For employers, one of the most anxiety producing elements of the Affordable Care Act (ACA) has been the upcoming Cadillac Tax. That’s the 40 percent excise tax on health benefits exceeding an annual limit ($10,200 for individuals and $27,500 for families). The Kaiser Family Foundation estimates that 26 percent of companies will be affected by the tax when it goes into effect in 2018, and 42 percent of employers will be paying it a decade later. The current push to repeal the tax has support from people in both political parties, employers, unions, and consumer advocacy groups alike.
Right problem, wrong solution?
The idea behind the Cadillac Tax was to provide more incentive for those with the most expensive plans to be responsible health care consumers. Since more generous plans usually require little or no copays or deductibles, it’s easy for those consumers to see health care as basically free, so they generally pay less attention to expenditures, driving up health care costs for everyone.
Good intentions, unintended consequences.
A 2013 report by Towers Watson and the nonprofit National Business Group on Health (NBGH) reveals that millions of Americans have essentially taken a pay cut as an unintended consequence of the Cadillac Tax. Even though it’s two years away, just the threat of the tax has many employers scrambling to avoid it, opting to convert their benefits plans into high-deductible health plans (HDHPs). That keeps their premiums lower while shifting more of the costs onto their employees, who generally pay a lower premium but pay nearly all of their medical care costs out of pocket until they meet the deductible.
It’s a tough pill to swallow for employees, whose share of premium and out-of-pocket costs rose by seven percent between 2013 and 2014 according to Towers Watson. And although most HDHPs are coupled with Health Savings Accounts (HSAs) – which allow health costs to be paid from tax-free savings – employer contributions to HSAs count toward the threshold for the Cadillac Tax. So in the end, it’s still a struggle for employers to offer a generous benefits package while encouraging employees to spend health care dollars wisely.
Now, for the latest developments …
On December 3, 2015 the Senate voted 52 to 47 to repeal large parts of the Affordable Care Act, including the Cadillac Tax, according to the Health Affairs Blog. The bill must now return for a vote in the House, where it is expected to pass. It then must go to the President, who is expected to veto. Since the Republicans do not have enough votes to override a veto, it may be the end of the legislative effort in the short term. That said, it’s highly likely that we may see some of the bill’s provisions again as Congress moves the 2016 appropriations bills forward. In short, the verdict is still out on whether employers will get hit by the Cadillac.
How are employers preparing for the impact?
According to a survey of employers from the International Foundation of Employee Benefit Plans, employers are increasingly taking action, including:
- Crunching the numbers. Nearly nine in ten organizations (87 percent) say they’ve done the math to see if their plans will trigger the Cadillac Tax, and 60 percent will. Among those, 62 percent will trigger the tax immediately in 2018 and another 12 percent will in 2020.
- Just over a quarter (27 percent) report they’ve done the calculations and won’t trigger the tax. Among those triggering the tax, 40 percent are working on making changes to avoid the tax, and another 40 percent plan to do so before 2018.
- Mixing it up. Forty six percent are trying to keep a lid on overall plan costs by pushing more costs onto workers through coinsurance, copayments, and other cost-shifting measures. Thirty nine percent are switching to a high-deductible health plan, one-third are reducing benefits, and nearly one-third are dropping higher cost plan options altogether.
What’s your strategy?
Implementing the changes needed to avoid the Cadillac Tax can be a time consuming challenge, and it could have huge implications for your employees. Have you put your strategy in place?
For more health reform updates and group benefits cost containment ideas, subscribe to the BeaconPath blog. And, if you haven’t already done so, download our ACA Reporting Guide with step-by-step instructions for 1094/1095 forms.