Health Insurance Health Reform

Who will pay the Cadillac tax?

Beginning in 2018, many individuals will face the “Cadillac” tax. What is the Cadillac tax?

The Cadillac tax is a tax on high-cost health insurance plans. According to a Truven report, it is calculated as “40 percent of the excess of total per employee per year (PEPY) healthcare costs above statutory threshold limits of $10,200 for individual coverage and $27,500 for family coverage.” Benefits subject to the tax include:

  • Employer and employee contributions to medical and pharmacy benefits
  • Flexible Spending Accounts (FSAs)
  • Employer contributions to Health Savings Accounts (HSAs) or Health Reimbursement Arrangements (HRAs)
  • Benefits obtained at worksite clinics

Employers who self-fund their health insurance benefits also are subject to the tax as they must calculate a premium equivalent.

How many people will be subject ot the Cadillac tax? Truven estimates:

“Beginning in 2018, 15 percent of active employee plans for U.S. employers are projected to incur the Cadillac tax; this rate is projected to increase to 19 percent by 2020…we estimate an average annual…tax amount…of $364 [per employee]… this amount represents 2.9 percent of total…costs for plans expected to incur tax.”

The probability of incurring the tax depends significantly on the composition of the employees covered under the plan. The tax will be much higher for plans covering older workers. “81 percent of early retiree plans for U.S. employers are projected to incur the Cadillac tax; this rate is projected to increase to 84 percent by 2020. For early retiree plans projected to incur the tax in 2018, we estimate an average annual PEPY tax amount of $1,069.”

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