We’ve surveyed employers about the ACA each year since the law was passed. In our first health care reform survey, back in 2010, we were initially surprised to find that employers’ number-one ACA-related concern was the excise tax — even though many other employer requirements would kick in long before the tax’s scheduled effective date in 2018. The excise tax has remained the top concern of employers in every survey since, until this year, when the administrative burden of complying with the law moved up after detailed reporting requirements were released.
Let's begin with the basics. What is the excise tax? Starting in 2018 there will be a 40% excise tax on “high cost” employer-sponsored coverage. The 40% tax is on the “excess benefit” (the amount over set dollar caps). The initial cap is set at $10,200 for self-only coverage and $27,500 for family coverage (“coverage other than self-only”), with higher thresholds for retirees, workers in high-risk professions, and single multiemployer plan coverage. Complex cost indexing and adjustments may apply.
The tax applies to more than just the medical plan cost. Also included are:
- Contributions to (and certain reimbursements from) a health FSA.
- Employer contributions to a HSA or an Archer MSA.
- Onsite clinic.
- Dental and vision if bundled with medical (perhaps).
- Employee HSA or Archer MSA contributions if made through pretax salary reduction (perhaps).
- Employee Assistance Programs (perhaps).
There are only a few pages in the law that cover the excise tax and, to date, we do not have any additional guidance from the regulators.
With the mid-term election change in the House and Senate, some are holding out hope that the excise tax might be postponed or eliminated. That’s hard to imagine given the huge revenue lift the government is counting on. The Congressional Budget Office estimates the excise tax will result in approximately $5 billion in new taxes in 2018, $10 billion in 2019 — and a total of $120 billion from 2018 to 2024. They estimate that about 25% of the $120 billion, or about $30 billion, will come directly from employers, TPAs, and issuers. The remaining 75%, or $90 billion from 2018 to 2024, will come from increased income and payroll tax revenue from the higher taxable wages employers are predicted to pay to offset the reduction in the health care benefits that is expected to occur because of the excise tax. As these numbers show, this tax is going to impose real costs on both employees and employers alike.
Who’s at risk for the excise tax?
How many employers will actually hit the threshold in 2018? The projections vary based on who you ask. SHRM recently reported that 15% of their survey respondents thought they might have to pay the tax in 2018. While it is interesting to see what employers think — or is it hope? — is going to happen in 2018, our own most recent projections, based on employers' actual plan cost trended forward to 2018, suggest that many more — about a third — are currently on a glide path to hit the threshold in 2018. Two years ago, our projection was considerably higher, but lower medical cost trends are delaying employers' arrival at the threshold. The lower trends are driven by dramatic changes in employer strategies to better manage cost. Does anyone know how long it will take a 60% plan to hit the excise tax threshold? We do — about 20 years.
More importantly, do you know when your plans will hit the excise tax threshold? Mercer’s new excise tax calculator (click on link) will help you find out — you just need to enter your number of employees and annual cost by medical plan tier. Note: The calculator only projects medical plan expenses forward. You may also need to consider applicable expenses from the list above in thinking about when you’ll reach the threshold.