By: Jorge A. Cisneros
The so-called “Cadillac Tax,” will go into effect on January 1, 2020. The Cadillac Tax is an excise tax of 40% on the premium cost of “excess” health benefits. Many employers are now claiming that their health plans would be subject to the Cadillac Tax and are asking for givebacks at the bargaining table. They are asking for reductions in health benefits or increases in out-of-pocket costs for the workers participating in the plans. Don’t take the employer’s claims about the Cadillac Tax at face value.
The 40% excise tax applies only to “excess benefits,” meaning the portion of the aggregate cost of an employee’s health benefits that exceeds statutory thresholds. The current thresholds – which will be raised before 2020 – are $10,200 per year for self-only coverage and $27,500 per year for family coverage. The tax is calculated on a monthly basis, so the employer sponsoring the plan will be taxed only for the cost of coverage that exceeds $850/mo for single coverage or $2,291.67/mo for family coverage. Costs below the thresholds are NOT taxed.
The employer may claim that it is projecting a large increase in coverage costs by 2020. That claim may not be reasonable, given recent trends in health care costs. Moreover, not every component of a health plan increases in cost. (Prescription costs may increase at a different rate than hospitalization coverage, for example.) Ask the employer for information about which components of the plan are driving its projected cost increases. Come prepared by asking for and reviewing the summary of benefit coverage for the plans and any other annual filings the employer makes, such as the Form 5500 for the plan.
The cost of applicable coverage is “determined under rules similar to the rules under COBRA for determining the Cobra premium.” Every employer that sponsors its own plan calculates the COBRA premium that it will charge separated employees. For plans that are “insured,” that is, where the employer pays a monthly premium to an insurance carrier to provide coverage, the COBRA premium is simply the monthly premium for similarly-situated employees. For self-insured plan sponsors, the premium is the amount the sponsor determines based on either plan experience [past-cost method] or on projected estimates of future experience [actuarial basis method]. Don’t let the employer lump all of its COBRA premium information together. Costs are different for different groups of employees based on the level of benefits they receive and whether they have self-only or family coverage. Make sure the employer is telling you the cost of coverage for the plan(s) in which employees are actually enrolled, not in the best possible plan that is offered to them. The tax is applied only to actual coverage.
When measuring the cost of health coverage, you should exclude the following types of coverage, among others, from any Cadillac tax calculation:
- Stand-alone dental and vision
- Accident and disability insurance
- Long term care
- Liability insurance
- Worker’s compensation
- After-tax HSA employee contributions
- Coverage for specific diseases if not excluded from gross income
If the employer’s applicable coverage costs do exceed the thresholds, consider bargaining for these types of excluded coverage instead.
Finally, remember that the Cadillac tax itself is a tax-deductible expense for the employer, further reducing its impact on the employer’s bottom line.