As fall approaches, we can expect to hear more about how employers are adapting their health plans for 2016 open enrollments. One topic likely to garner a good deal of attention is how the Affordable Care Act’s high-cost plan tax (HCPT), sometimes called the “Cadillac plan” tax, is affecting employer decisions about their health benefits. The tax takes effect in 2018.
The potential of facing an HCPT assessment as soon as 2018 is encouraging employers to assess their current health benefits and consider cost reductions to avoid triggering the tax. Some employers announced that they made changes in 2014 in anticipation of the HCPT, and more are likely to do so as the implementation date gets closer. By making modifications now, employers can phase-in changes to avoid a bigger disruption later on. Some of the things that employers can do to reduce costs under the tax include:
- Increasing deductibles and other cost sharing;
- Eliminating covered services;
- Capping or eliminating tax-preferred savings accounts like Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), or Health Reimbursement Arrangements (HRAs);
- Eliminating higher-cost health insurance options;
- Using less expensive (often narrower) provider networks; or
- Offering benefits through a private exchange (which can use all of these tools to cap the value of plan choices to stay under the thresholds).
For the most part these changes will result in employees paying for a greater share of their health care out-of-pocket.
In addition to raising revenue to fund the cost of coverage expansion under the ACA, the HCPT was intended to discourage employers from offering overly-generous benefit plans and help to contain health care spending. Health benefits offered through work are not taxed like other compensation, with the result that employees may receive tax benefits worth thousands of dollars if they get their health insurance at work. Economists have long argued that providing such tax benefits without a limit encourages employers to offer more generous benefit plans than they otherwise would because employees prefer to receive additional benefits (which are not taxed) in lieu of wages (which are). Employees with generous plans use more health care because they face fewer out-of-pocket costs, and that contributes to the growth in health care costs.
The HCPT taxes plans that exceed certain cost thresholds beginning in 2018. The 2018 thresholds are $10,200 for self-only (single) coverage and $27,500 for other than self-only coverage, and after that they generally increase annually with inflation. The amount of the tax is 40 percent of the difference between the total cost of health benefits for an employee in a year and the threshold amount for that year.
While the HCPT is often described as a tax on generous health insurance plans, it actually is calculated with respect to each employee based on the combination of health benefits received by that employee, and can be different for different employees at the same employer and even for different employees enrolled in the same health insurance plan. While final regulations have not yet been issued, the cost for each employee generally will include:
- The average cost for the health insurance plan (whether insured or self-funded);
- Employer contributions to an (HSA), Archer medical spending account or HRA;
- Contributions (including employee-elected payroll deductions and non-elective employer contributions) to an FSA;
- The value of coverage in certain on-site medical clinics; and
- The cost for certain limited-benefit plans if they are provided on a tax-preferred basis.
The inclusion of FSAs here is important. FSAs generally are structured to allow employees the opportunity to divert some of their pay to pretax health benefits, which means that they can avoid payroll and income taxes on money they expect to use for health care. Employees often are permitted to elect any amount of contribution up to a cap (which is $2,550 in 2015), which means that the amount of benefits for an employee subject to the HCPT in a year could vary depending on their FSA election.
The amount and structure of the HCPT provide a strong incentive for employers to avoid hitting the thresholds. The tax rate of 40 percent is high relative to the tax that many employees would pay if the benefits were merely taxed like other compensation, and the ACA does not allow the taxpayers (e.g., the employer) to deduct the tax as a cost of doing business, which can significantly increase the tax incidence for for-profit companies. Further, to avoid the perception that this was a new tax on employees, the HCPT was structured as a tax on the service providers of the health benefit plans providing benefits an employee: insurers in the case of insured health benefit plans; employers in the case of HSAs and Archer MSAs; and the person that administers the benefits, such as third party administrators, in the case of other health benefits. While it is generally expected that insurers and service providers will pass the cost of the tax back to the employer, doing so may not always be straightforward. Because there can be numerous service providers with respect to an employee, the excess amount must be allocated across providers. In some cases, it may not be possible to know whether or not the benefits provided to an employee will exceed the threshold amount until after the end of a year (for example, in the case of an experience-rated health insurance plan), which means that service providers may need to bill the employer retroactively for the cost of the tax they must pay. Amounts that employers provide to reimburse service providers for the HCPT create taxable income for the service provider, which the parties will want to account for in the transaction. The IRS has requested comments on potential methods for determining tax liability among benefit administrators, including a way that could assign the responsibility to the employer in cases other that insured benefit plans. The proposed approach could simplify administration of the tax.
|How the High-Cost Plan Tax Works|
Let’s take an employer that, in 2018, offers employees an HSA-qualified health plan with a total annual premium of $7,800 ($650 monthly) for single coverage. The employer makes an annual contribution of $780 to HSAs established by its employees, and offers a FSA plan where employees can elect to contribute up to $2,700 (the estimated legal maximum) for the year through payroll deduction. Employee A enrolls in single coverage under the plan for all 12 months but does not elect to contribute to an FSA while employee B enrolls in single coverage under the plan for all 12 months and elects to make the maximum FSA contribution. For employee A, the monthly health benefit cost would be the sum of $650 for the health plan premium and $65 (one-twelfth of the annual HSA contribution by the employer), or $715. Because this is less than the monthly threshold amount for single coverage of $850 (one-twelfth of $10,200), no HCPT would be owed for employee A. For employee B, the monthly health benefit cost would be the sum of $650 for the health plan premium, $65 (one-twelfth of the annual HSA contribution by the employer) and $225 (one-twelfth of the annual FSA contribution), or $940. Because this is more than the monthly threshold amount for single coverage of $850, there would be a HCPT for employee B for the month equal to 40 percent of the health benefit cost in excess of the threshold. The excess amount in this case is $90 ($940 – $850), and 40 percent of the excess is $36. The annual HCPT owed for employee B would be $432.
To illustrate the impact of the HCPT, we created a simple model of future plan costs, based on the distribution of employer-sponsored plans from the 2015 Kaiser/HRET Employer Health Benefits Survey (EHBS), and estimated the share of employers with plans that could be expected to hit the HCPT threshold in 2018, 2023 and 2028 if plan premiums grew at a range of reasonable rates. The EHBS has information about plan premiums, and employer contributions to HSAs and HRAs, but generally does not ask about the details of other health benefits offered to employees. While we can identify which employers make an FSA option available to employees, we do not have information about permitted or actual contribution levels.