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Is Your Health Insurance a Luxury?

How could that be? Health insurance is now mandatory. Why should health plans be subject to a luxury tax? Beginning in 2018, employers that provide high-cost benefits through an employer sponsored group health plan will be subject to an Affordable Care Act (ACA) created excise tax, also known as the “Cadillac” luxury tax on these plans.

The plan is to assess employers 40% of the cost of plans that exceed predetermined threshold amounts. For planning purposes, the threshold levels for high cost plans are $10,200 for individual coverage and $27,500 for family coverage. For pre-65 retirees and individuals in what are considered high-risk professions, the threshold levels are $11,850 for individuals and $30,950 for family coverage. Keep in mind, this tax doesn’t only apply to premiums paid by the employers, but also to tax-free employee contributions and reimbursements from flexible spending accounts for medical expenses. These amounts will most likely be adjusted in 2018, as the cost of coverage will have risen from current levels. Threshold levels are also expected to be indexed for inflation in future years.

Three years seems like a long time away to be concerned about a penalty tax. According to the Kaiser Family Foundation, last year average family premiums rose 3% to $16,834, while individuals’ remained steady at $6,025. Companies with a large percentage of high-wage workers paid more, with an average of $6,244. As a result of the inflationary increases the American Health Policy Institute estimates that in 2018, this tax will hit 17% of all American businesses and 38% of large employers. Anticipating this tax in 2018, employers are shifting more cost of these plans to employees.

Why the excise tax? The purpose of this tax is to generate new tax revenue to fund the expansion of health coverage. In fact, the Congressional Budget Office (CBO) estimates that the excise tax will result in approximately $5 billion in 2018, $10 billion in 2019, and $13 billion in 2020.  The CBO also predicts that higher taxable wages paid to employees to offset the rise in employee costs will generate an increase in income and payroll tax revenue.


The potential impact of this tax is driving employers to reassess their health care costs to see how they want to approach health care in the future. As the cost of benefits continue to rise, eventually used car benefit plans will be taxed as Cadillacs. We’ll see what 2018 brings…..

For additional information, contact EAB HealthWorks.