The Excise Tax on High-Cost Employer Health Plans
President Obama signed The Patient Protection and Affordable Care Act (“the Act”) into law on March 23, 2010. Separately, on March 25, 2010, the Senate and House passed the Health Care and Education Reconciliation Act of 2010 (“the Reconciliation Act”) amending many provisions of the Act. The Reconciliation Act is awaiting President Obama’s signature. The tax provisions contained in this major health care overhaul are the subject of a series of Insight articles. The focus of this Insight is the excise tax on high-cost employer health plans.
What is “Cadillac” coverage?
Over the last several months we have heard the discussions regarding Congress’ plan to tax high cost, or “Cadillac” health insurance plans touted as a means of raising revenue and driving down the costs of health care. In theory, Congress believes that by taxing the issuers of these high cost plans, it would make these plans less attractive to issue, and in turn, reduce the perceived overuse of medical care by those covered by such plans.
Congress chose to define “Cadillac” plans not by the level of benefits the plan provides, but by how much it costs. Some “Cadillac“ plans do provide for extravagant benefits, but the most common plans that fall under the “Cadillac” plan definition are the generous health care benefits that many union workers receive. These union plans generally have high employer paid premiums, low deductibles, prescription drug coverage, vision and dental care and low or no co-payments. These better health care benefits were often received by union workers in exchange for foregoing larger wage increases in contract negotiations. In addition, many other health care plans are classified as “Cadillac” plans not for providing generous benefits, but by virtue of other insurance cost factors such as the age, gender, and health status of the insured group, or the level of health care costs in specific regions.
Accordingly, not everyone with high cost coverage is wealthy or well-off. Some union workers and employers of businesses with older or less healthy workers may have premiums caught in the “Cadillac” category. Congress anticipates that the excise tax imposed on these plans will make these high cost plans too expensive and force employers to provide plans with reduced benefits and higher co-pays. Thus, to the extent employees continue to consume health care, they will have to pay for it out of pocket, thus reducing demand for services and driving down the cost of health care plans.
Excise tax on Cadillac plans
Beginning in 2018, The Act, as amended, imposes a nondeductible 40 percent excise tax on group insurers if annual premium payments exceed $10,200 per year for individuals, or $27,500 for families The premium levels would be indexed for inflation in 2019 by CPI-U+1%, and for years after 2019, by just CPI-U.
The excise tax would be imposed on a pro rata basis on all providers of coverage. Thus, to the extent that coverage is provided by an employer under an insured plan, the insurer of the coverage is liable for this tax. For self-insured plans, the plan administrator (or employers that act as plan administrators) would pay the excise tax. In determining the aggregate cost of annual premiums, all employer-sponsored health insurance coverage, except for the value of stand-alone dental and vision plan coverage, is taken into account.
The Act, as amended, also provides for adjusted premium thresholds for Retirees and “high-risk” professions. For retired individuals over age 55 and for plans that cover employees engaged in high-risk professions, the annual premium threshold is increased by $1,650 ($11,850) for individual coverage and $3,450 ($30,950) for family coverage. These amounts will also be indexed for inflation beginning in 2019, as noted above. High-risk professions include:
- law enforcement officers;
- rescue squad or ambulance crews
- longshoreman, and
- individuals engaged in construction, mining, agriculture, factory or fishing industries.
Wage (W-2) Reporting
Beginning in 2011, W-2 Statements issued to employees must include the aggregate cost of employer sponsored health benefits. More to come on this requirement as details become available.
Although the 40% excise tax on “Cadillac” plans does not kick in until 2018, employer reporting of the value of employer sponsored health benefits on Form W-2 will begin in 2011.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.