OOPS! The Cadillac tax (officially called the High Cost Plan Excise Tax) is scheduled to begin in 2020, but I have discovered a flaw (?) in how our government set at least one of the benchmark threshold values (i.e., the insurance plan cost ceilings for single and family coverage above which a tax is owed). We are only in 2016 and the benchmark plan is a Cadillac plan for some plan participants–four years before the Cadillac tax is supposed to begin! My example Cadillac tax calculations below reveal some interesting findings. Read on.
As described in an earlier post, the Cadillac tax is a 40% excise tax on employer-sponsored health insurance costs. It applies to health insurance coverage costs in excess of $10,200 (single) and $27,500 (family). Plans that cost MORE than these thresholds are considered “overly generous” high cost plans and will incur the tax. My Cadillac tax calculations that follow use these 2018 threshold numbers since revised 2020 numbers have not been released yet by the Internal Revenue Service. The Cadillac tax was delayed an additional two years in December of last year.
I will outline the tax calculations for two different employees:
- Employee 1: A single 56 year old man (single coverage required)
- Employee 2: A married 40 year old woman of two (family coverage required)
buying two different Federal Employee Health Benefit (FEHB) plans:
- Plan #1–Blue Cross Blue Shield Standard plan (the Cadillac tax benchmark plan)
- Plan #2– Nationwide MHBP- Consumer, a High Deductible Health Plan
Cadillac Tax Calculations
The health insurance information for the FEHB program is readily available online. I could not do these calculations otherwise. The cost of the taxpayer-subsidized employer-sponsored health insurance plans includes both the cost of the health insurance premium and the contributions to medical savings accounts.
Plan #1: Blue Cross Blue Shield Standard plan
This is the insurance plan that serves as the benchmark for defining the boundary (thresholds) between “overly generous” high cost plan and the rest. The thresholds given above ($10,200 (single) and $27,500 (family)) are simply the costs of this plan inflation-projected to 2018. Insuring about 40% of FEHB program participants, the Blue Cross Blue Shield plans are the most popular. Although federal employees typically have at least 10 plan choices from which to choose (out of 252 plans offered), they prefer Blue Cross Blue Shield national plans because of their stability, large provider network, and comprehensive benefits package relative to the other plans offered.
In 2016, the premium for the Blue Cross Blue Shield Standard plan is $8152.32 (single coverage) and $18,895.20 (family coverage). I will assume that both employees choose to add the $2550 statutory maximum Flexible Savings Account (FSA) contributions (one maximum for both single and family coverage). The Cadillac tax calculation for these two employees is given in the table below:
The “person who administers the plan benefits” for the government will owe an extra $200.98 in tax for insuring Employee 1 and no extra tax for insuring Employee 2. I assume this extra tax would be factored into the following year’s insurance premiums. Will the employer have to encourage employees NOT to make the maximum medical savings account contribution to avoid the Cadillac tax?
We are only in 2016 and Employee 1’s choice of maximum FSA contribution has pushed his plan cost over the Cadillac tax threshold!!! What does this tell me?
- The price for the single coverage plan rose much higher than expected since the threshold was set
- The Cadillac tax threshold did not include the cost of all tax-free employee contributions to health coverage
- The taxpayer is subsidizing employees with families more than he is subsidizing single employees
Can you think of anything else it tells us?
Plan #2. Nationwide MHBP- Consumer Option
This High Deductible Health Plan (HDHP) has a premium of $6746.28 (single) and $15,675.96 (family). I will assume that both employees have Health Savings Accounts (HSA) and each maximizes their statutory tax-free contributions (from the employer and the employee) . The “employer contribution” (called “premium pass through” if the employer is the federal government) for this plan is $900 (single) and $1800 (family). Employee 1 therefore contributes a maximum tax-free $3450 ($3350 + $1000 -$900) and Employee 2, $4950 ($6750-$1800). Because Employee 1 is over the age of 55, he is entitled to an extra $1000 tax-free contribution. In the table below, I have calculated the cost of coverage for Cadillac tax determination by adding together the total health insurance premium cost and all tax-free HSA contributions (employer and employee).
As with Plan #1, the single coverage plan triggered the Cadillac tax and the family coverage plan did not. I was surprised that Plan #2 produced a LARGER Cadillac tax than did Plan #1 given that the former (a High Deductible Health Plan) sports a lower premium than does the latter (a Preferred Provider Organization (PPO) plan). The “less generous” High Deductible Health Plan (Plan #2) has the “more generous” tax-free medical savings account.
If you do not contribute the maximum allowable amount to your medical savings accounts (especially to the HSA which rolls over year after year), you will not be getting maximum value out of your employer-sponsored health plan. Unfortunately, many people cannot afford to put aside the maximum amount because of limited funds. Those taking advantage of maximum tax-free HSA contributions are usually the most highly compensated Americans. The HSA is viewed by many of them as a second taxpayer-subsidized retirement account. Both high-income and older tax filers established HSAs and fully funded their HSAs at least four times as often as did low-income and younger filers. After the age of 65, people can use HSA funds for non-medical purposes without penalty or paying taxes.
What is the situation for people who work for private employers? Private companies are not as forthcoming with their premium information, even to employees. Luckily, Obamacare (PPACA) requires all employers to provide premium information on Federal Form W2. If you look at your most recent W2, the figure in Box 12 (code DD) is what your employer paid for your major medical health insurance coverage (stand- alone dental and vision coverage are not included). Add your medical savings account contributions to this premium price from your W2 and you will have an idea of how “generous” your plan is. I have “generous” in quotes because high priced health insurance doesn’t necessarily mean that your plan is generous. Many other factors (like risk pool composition and size) affect premium costs. If your numbers are close to the Cadillac tax benchmarks, it is safe to say that your employer is probably in the process of reducing your health benefits because of the threat of the future “Cadillac” tax.
The Bottom Line
If the benchmark Federal Employee Health Benefit (FEHB) – Blue Cross Blue Shield Standard plan for single coverage triggers the Cadillac tax in 2016, what do you think will happen to yours now or in the future? If the maximum tax-free employee contributions to the medical savings accounts (FSA or HSA) are included in the Cadillac tax calculation, then both the single coverage Preferred Provider Organization (PPO) plan and the HSA-qualified High Deductible Health Plan (HDHP) above would have triggered the Cadillac tax in the year 2016! Surprisingly, the HSA-qualified HDHP produced a LARGER Cadillac tax than did the PPO. Did our government fail to include ALL tax-exempt costs when setting the single coverage Cadillac tax threshold?