ARLINGTON, VA, September 23, 2014 — Despite continuing efforts to rein in rising health care costs, roughly half of large U.S. employers will begin to hit the excise tax in 2018 and the percentage is expected to rise significantly in subsequent years, according to an analysis of large employer health care programs conducted by global professional services company Towers Watson (NYSE, NASDAQ: TW). Further, the size of the tax burden is expected to be substantial as the Congressional Budget Office (CBO) estimates the total liability for companies subject to the tax could be a cumulative $79 billion between 2018 and 2023.

Implemented as part of the Patient Protection and Affordable Care Act (PPACA), 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 contemplating charging the tax back to plan participants). A recent Towers Watson survey1 found that 73% of companies are very or somewhat concerned they will trigger the tax, and 62% say it will have a moderate or greater impact on their health care strategy in 2015 and 2016. The analysis revealed that 48% are likely to trigger the tax in 2018 and 82% could cross the threshold by 2023.

“Even with conservative projections2, the impact of the excise tax on employers is substantial, yet it is often not fully understood,” said Trevis Parson, chief health actuary for Towers Watson. “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.”

“When all the plans and programs included in the excise tax definition are rolled up, even a Chevy may be affected by the Cadillac Tax,” said Randall Abbott, a senior health strategist at Towers Watson. “For most employers, the excise tax will be a question of when, not if, unless action is taken. The PPACA 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.”

In particular, Abbott lists three key factors that are not well known about the tax:

  • The excise tax is based on both employer and employee premium contributions, not just what the employer pays for coverage
  • 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. 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. Ultimately, the tax is determined by the aggregate value of the programs an employee elects, not just the medical plan value itself.
  • Annual increases in the excise tax thresholds are not based on health care cost inflation, but instead on the Consumer Price Index, which was 1.5% for 2013 — far less than medical cost trend and considerably less than the 4% annual health care cost increase that the better performing employer health plans are expected to achieve in 2015 after plan changes3.

“With so much at stake, it is critical that companies take a close and comprehensive look at their health programs and understand their projected costs  going forward. It also highlights the need for companies to improve their health program performance to achieve or maintain a high-performance health plan,” said Abbott. “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 either have already taken or are likely to take as they better understand the challenge.”

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has more than 14,000 associates around the world and is located on the web at

1 Towers Watson, 2014 Health Care Changes Ahead
2 The Towers Watson analysis is based on a study of employers with 5,000 or more employees, and assumes a 7% medical cost trend with employers maintaining their current plans. For the analysis, Towers Watson estimated the value of medical and drug benefits as well as employer contributions to health savings accounts. Not included are costs for dental and vision benefits as well as employee contributions made through employer plans to a health flexible spending account or a health savings account. These are included in the definition of the excise tax but due to their variability we have excluded these amounts from our calculations. The percentage of large employers estimated to exceed the excise tax threshold increases by about 10% for those large employers offering self-insured dental and vision benefits in addition to medical and prescription drug benefits resulting in 58% hitting the excise tax in 2018 when these elements are added.
3 Towers Watson, 2014 Health Care Changes Ahead