OK, so how many benefit plan administrators are ready for the great health care reform employee freak-out?
The landmark Supreme Court decision on the Patient Protection and Affordable Care Act is bound generate lots of questions from employees nationwide. There will be a lot to talk about, but one of the first things to take effect will be the so-called “Cadillac Tax” for the richest of employee medical insurance benefits.
Let’s start there (for more on grandfathered plans, see our post here). What, exactly, is this thing? Employees are going to want to know.
Simply put, the “Cadillac Tax” is 40% excise tax on the portion of medical insurance plans (dental and vision benefits don’t count) costing more than $10,200 per year for individuals or $27,500 per year for families.
OK, that’s not so simple. What’s an excise tax?
The best way to explain an excise tax is to describe it as a tax on top of the cost of something. It’s kind of like paying the “sin tax” on things like junk food and soda. (Actually, that’s exactly what it is.)
If there’s a 15% tax on candy, for example, then a $1 chocolate bar will cost $1.15 when it’s rung up at the register.
One important thing to keep in mind when explaining this to employees is that excise taxes are not taxes on wages or income. The simple act of having a Cadillac plan won’t mean that they’ll have to write a bigger check to Uncle Sam every year around April 15.
Rather, it just means that their insurance could start costing more. Although providers or sellers of Cadillac plans will be the ones actually cutting checks to the government, they’re going to pass the increased cost on to their customers.
For example, after the Cadillac tax, a $15,000 plan will cost $16,920. That’s because, at $15,000, the plan is $4,800 over the $10,200 threshold for the tax. The extra $4,800 will be taxed at a rate of 40%, which amounts to $1,920.
+ $1,920 tax
$16,920 total cost
Now it’s important to remember that those numbers are for the total cost of the insurance, not just what the employee pays in premiums. For example, if an employee only contributes $250 a month ($3,000 a year) towards her $15,000 individual plan, she still has a Cadillac plan despite the fact that her (very generous) company is picking up the tab for the other $12,000.
After a Cadillac tax, one of the following things is going to happen:
1) The insurance company absorbs the cost of the tax out of its profits. Also, they’ll give everybody a solid gold Ferrari.
2) Employers will pay the cost of the tax while employees continue paying the same rate.
3) Employees will pay the cost of the tax on top of their premiums.
4) Employers will share the cost of the tax with employees.
5) Employers will eliminate Cadillac plans altogether
I’m pretty sure number 5 is the most likely outcome, but I’m holding out hope for number 1. What about you and your company? When the Cadillac tax goes into effect in 2018, what will you be doing? Share your predictions in the Comments section below.