Lundy Insurance Services, Inc.

The “Cadillac Tax”

Wait a minute! I thought this was a “Cadillac Tax”.

Recently, a few folks have asked me why they were going to have to pay a tax on the value of their employer provided health care benefits. They had received information from somewhere indicating this was being proposed and they wanted to confirm it. What these folks had heard was not entirely accurate.

“Here’s the real scoop…”

It is true that the federal health care reform legislation will require employers to begin reporting the value of employer sponsored benefits on each employees W-2 form. This requirement was originally set to begin on January 1, 2011, but has since been pushed back to 2012.

However, it should be noted that there will be no tax effect until 2018. The intent here is to get employers engaged in reporting this information now so that everyone is in compliance by 2018. It will also allow the government to begin tracking this data.

I would suggest all employers begin discussion and planning with their payroll company now to ensure proper implementation in January, 2012.

“Now for the bad news…”

This new tax issue has been commonly referred to as the “Cadillac tax”.

Based on the final legislative wording now being implemented, I believe it should more appropriately be called the “used pick-up truck tax”. Why? My opinion is that just about everyone will be subject to this new tax at some point.

For example:

Beginning in 2018, a 40% excise tax will be charged to any insurance company that sells a plan to an employer where the annual benefit (Premium) value is over $10,200 for an individual or $27,500 for a family. This may sound like a lot of money today. But it may be very common eight years from now.

Here is how the excise tax will work: Assume that the monthly premium for someone in their mid 40’s today is about $400. Also assume that medical inflation will run at somewhere around 15% per year and the cost of coverage will increase with age. Given these contributors to cost, the monthly premium in 2018 for this individual will likely be just under $1,300. Annually, the premium in 2018 will be roughly $15,600. If we subtract the $10,200 (the legislative threshold) from the $15,600 (estimated annual premium), the resulting taxable benefit would be $5,400. The actual tax would then be $2,160 (40% of $5,400) for this individual. Make no mistake about it. Even if the value does not go higher than $10,200 in 2018, it is certainly headed in that direction and will at some point in the future.

Here is how this tax will impact you

As I mentioned above, your insurance company will be responsible for paying this 40% excise tax ($2,160 in the example). Therefore, one of two things will likely occur. First, the insurance company will pass the cost of the new tax directly on to you in the form of higher premiums. This response will only exacerbate and accelerate the impact as each year your premiums will increase and so does the tax.

The second possible response will be for insurance companies to stop offering any plan that has an annual value for individuals of over $10,200 and over $27,500 for a family. This response will ultimately result in reductions in covered benefits and far higher out-of-pocket costs when services are received.

Either way, we all lose.

“A side note…”

As of this writing, it has been widely reported that over 750 businesses and unions have been granted “waivers” by the administration so that they may be excluded from the requirements of health care reform. Union health benefit plans are among the richest plans in the country and have the highest premium costs. These plans would have been among the first to be impacted by the 40% excise tax. Why have they been granted a waiver?