‘Cadillac Tax’ Will Hit Majority of Employer Plans

Employers have options to reduce the tax

By Allen Smith, J.D. Oct 30, 2017
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This is the third in a series of articles about the Affordable Care Act (ACA). This article examines the "Cadillac tax" and methods for reducing it.

The "Cadillac tax" on group health plans—a 40 percent excise tax on high-value coverage—will eventually apply to all employers and, should it take effect in 2020, it will cover most employers, benefits experts say. That's because the tax thresholds are indexed to general inflation, not medical inflation, which has been roughly two and a half times higher.

As employers call for the tax to be repealed or delayed, they're also planning how to reduce their exposure to the tax. This can be accomplished in many ways—but some steps may prove unpopular with employees.

The tax works this way: It taxes the amount that an employee's group health coverage exceeds a statutory annual limit, called the excess benefit. The excess benefit will be subject to the 40 percent excise tax.

"Some argue that the Cadillac tax was designed as a less transparent—and more politically palatable—equivalent to the elimination of or cap on the tax exclusion for group health plan coverage," said Eric Schillinger, an attorney with Trucker Huss in San Francisco. 

Purpose of the Tax

The Cadillac tax is designed to encourage employers to control health care costs by choosing less expensive health plans for employees, noted Richard Asensio, J.D., vice president and director of compliance for Burnham Benefits, a benefits consultancy based in Irvine, Calif.

"Relentlessly rising health expenses, far beyond wage growth and growth in the economy, are motivation enough to keep health benefits within reason," said Steve Wojcik, vice president of public policy for the National Business Group on Health (NBGH) in Washington, D.C.

The tax also raises revenue for the Affordable Care Act (ACA). According to one report by the Congressional Budget Office, a six-year delay of the tax would decrease federal revenues by about $66 billion over a decade.

Tax May Eventually Hit All Employers

​On Dec. 18, 2015, Congress passed and President Barack Obama signed a law allowing for a two-year delay of the Cadillac tax, changing its effective date from 2018 to 2020.

A 2017 Society for Human Resource Management (SHRM) health care reform survey found that 14 percent of organizations have already taken action to avoid paying the excise tax, noted Chatrane Birbal, SHRM senior advisor of government relations.

The threshold amounts for 2020, unless Congress further delays or repeals the tax, are expected to be $10,900 for employee-only coverage and $29,400 for all other coverage, including family coverage, according to Wojcik.

"The exact amounts depend on the rate of general inflation in the overall economy between now and 2020," he said. While these amounts sound like they are for plans with generous coverage, the NBGH estimates that the average cost of employee-only coverage will be $14,156 in 2018.

Schillinger predicted that if current health insurance costs continue to rise, "all group health plan coverage, if left unchanged, would eventually become subject to the Cadillac tax."

Methods for Reducing the Tax

​Schillinger noted that there are many possible ways to reduce aggregate group health plan costs to avoid the Cadillac tax, such as by scaling back major medical coverage, subject to the ACA's limitations (those limitations prohibit annual and lifetime dollar limits on essential health benefits) and to the employer mandate, which dictates that coverage must be of minimum value to avoid an affordability penalty.

Other ways include:

  • Doing away with or reducing pretax employer and employee health savings account (HSA) contributions, which are also taken into account for the Cadillac tax. Employees could instead make payroll contributions to HSAs on an after-tax basis and then deduct these contributions on their income tax returns.
  • Eliminating health flexible spending accounts (FSAs), where money can be placed into a tax-free account for out-of-pocket health care costs, or reducing the level of permitted health FSA contributions and eliminating health reimbursement arrangements (HRAs).

Many critics and observers of the law "believe that raising deductibles will be the primary way employers adjust their plans to avoid the tax," said Arthur Tacchino, J.D., principal and chief innovation officer with compliance software firm SyncStream Solutions, headquartered in Baton Rouge, La.

Some of these choices, such as limitations on HSA contributions or elimination of HRAs "may run counterproductive to current strategies being put forth to reduce the costs of health care," Asensio noted.

He suggested focusing on pharmacy benefits to control health care costs. Strategies include everything from reducing the list of covered medications, adding quantity limits covered over a certain period of time and providing more oversight on brand name usage, to offering lower co-payments if members fill their prescriptions at a preferred pharmacy inside the network.

Repeal Efforts Continue

Strong bipartisan sentiment to repeal the tax continues, and there have been several bills in both houses of Congress and on both sides of the aisle to permanently repeal the tax, Wojcik noted.

While these efforts were sidelined by the failed efforts to repeal and replace major parts of the ACA, which included provisions to delay the tax to 2026, Wojcik expressed hope that Congress would repeal the excise tax in a stand-alone bill or as part of other legislation.

Said Birbal: "SHRM has long supported the repeal of the Cadillac tax and will continue to advocate in support of bipartisan, bicameral legislative proposals that have been introduced to repeal the tax."

This was the third in a series of articles on the ACA. The first installment examined the Form 1095-C. The second installment analyzed employers' annual decision of whether to pay or play.

 

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