One of the more unresolved aspects of the Affordable Care Act (ACA) is the Cadillac Tax, which is set to go into effect in 2018. Very little in the way of concrete guidance has been disseminated by the IRS and the Treasury Department. What we know at this point is that there will be an excise tax on “high cost” medical plans. According to Spring’s research, while the Cadillac Tax will likely not be a large burden right away, the projected Cadillac Tax will increase considerably in the future for many organizations.

The total cost of medical plans for the purpose of Cadillac Tax calculations will be similar to COBRA rates. The excise tax will be 40% of the medical plan costs that exceed the Cadillac Tax threshold. While the final thresholds have not yet been released, we know that they will be adjusted for group demographics such as age and gender. As of today, there have been no indications of how the thresholds will be adjusted for demographics.

Beyond 2018, the Cadillac Tax threshold is projected to increase each year with CPI. Therein lies a major problem as medical plans have had cost increases that far exceed CPI. Because medical plan costs will increase faster than the Cadillac Tax thresholds, we project that Cadillac Tax payments will increase considerably if no plan changes are made.

We are very short on guidance related to the Cadillac Tax and final regulations could be very different than what is currently expected. However, for most organizations, it’s clear that they will need to make significant changes to their medical plans over time to reduce the Cadillac Tax burden. These changes could include higher deductibles, co-pays, or out-of-pocket maximums.

Want to get an estimate of how much the Cadillac Tax may impact your business? Try out our new calculator tool and find out!

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Tom King

Thomas M. King, ASA, EA, MAAA is a Consulting Actuary with Spring Consulting Group, LLC. He has nine years of actuarial experience with a focus on the design and valuation of pension plans and retiree welfare plans. Prior to joining Spring, Tom spent nine years as a Retirement Consultant with Towers Watson. Tom earned a B.A. in Mathematics from Oberlin College. He is an Associate of the Society of Actuaries and an Enrolled Actuary, and is currently pursuing Fellowship.

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