Even though the “Cadillac tax” on high-cost health plans is due to take effect in 2018, employer groups and benefits consultants have asked the IRS to postpone the implementation.
They say that employers need time and flexibility to implement changes to health benefit plans and their internal administrative systems to prepare for the 40% tax on group health care premiums.
Under proposed regulations, starting in 2018, the IRS will tax at a rate of 40% the portion of any plan that exceeds $10,200 in premium for individual coverage and $27,500 for family coverage. These thresholds are predictions. There is a formula in place for calculating the threshold based on a number of statistics, which change year to year.
The excise tax rules require health insurers to pay the tax, which they are expected to pass on to employers.
Benefits consultants are also asking that some health benefit costs not be included when tabulating the premium for purposes of the Cadillac tax.
In a letter to the IRS, international consulting firm Mercer LLC urged the agency:
- To exclude in its forthcoming proposed regulations non-core medical benefits – such as workplace wellness programs and on-site medical clinics – from the calculation of coverage costs.
- To provide employers with enough flexibility to calculate coverage costs consistent with reasonable actuarial principles, and
- To postpone its implementation of the excise tax, or at least provide a “good faith” compliance period.
Meanwhile, an employer benefits lobbying group known as the ERISA Industry Committee has asked for a two-year transition period to allow employers time to restructure their health benefit plans, administration systems and employee communications to comply with the reform law.
It also asked for exemption from the excise tax for programs designed to lower health care costs, such as health savings accounts, on-site medical clinics and wellness programs.
How Cadillac tax works: examples based on current threshold amounts
A $12,000 individual plan would pay an excise tax of $720 per covered employee:
$12,000 – $10,200 = $1,800 above the $10,200 threshold
Tax due: $1,800 x 40% = $720
A $32,000 family plan would pay an excise tax of $1,800 per covered employee:
$32,000 – $27,500 = $4,500 above the $27,500 threshold
Tax due: $4,500 x 40% = $1,800