Q: Our broker has informed us that our insurance plan is too good, and that we will have to pay a penalty. Is this true? I understand that there are minimum requirements, but I wasn’t aware that there are also caps on how comprehensive the coverage you offer can be.
A: Your broker is referring to the excise tax on the high cost of health coverage, or more commonly known as the Cadillac Tax. It will go into full effect in 2018, and is intended to reduce the demand for high cost coverage, and in theory, encourage health insurers (as well as consumers) to control health care costs. It was incorporated into the ACA as a revenue source for other provisions of the health care law.
This excise tax will affect health care plans that cost more than $10,200 for an individual, or $27,500 for a family starting in 2018, and will be adjusted annually for cost of living inflation.
The plans included in counting costs are:
- Health insurance plans (excluding stand alone dental and vision)
- Employee and employer contributions to flexible spending accounts
- Employer contribution and employee pretax contribution to a health savings account
- Voluntary benefits purchased on a pretax basis (i.e. hospital indemnity, cancer insurance)
- Health reimbursement arrangements
The excise tax is 40% of the excess benefit. For instance, if the benefits provided are valued at $11,000 for an individual (remember, the maximum value allowed is $10,200), this creates an “overage’ of $800, which is then multiplied by 40% creating a tax of $320.
If your school has a combination of plans that cause your employees to reach the excess benefit, the formula gets even more complicated! For example, let’s assume the single premium is $10,000 for the year and an employee elects $2,500 for a Flexible Spending Account (FSA), totaling $12,500. The excess benefit is $2,300 ($12,500 - $10,200 allowed). In this example, the health insurance represents 80% of this total ($10,000/$12,500) and the FSA is 20% ($2,500/$12,500).
Depending on the type of plan, different entities pay the tax. For the insured plans the insurance company pays the excise tax. For HSA plans the employer (you) pays the excess payment. And, for all other plans the plan administrator pays.
Using the math above, this means the health insurance company is responsible for 80% of the excise tax and the employer (who is the plan sponsor for the FSA) is responsible for 20% of the excise tax.
Why should you be thinking about this now if it doesn’t go into effect until 2018? Or, why is your broker bringing this to your attention? Most of the schools we work with budget three to five years ahead. Bringing this to your attention now, allows you to budget accordingly instead of being surprised and having to scramble to drastically change your offerings to avoid the tax.
Between now and then, it might be a good idea to adjust your plan to decrease cost, have employees make an HSA contribution on a after-tax basis, and limit what employees can pretax through their cafeteria plan.
Curious about your school's health care policies and the reform's changes? Ask ISM’s Health Care Reform Expert a question. We respect your privacy. You can also view ISM’s health care solutions.
