The “Cadillac tax” has been top of mind lately for many business owners, mainly because they are still unsure of how the tax will affect their business. Proponents of the tax predict it will decrease health care costs by discouraging employers from offering high cost health plans and, instead, paying their employees more. Supporters of the Cadillac tax also expect it will cut health care costs by reducing free-spending health plans, which in turn can reduce the overall demand for health care services and make it more difficult for health care service costs to increase. The hope is that everyone, even those whose health plans are not affected by the implementation of the tax, will benefit from the reduced cost of care.

However, one of the biggest issues people have with the tax is whether or not it will mean the end of pre-tax benefits like flexible spending accounts (FSAs) and whether it will shift an increasing portion of health care costs to employees. Although the tax won’t be implemented until 2018, companies should understand how they can start offering benefits in the next two years that won't trigger the tax. The various regulations are a lot to take in, so it’s important for brokers to ensure their clients are a step ahead of any potential penalties and planning accordingly.

What is the Cadillac tax?

The Cadillac tax will impose a 40 percent tax on the portion of a health care plan that exceeds the threshold of $10,200 a year for individuals or $27,500 for families.1 These thresholds will increase in future years since they are indexed for inflation.

The tax is paid by insurance providers, and if there are multiple carriers, each carrier will pay the percentage of the excise tax equal to their percentage of the total premiums. Since the tax is based on an employee’s total benefits package, employers are currently responsible for calculating the tax and reporting each provider’s portion of the tax to the IRS. However, it is employers – not providers – who may be penalized for incorrectly calculating the tax, making it important for brokers to ensure their clients understand the nuances of reporting.

The tax only applies to the employer- and employee-paid portions of pre-tax group employer-sponsored coverage. This includes health coverage, FSAs, health savings accounts (HSAs) and retiree coverage, among others.

How can brokers help employers prepare?

There are still two years left before the Cadillac tax deadline, and brokers can help clients by giving them tools and resources to better prepare for and understand the implications of the law. Brokers can help clients assess their current health benefits offerings and discuss cost-saving and cost-accountability measures they can take.

In addition, brokers should help employers create long-term solutions for managing health plan costs in a way that will not trigger the tax. Here are a few options brokers can suggest to clients: