One of the significant revenue raisers under the Affordable Care Act is the so-called Cadillac excise tax – a non-deductible 40% excise tax on high-cost health plans starting in 2018. The excise tax will apply to health plans that cost more than $10,200 for individual coverage or $27,500 for family coverage. The cost of a health plan will be based its COBRA premium. The $10,200 and $27,500 thresholds will be indexed but at a rate below medical inflation so that, over time, more and more health plans will – if no action is taken – exceed the thresholds.
Many of these “Cadillac plans” are found in union contracts, where unions may have emphasized health care benefits more heavily than wage increases in past negotiations. For that reason, labor professionals will want a projection of when their employers’ health benefits might reach the thresholds. That projection may need to be a factor in negotiations.
The Congressional Budget Office (CBO) projected that the excise tax will raise $5 billion in 2018 and a total of $149 billion between 2018 and 2015. However, most of this revenue is not from payment of the excise tax. Rather, the CBO expects employers to cut back on (non-taxable) health benefits so as to avoid the excise tax and instead pay higher (taxable) wages. Most of the revenue projected by the CBO is a result of taxes on the higher (taxable) wages.
Health flexible spending accounts (FSAs), health reimbursement accounts (HRAs) and employer contributions to employees’ health savings accounts (HSAs) are aggregated with medical coverage. If an employer has an on-site health clinic providing routine care, the COBRA value of the clinic is also factored into the calculation. In fact, only insured dental and vision coverage are excluded from the calculation (although we hope that IRS will also exclude self-insured dental and vision coverage). Several special rules and adjustments will provide somewhat higher thresholds for retirees and certain other groups.
In preparing for this looming benefits issue, therefore, labor professionals should:
- Keep in mind the potential application of the excise tax when negotiating health benefits in multi-year contracts.
- Get an estimate of when the employer’s health benefits would, if not modified, reach the $10,200 and $27,500 excise tax thresholds.
- Work with the employer’s benefits or HR team to develop options for modifying health benefits so as to postpone the application of the excise tax.