Ever since the ACA was signed into law, the excise tax on high-cost plans has been the number-one concern of employers. The statute defining the excise tax is contained in seven pages of the law. That’s it — seven pages. Don’t get me wrong, what is outlined is complicated. But seven pages is nothing in a law that originally spanned 2,000 pages.
The Congressional Budget Office has produced estimates, which they periodically update, of the revenue expected from the excise tax. Roughly 25% of the estimated revenue will stem from excise tax receipts, but the lion’s share — 75% — will come from increased income and payroll tax revenue from the higher taxable wages that employers are predicted to pay to offset the reduction in the health care benefits that is expected to occur because of the excise tax. The CBO anticipates many employers and workers will shift to health plans with premiums that are below the specified thresholds to avoid paying the tax. This is certainly supported by Mercer survey data, which finds that virtually all employers that believe they are at risk for hitting the excise tax threshold say they will take steps to avoid it, and well over half say they will do “whatever is necessary.”
Earlier this week, the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) released updated budget projections for the ACA for 2016-2025. This updates their January 2015 baseline projections. Total revenue projections for the excise tax are now $87 billion, down from $149 billion in January. The amount decreased because premiums are now projected to be lower (that’s a pat on the back for all of us). They also expect even fewer workers to be enrolled in employment-based insurance plans with premiums that exceed the excise tax thresholds specified in the ACA. The government is still applying the same 25%/75% assumption for where the revenue will come from. Given the $62 billion decrease in the estimated revenue, this suggests that the employer share will be about $2 billion a year over the seven-year period from 2018-2025 (although it’s likely it would be less in the early years and build over time).
In addition, the CBO and JCT now project that, on net, one to two million fewer people will move out of employment-based coverage under the ACA than they projected previously. A smaller loss of employment-based coverage means that less nontaxable compensation in the form of health benefits will be converted to taxable compensation as a result of the ACA. Moreover, the downward revision to projected premiums for employment-based coverage means that the losses in such coverage as a result of the ACA will yield smaller increases in taxable compensation and therefore smaller increases in tax revenues.
This explains why employee pre-tax contributions to flexible spending accounts and health savings accounts are proposed to be included in the excise tax calculations. Certainly, for an employer trying to avoid the tax, eliminating pre-tax contributions will be one of the easiest ways to reduce cost for the excise tax calculation while still preserving the basic health care benefits package. It’s as if the government doesn’t want to take those pre-tax account contributions away from employees, but they want employers to do it! Wouldn’t it be a whole lot easier if the government made a few straightforward changes to raise revenue in lieu of this complicated excise tax scheme? Lots more to come on this topic!