Employers have already started thinking about plan design changes in anticipation of the new tax on high-cost health plans imposed by The Patient Protection and Affordable Care Act (often referred to as the “Cadillac tax”). As we noted in an earlier post, beginning in 2018, a 40% nondeductible excise tax will be imposed on the value of health insurance benefits exceeding the applicable threshold. The applicable threshold is based on a statutory dollar amount which is subject to a variety of adjustments. Initially, the threshold for individual coverage will be $10,200, while the threshold for family coverage will be $27,500.

If it is determined that a plan exceeds the threshold amount, the 40% excise tax will be applied to the amount in excess of the threshold, not the entire plan. While conceptually this seems simple, the calculation and administration of the tax will likely present some challenges. The tax amount is determined by the employer and allocated among the providers of the employee’s coverage. If the coverage is insured, the coverage provider responsible for paying the tax is the insurance company who will presumably pass the cost on to the employer and/or employees. For other coverage, the coverage provider responsible for paying the tax may be the employer or the plan administrator.

Employers seeking to avoid application of the Cadillac tax may need to manage the value of health coverage offered to employees. While it is not urgent to make adjustments now, employers may wish to begin evaluating different strategies to reduce benefit costs as necessary.