Beginning in 2022, many employers will face an excise tax on high-cost healthcare plans, commonly called the Cadillac Tax, as a part of the continuing changes rolled out by the Affordable Care Act. Congress has also debated plans to completely eliminate the tax, an idea often touted by President Trump, but so far the tax stands. Employers who want to make changes to avoid the Cadillac Tax are getting started now.
The tax won’t apply to everyone. It was specifically designed to target employer-provided healthcare plans that exceed certain annual thresholds for contributions from both employers and employees. Currently, that threshold remains at $10,200 for individual plans, and $27,500 for family plans, in most situations. Payments above those amounts will be taxed at a rate of 40 percent. However, deductibles and co-pays are not included within these limits.
For certain situations the thresholds will be higher, such as when the majority of employees are engaged in high-risk professions, or for retirees who haven’t reached the age of 65 (Medicare eligibility).
In order to avoid the Cadillac tax, many employers are considering a switch to higher-deductible, lower-premium plans. These plans do assign more responsibility for healthcare costs to the employee, but we have ways of mitigating that situation.
A common option, which has proven effective, is to pair a high-deductible healthcare plan with a tax-exempt health savings account. This pairing keeps costs lower for both employer and employee, while allowing the employee to set aside pre-tax money in a savings account to handle the annual deductible. If the money in that HSA is not used in a particular year, it rolls over to the next year. In fact, unused funds in an HSA can be rolled over all the way to retirement, when the money can then be used for qualified medical expenses.
Employers are also exploring other improvements to reduce overall healthcare costs, such as worksite clinics or tele-health options. In many cases, these cost reductions result in more convenient healthcare for employees; a win-win situation for everyone.
For more information on the Cadillac Tax, and how it will be calculated, give us a call. We can assess your current healthcare expenditure, anticipate future increases, and help you assess your options to keep costs in line with your budget.