. The
tax is not determined by the value of the medical plan but rather
the value of all affected health benefits elected by an employee or
family. Ultimately, the tax is determined by the aggregate value of
the programs an employee elects, not just the medical plan value
itself.
- Annual increases in the excise tax
thresholds are not based on health care cost inflation, but instead
on the Consumer Price Index, which was 1.5% for 2013 — far less
than medical cost trend and considerably less than the 4% annual
health care cost increase that the better performing employer
health plans are expected to achieve in 2015 after plan
changes.4
“With so much at stake, it is critical that companies take a
close and comprehensive look at their health programs and
understand their projected costs going forward. It also 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. In fact, Towers Watson estimates that the
number of companies expected to trigger the tax would be
considerably higher if not for the variety of actions that
employers either have already taken or are likely to take as they
better understand the challenge.”
About Towers Watson
Towers Watson (NYSE, NASDAQ: TW) is a leading global
professional services company that helps organizations improve
performance through effective people, risk and financial
management. The company offers consulting, technology and solutions
in the areas of benefits, talent management, rewards, and risk and
capital management. Towers Watson has more than 14,000 associates
around the world and is located on the web at towerswatson.com.
1 Add CBO citation
2 Towers Watson, 2014 Health Care Changes Ahead
3 The Towers Watson analysis is based on a study of employers
with 5,000 or more employees, and assumes a 7% medical cost trend
with employers maintaining their current plans. For the analysis,
Towers Watson estimated the value of medical and drug benefits as
well as employer contributions to health savings accounts. Not
included are costs for dental and vision benefits as well as
employee contributions made through employer plans to a health
flexible spending account or a health savings account. These are
included in the definition of the excise tax but due to their
variability we have excluded these amounts from our calculations.
The percentage of large employers estimated to exceed the excise
tax threshold increases by about 10% for those large employers
offering self-insured dental and vision benefits in addition to
medical and prescription drug benefits resulting in 58% hitting the
excise tax in 2018 when these elements are added.
4 Towers Watson, 2014 Health Care Changes Ahead
Towers WatsonMedia Contact:Rob Wyse, +1 212 920
1470rob@capital-content.com
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