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Employers will be ensnared in the tax on "high value" plans unless they take action
Update: The Affordable Care Act’s 40 percent excise tax on high-value health plans is now slated to take effect beginning in 2020. The levy—popularly known as the “Cadillac tax”— received a reprieve provided by the Consolidated Appropriations of 2016, enacted in December 2015.
Despite continuing efforts to rein in rising health care costs, roughly half of large U.S. employers will begin to hit the thresholds triggering the Affordable Care Act’s (ACA’s) excise tax on high-value plans [now delayed to 2020], and the percentage is expected to rise significantly in subsequent years, according to an analysis by consultancy Towers Watson.
The excise or “Cadillac” tax is a 40 percent tax on the value of all participant-elected health care benefits that exceed certain dollar thresholds: $10,200 for individual coverage and $27,500 for family coverage, but the actual thresholds will be adjusted based on inflation between 2010 (the year of the ACA’s enactment) and 2018 [now 2020] and annually thereafter.
The nondeductible excise tax must be paid by the employer, although some employers are contemplating charging the tax back to plan participants.
The analysis, based on a study of employers with 5,000 or more employees, revealed that:
• 48 percent of large employer plans are likely to trigger the tax in 2018.
• 82 percent of large employer plans could cross the threshold by 2023.
• The percentage of large employers estimated to exceed the threshold increases by about 10 percent for those offering self-insured dental and vision benefits in addition to medical and prescription drug benefits, resulting in 58 percent hitting the excise tax in 2018 when these elements are added.
A 2014 survey by Towers Watson found that 73 percent of companies are very or somewhat concerned they will trigger the tax, and 62 percent say it will have a moderate or greater impact on their health care strategy in 2015 and 2016.
“Even with conservative projections, the impact of the excise tax on employers is substantial, yet it is often not fully understood,” said Trevis Parson, chief health actuary for Towers Watson. “Each company will need to look at the tax carefully based on its own programs, and we expect a great deal of variation by industry.”
“For most employers, the excise tax will be a question of when, not if, unless action is taken,” added Randall Abbott, a senior health strategist at Towers Watson. “The ACA has put a timer on cost management for many employers and unless one cuts benefits or improves program performance there’s a real risk of triggering it.”
Abbott pointed to key factors he said are not well known about the excise tax:
• The tax is based on both employer and employee premium contributions, not just what the employer pays for coverage.
• Along with employer contributions, employee contributions made through a salary-deduction plan to an FSA or an HSA are included when calculating the aggregate value of health benefits. (This has also been stated in Forbes and elsewhere, but Fidelity Investments indicated additional agency clarification is being awaited as to whether employee HSA contributions, for instance, will be included in the excise tax calculation.)
“When all the plans and programs included in the excise tax definition are rolled up, even a Chevy may be affected by the Cadillac Tax,” said Abbott. He reiterated that the tax is not determined by the value of the medical plan but rather the value of all affected health benefits elected by an employee or family.
Other sources, including the journal Health Affairs, have reported that separate, stand-alone dental and vision plans will not be subject to the excise tax. Moreover, an analysis by HR consultancy Mercer also states that bundled dental and vision coverage will be included under the excise tax but stand-alone dental and vision plans—elected separately by employees from the medical plan and with separate premium payments—will not be. Future regulations may clarify under what conditions nonintegrated health benefits may be excluded from excise tax calculations.
An October 2014 final rule on “excepted benefits” not subject to coverage requirements under the ACA’s insurance market reforms (for instance, no annual and lifetime dollar limits on benefits; employees’ children must remain eligible until age 26) exempts stand-alone dental and vision plans from those requirements. However, the final rule does not address benefits to be excepted from the 40 percent excise tax.
Annual increases in the excise tax thresholds will not be based on health care cost inflation, but instead on the Consumer Price Index (CPI) plus 1 percent in 2018 and 2019, and CPI only thereafter. CPI was 1.5 percent for 2013—considerably less than the 4 percent annual health care cost increase that better-performing employer health plans are expected to achieve in 2015 after plan changes. As a result, a growing number of plans will exceed the excise tax threshold if health care inflation continues to outpace the general rate of inflation.
All of which highlights “the need for companies to improve their health program performance to achieve or maintain a high-performance health plan,” said Abbott. “The good news is that many have already taken steps and with proper plan management the impact of the tax can be significantly mitigated.”
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.
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