Nearly Half of Employers Will Hit the Cadillac Tax in 2018


Despite efforts to rein in health care costs, roughly half of large U.S. employers will face the excise tax in 2018; and the percentage is expected to rise significantly in subsequent years, according to an analysis by Towers Watson. The Congressional Budget Office  expects a $79 billion excise tax burden from 2018 to 2023.

As part of the Affordable Care Act (ACA), the excise or Cadillac tax is a 40% tax on the value of all affected health care programs a participant elects that exceed certain dollar thresholds in 2018 and beyond. This non-deductible excise tax must be paid by the employer although some employers are considering shifting the costs to plan participants. Seventy-three percent of employers are concerned about triggering the tax, and 62% say it will have at least a moderate effect on their health care strategy in 2015 and 2016. The survey revealed that 48% are likely to trigger the tax in 2018; and 82% could cross the threshold by 2023.

Trevis Parson, chief health actuary for Towers Watson said, “Even with conservative projections, the impact of the excise tax on employers is substantial, yet it is often not fully understood. Each company will need to look at the tax carefully based on its own programs, and we expect a great deal of variation by industry.”

Randall Abbott, a senior health strategist at Towers Watson said, “Even a Chevy may be affected by the Cadillac Tax. For most employers, the excise tax will be a question of when, not if, unless action is taken. The ACA has put a timer on cost management for many employers and unless one cuts benefits or improves program performance there’s a real risk of triggering it.” Abbott says that these three key factors are not well known about the tax:
1. The excise tax is based on employer and employee premium contributions, not just what the employer pays for coverage.
2. The definition of what’s included for calculating the tax extends to tax-advantaged health care accounts, such as health flexible spending accounts, health reimbursement accounts, and pretax contributions to a health savings account.
3. The tax is not determined by the value of the medical plan, but rather the value of all affected health benefits elected by an employee or family. The tax is based on the aggregate value of the programs an employee elects, not just the medical plan value itself.

Annual increases in excise tax thresholds are not based on health care cost inflation, but on the Consumer Price Index, which was 1.5% for 2013. That is far less than medical cost trend and considerably less than the 4% annual health care cost increases that better performing employer health plans are expected to achieve after plan changes in 2015 .

Abbott said, “With so much at stake, it is critical that companies take a close…look at their health programs and understand their projected costs…It also highlights the need for companies to improve their health program performance…The good news is that many have already taken steps, and with proper plan management, the impact of the tax can be significantly mitigated. In fact, Towers Watson estimates that the number of companies expected to trigger the tax would be considerably higher if not for the variety of actions that employers have already taken or are likely to take as they better understand the challenge. “For more information, visit

Last Updated 01/19/2022

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