What is the ACA Excise Tax?

The Affordable Care Act (ACA) stipulates that in 2018 an ACA excise tax on high-value employer health plans will take effect. The excise tax is already motivating many employers to reassess and adjust the health care plans they offer employees. The tax is intended to reduce health care spending, but it also reduces the value of health care plans for certain employers.

A Quick Introduction

The Affordable Care Act (ACA) is revolutionizing how Americans access, qualify for and pay for health insurance. The ACA mandates that if the total cost of employer-sponsored health insurance coverage for an employee exceeds $10,200 for one person, or $27,500 for a family, this invokes a non-deductible 40 percent excise tax is applied to the amount that exceeds the allowed tax threshold. These threshold amounts will increase every year based on the Consumer Price Index (CPI). The excise tax doesn’t just apply to the premiums paid by employers, but also applies to employer-paid premiums, tax-free employee contributions and reimbursements through a health savings account (HSA), flexible spending account (FSA) and a health reimbursement arrangement (HRA).

What is the Purpose of the Excise Tax?

Congress created the excise tax to reduce the costs and subsequent values of employer health care plans. The goal is to encourage employers to offer less costly insurance policies. Ideally, cost sharing will streamline benefit management, directly lower premiums and indirectly lead to less use of medical services. The excise tax is structured to incentivize employers to limit available benefit options that may encourage unnecessary large employee contributions. As a result, more and more employers are monitoring their HAS, FSA and HRA plans to ensure that payroll deductions are an appropriate amount. As employers reduce the value of their health benefits, they will ideally increase wages and other types of taxable compensation for workers.

The Economic Theory and Foundation

The ACA’s excise tax is based on economic evidence that indicates that reductions in the money spent by employers on benefits are statistically offset by changes in taxable wages and salaries over time. The economists who helped design the ACA wanted to insure the uninsured, share the costs of covering the uninsured and create a national network of insurance markets. These economists believed that the ACA will slow the ever rising costs of health care. They believed that the over-utilization of the health care system and excessive tax-free compensations actually suppress wage growth while limiting disposable income that could be used to drive economic growth.

The Disadvantages

The economists who helped design the ACA’s excise tax wanted to reduce the value of employer-based health care benefits in order to provide better access to the uninsured and the poor. However, the excise tax is forcing employers to reduce their plans’ benefits and change their approach to providing health care benefits to employees. This means that cost sharing, benefit reduction and other management strategies that help employers avoid the excise tax threatens the availability of health plans for many low to moderate wage employees and their families. Employed individuals now may have less access to medical care, but the poor and uninsured now have better access.

The ACA excise tax is designed to reduce excessive employer-based health care options in order to save money and increase access to medical services. Businesses can learn more about the ACA’s excise tax here.

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