Original post by John Scorza, shrm.org
Hope for the best, but prepare for the worst, may be the best advice for employers when it comes to the uncertain future of the “Cadillac tax.”
The Affordable Care Act’s (ACA’s) 40 percent excise tax is now slated to be levied on costly employer-sponsored health insurance coverage beginning in 2020. The plans subject to the tax are those with benefits valued above $10,200 for single coverage and $27,500 for family (other than self-only) coverage, indexed annually for inflation.
The levy—popularly known as the “Cadillac tax”—has employers on edge, with many acting to reduce their risk of exposure while keeping an eye on repeal efforts. A brief repreive was provided by the Consolidated Appropriations of 2016, enacted in December 2015.
As regards the Cadillac tax, the omnibus measure:
- Delayed the effective date by two years, from 2018 to 2020.
- Made the excise tax deductible by businesses.
“The two-year delay gives Congress more time to devise a longer-term solution to the excise tax, including potentially amendment or repeal,” commented Kathryn Bakich, J.D., national health care compliance practice leader at Segal Consulting in Washington, D.C.
Even with this delay, it’s wise for employers not to bank on its ultimate repeal, as noted below, and to use any expanded breathing room to consider steps to avoid the tax’s grasp—or just to keep health benefit spending under control.
Restraining Spending & Raising Revenue
The excise tax was designed to accomplish two primary goals:
- Lower overall spending on health care by making employer-sponsored health plans less comprehensive, and thereby fostering more cost-conscious spending decisions by employees.
- Generate federal revenue to pay for other provisions of the ACA, including subsidies provided through federal and state health exchanges for low-to-moderate-income employees who lack affordable coverage through their employer.
The Cadillac tax is estimated to raise nearly $90 billion through 2025. Twenty-five percent of those funds will come directly from employers. The other 75 percent will be generated by taxes on higher employee wages that presumably would result from lower health care costs—although there’s no guarantee that companies will raise wages as health costs go down. “There’s evidence both for and against” that assumption, noted Paul Fronstin, director of the Employee Benefit Research Institute’s (EBRI’s) health research and education program, at a Dec. 10 EBRI policy forum in Washington, D.C.
Opposition to the tax is strong. The tax eventually will affect nearly all 175 million Americans with employer-sponsored health plans, said Katy Spangler, senior vice president of health policy at the American Benefits Council. That’s because the thresholds that trigger the tax are indexed to the consumer price index (CPI), but medical inflation rises much faster than the CPI. As a result, more and more plans will become subject to the tax, Spangler said. Additionally, the tax is forcing employers to shift costs to employees in the form of higher deductibles and co-pays, she said.
That’s the main tactic employers are using to prepare for the tax, according to Richard Stover, principal with Buck Consultants. He identified five possible employer strategies:
- Shift costs. Many companies are doing this, at least as a component of their overall strategy, by imposing higher deductibles, reducing medical benefits, implementing high-deductible health plans combined with health savings accounts (HSAs) and offering voluntary benefits that help employees cover medical expenses. “Unfortunately, the primary way [to achieve significant cost-savings], the easiest way to do it, is to shift costs to employees,” Stover said.
- Absorb the cost. This is not a viable long-term strategy because of the cost impact and the administrative burden that would result, Stover said. “No one wants to absorb the cost,” he remarked.
- Improve plan efficiency. Employers can consider three broad approaches here, according to Stover. First, manage utilization through tactics such as onsite clinics, high-performance networks, and telehealth and transparency tools. Second, manage unit costs by using medical and prescription discounts and finding more effective vendors, for instance. Third, promote health through wellness and disease-management programs.
- Eliminate ancillary health benefits. Options here include reducing or eliminating employer HSA contributions and limiting or eliminating employee pretax HSA contributions (see the SHRM Online article HSA Strategies to Avoid the Cadillac Tax).
- End health plan sponsorship. Just as most employers are not willing to absorb the costs of the tax, most are not considering dropping their health plans, either. Organizations that terminate their plans will likely face significant recruiting and retention problems unless they provide employees with additional wages to purchase coverage on a public exchange. But even that is no panacea. “There’s really no tax-effective way to do that,” Stover said.
Regarding these five strategies, Stover stressed that “No one of these levers is enough. Employers are looking at combinations of these approaches that they could use to better manage the costs of their programs.”
Spangler at the American Benefits Council is optimistic that Congress will ultimately repeal the excise tax. The council is a member of the Alliance to Fight the 40, a coalition of nearly 90 organizations opposed to the levy.
Others have noted, however, that revenues lost due to repeal would need to be replaced with other income sources.
In the immediate future, President Barack Obama has pledged to veto any repeal measure. In any event, benefit advisors are telling employers not to leave themselves vulnerable to triggering the tax, if and when it should take effect.
John Scorza is associate editor of HR Magazine.