ACA’s Excise Tax – What Should Employers Do in 2015?

What Should Employers Do in 2015 for ACA’s Excise Tax?

Mar 02, 2015


shutterstock_173912759Under the Affordable Care Act (ACA), the excise tax is 40% of the excess amount the plan’s health care cost exceeds limits as defined in the legislation.  Although the tax is not scheduled to take effect until 2018, employers should be evaluating their projected exposure now in order to have adequate time to make any necessary changes before the effective date.  This is of particular importance for employers with collective bargaining contracts and/or the inability to make unilateral decisions regarding benefit changes.

Excise Tax Thresholds

The thresholds for the excise tax start at $10,200 for an individual (self-only) plan and $27,500 for a family (other than self-only) plan, with additional increases for qualified (non-Medicare eligible) retirees and specified high-risk professionals. These thresholds will increase annually at a low rate of inflation, based on the Consumer Price Index (CPI) plus 1 percent in 2019, and CPI only thereafter. With such a low rate of increase compared to the expected annual health care cost increase, even employers who are below the threshold in 2018 will be at risk in future years.

Potential Exposure

In analyzing potential exposure, employers must consider that the excise tax is based on the full health premium or premium equivalent rate, not just the employer’s contribution. Also, when calculating the aggregate value of health benefits, any employer and employee contributions made through salary deductions, such as HRA, FSA or HSA contributions, must also be included.  In addition, the excise tax is the full responsibility of the coverage provider.  For self-funded plans, the employer sponsor is responsible; for fully-insured plans, the insurance carrier is responsible. The carriers are expected to pass this cost on to employers in the form of higher premiums, with the potential that for-profit carriers may gross up the amounts to cover their tax obligation.

Strategies Needed In 2015

During 2015, employers should undertake a detailed review of their plans so as to have sufficient time to make any necessary changes before the excise tax becomes effective.  Potential strategies to reduce or eliminate the excise tax exposure may include:

  • Plan Design Changes – Adjustments to deductibles, copays and coinsurance.  Note that other ACA restrictions on plan design changes and coverage levels must also be taken into consideration.
  • Administration Considerations – Examining the cost differences related to self-insuring a plan rather than purchasing fully insured coverage.
  • Adding a Low Cost Plan – Adding a high deductible health plan with a health savings account or health reimbursement account  to the current benefit offerings and encouraging participation in lower value plans.
  • Tier Alignment – Offering a multi-tier rate structure and examining the tier ratios as they compare to the 2 tier structure and 2.7 tier ratio of the thresholds.
  • Scaling Back Eligibility – Limiting benefits to certain categories of spouses to reduce participation.
  • Controlling Trend – Adding programs that improve the population health or help manage chronic conditions, such as wellness, health coaching, and disease management.

In conclusion, employers should spend the upcoming months evaluating their plans and looking at ways they can make adjustments not only to avoid paying the excise tax in 2018, but to offer a comprehensive benefit package and mitigate future costs.

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