The excise tax on high-cost plans is the health care reform requirement that concerns the most U.S. employers, according to a survey by consulting firm Mercer.
Starting in 2018, health benefit coverage that costs more than $10,200 for an individual employee or $27,500 for dependent coverage will be subject to a 40 percent excise tax. Some employers offer high-cost plans because a generous plan is part of their attraction and retention strategy; some have high-cost plans because they have an older or less healthy workforce or are located in a high-cost area. In any case, a 40 percent excise tax on health benefits could prompt a significant change in health benefit strategy, policy analysts say.
Mercer’s survey was conducted in late summer 2010 using a national probability sample of U.S. public and private organizations with 10 or more employees. More than 2,800 employers completed the survey. When asked about their most likely response to the excise tax:
• Nearly a quarter (23 percent) of U.S. employers with 50 or more employees said: “We will do whatever is necessary to bring cost below the threshold amounts.”
• An additional 37 percent said they will attempt to bring the cost below the threshold amounts but acknowledged that “it may not be possible.”
• Only 3 percent said they will take no special steps to bring cost below the threshold amounts.
• The remainder (37 percent) predicted that their plans will never hit the cost threshold, which will be tied to the U.S. consumer price index (CPI) and will change each year.
(click on charts, below, to view larger versions.)
To estimate the percentage of employers currently at risk for triggering the excise tax when it goes into effect, employers were asked to provide the employee-only and family premiums for their highest-cost plans in 2010. These costs were trended forward using an annual increase of 6 percent, although this might be conservative. If they make no plan design changes, 39 percent of employers polled who have 50 or more employees can expect to trigger the excise tax in 2018, the year in which it becomes effective.
“It’s important to keep in mind that this new tax is still eight years out and a lot could change between now and then,” said Tracy Watts, a partner in Mercer’s Washington, D.C., office. “Given how often ERISA, tax, Medicare and Medicaid rules are modified, there’s a good chance that the excise tax that takes effect in 2018 won’t be exactly the same as the sketch we’re working from today.”
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In other findings, the survey revealed that large U.S. employers remain committed to their role of health plan sponsor. Just 6 percent of all employers with 500 or more employees—and just 3 percent of those with 10,000 or more—said they are likely to terminate their health plan and have employees seek coverage in the individual market after 2014, the year in which the employer mandate to provide coverage or pay a penalty takes effect. Also in January 2014, state-run exchanges for purchasing individual and family policies (with subsidies for low earners) are to be launched.
“Employers are reluctant to lose control over a key employee benefit,” said Watts. “But beyond that, once [they] consider the penalty, the loss of tax savings and grossing up employee income so they can purchase comparable coverage through an exchange, for many employers dropping coverage may not equate to savings.”
On the other hand, a fifth of small employers (those with 10 to 499 employees) said they were likely to terminate their health plan after 2014, especially those with low-paid workers and high turnover, like retailers. These small employers generally offer fully insured health plans and, with small risk pools and little purchasing power, are vulnerable to large rate increases.
“You can see why the idea of dropping employee health plans would be attractive to small employers,” said Beth Umland, who directed the study for Mercer. “On the other hand, when you look at the experience in Massachusetts, where insurance exchanges have been operating under state-based health reform for over three years, it hasn’t happened.”
Stephen Miller is an online editor/manager for SHRM.
Rethinking Health Care Strategy in the Age of Reform, SHRM Online Benefits Discipline, October 2010
Tax on ‘Cadillac’ Health Plans Could Have a Major Impact, HR News, April 2010
SHRM Online Benefits DisciplineSHRM Online Health Care Reform web page