MONTPELIER — The impact of a tax on high-end insurance plans slated to begin in 2018 is not expected to impact the state as much as initially thought, according to the Legislature’s Joint Fiscal Office and the Shumlin administration.
The so-called Cadillac Tax, part of the federal Affordable Care Act passed in 2010, will impose a 40 percent non-deductible excise tax on health insurance plans that exceed $10,200 for an individual and $27,500 for a family beginning in 2018. The tax is indexed to inflation and will rise over time.
JFO released an estimate in April showing the state of Vermont as an employer and many individual Vermonters would be hit by the tax when it takes effect. As a result, JFO surmised that employers would be likely to alter the coverage they offer employees to avoid paying the tax, or pass the additional costs on to employees.
Based on preliminary guidance offered by the federal government, the Joint Fiscal Office estimated in April that the total excise tax bill in Vermont will be about $9 million in 2018 and will rise to about $40 million in 2023. A big chunk of that would come from individual and family plans offered to state employees, which are expected to be hit by the tax in 2018. That means the state will have an additional $6.8 million in health insurance costs that must be accounted for.
Additionally, JFO estimated that two of the seven individual health plans and one of the family plans offered to Vermont school employees will fall under the tax in 2018.
But new guidelines from the federal Internal Revenue Service have altered the estimates and lowered the expected impact in the state.
JFO analyst Joyce Manchester penned a new memo this week that states the new tax liability for the state as an employer is estimated to range from $360,000 to $1.5 million in 2018. The tax liability is estimated to range from $28.7 million to $29.7 million by 2027.
“The April 2015 estimate was essentially a worst case estimate based on then-current information,” she wrote in the most recent memo.
Michael Costa, deputy director of health care reform for Gov. Peter Shumlin, said the downgrade in the estimated tax liability is based on two factors. The tax is calculated by tallying total employee benefit costs and then comparing them to a threshold set by the federal government. The 40 percent excise tax is applied to any amount above that threshold.
The recent IRS guidelines include adjustments that “reduced the tax estimate by millions of dollars,” Costa said.
The most recent guidelines, released in July, “suggests that when calculating the cost of benefits that you can average the cost of two-person plans and family plans,” he said. The effect of that lowers the cost of family plans overall and reduces the tax liability.
The IRS has also indicated there are available adjustments to the tax threshold. Under the federal Affordable Care Tax, which included the Cadillac Act, the age and gender of employees can alter the threshold. Employers, in this case the state of Vermont, can increase their tax threshold if the employee group is older or includes more women, on average, than the national workforce, according to Costa.
“Our actuaries made assumptions to calculate this adjustment for the employers in the study, and the age and gender adjustment increased the tax thresholds and reduced tax liability by millions of dollars. The JFO estimate, put together before current IRS guidance, did not average benefit costs and did not adjust the tax thresholds,” he said.
The most recent estimates of the state’s pending tax liability under the Cadillac Tax are far from certain, Costa noted. He said plenty of uncertainty remains with the federal guidelines that will determine the calculation of the tax threshold.
“We have some IRS guidance, but federal regulations have not been issued. To be perfectly candid, the IRS guidance raises as many questions as it answers,” Costa said. “Accordingly, whether and how to properly average benefit costs and adjust tax thresholds still needs additional clarification. Future federal regulations may change the study’s estimates substantially.”
Read the Dec. 7, 2015 JFO memo below: