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‘What if?’ scenarios can help avoid worst-case situations
On Jan. 1, 2020, U.S. employers will face a nondeductible 40 percent excise tax on high-cost health plans (popularly known as the Cadillac tax). Despite the length of time before the tax takes effect, it has garnered more than its share of attention.
“Even though, the excise tax is the last part of the Affordable Care Act that employers have to comply with, it is the No. 1 concern and has been for some time,” said Tracy Watts, national health care reform leader with Mercer. The question is, when do employers have to translate this concern about the tax into concrete actions?
The 40 percent will be levied on the value of health insurance benefits above a certain amount—$10,200 for single coverage and $27,500 for family coverage, indexed annually for inflation. The levy is expected to particularly hit hard plans that are costly because they are tailored for employees in high-risk professions or for employers with a large proportion of older employees. Self-insured employers will have to pay the tax themselves. Insurance carriers will pay the tax on behalf of employers with fully insured plans. However, carriers almost certainly will pass along the cost of the tax to employers.
Questions Remain: ‘What If?’
Although the tax is on companies’ radar screens, “few employers have taken a close look at it and rarely have those employers taken any action as a result,” said Tim Nimmer, chief health actuary with Aon Hewitt. “A lot of that has to do with the fact that there are still several unknowns; we do not have a comprehensive set of rules to work with.” (Conflicting views over which health benefits are likely to be included in the excise tax calculation are discussed in the
SHRM Online article
Big Employers Foresee Excise Tax Hit.)
Until guidance is forthcoming, employers will have to settle for calculating any projected tax based on various scenarios. A baseline calculation might focus solely on the types of coverage almost certain to be included in excise tax calculations, like major medical coverage. From there, employers can include the value of more types of benefits to generate some “What if?” scenarios.
For example, this calculation can answer questions such as: What if the guidance includes employer and employee contributions to flexible spending accounts (FSAs) and health savings accounts (HSAs), or the value of care provided by onsite medical clinics? By including every benefit that could reasonably be included in the calculation, employers can develop a sense of what a worst-case scenario might look like.
If employers do not have the tools to run these analyses themselves, they can ask a broker, plan administrator or consultant for help. There are also free calculators available online that can do basic calculations based on current costs and benefits. The Alliance has
one such calculator.
When and how to take action using this information will depend on an organization’s circumstances. In some cases, employers in highly competitive industries like technology may find themselves with few options if they want to be able to attract and retain highly skilled workers with a rich benefit program. “Those industries are looking at this much more closely because the excise tax could have a more dramatic impact on those plans,” said Nimmer. Such companies may simply have to pay the tax to remain competitive, unless they find new ways to enhance their total rewards offering.
Tracking the Cost Trend
No matter what benefits are ultimately included in the tax calculation, how quickly an employer could reach the tax thresholds will largely depend on that employer’s benefit costs trend. The more health benefit costs increase each year, the faster and more likely it is that the employer could reach the tax thresholds in subsequent years.
“Much of this depends upon size,” said Mark Bagnall, president of Bagnall Co. in Phoenix. “The larger the employer, the easier it is to track and project.” He suggested that employers use their current cost trend rate to project when and if their health plans will be subject to the excise tax. “It is a good idea to use benchmarking to consider future plan design changes that can mediate any trend increases,” he said.
Use your plan’s current cost trend rate to project when and if it will be subject to the excise tax.
In the current climate, health care cost trend rates themselves can be wild cards, with many employers seeing historically low cost increases. Since it is difficult for an employer to project whether those lows will continue for the next three years, it makes sense to project future excise tax exposure using a few trend rate scenarios. This will give employers a sense of when the trend rate becomes high enough to increase the risk of hitting the tax threshold.
Using all of this information, the employer can rethink and recalculate its risk each year. This is a key point to remember. With so many variables at play, an employer is unlikely to get a definitive yes or no answer to the excise tax question right now. Rather, the focus in 2015 will be to gauge risk and to determine whether the risk is large enough a) to keep tracking, and b) to take action and if so, when and what kind.
Actions to Take, and When
The actions an employer can take to avoid the excise tax will depend on what counts as a benefit for the purpose of calculating the tax. HSAs could be an important tool to help employers neutralize any health plan design changes. For example, employers could shift to a higher deductible health plan to reduce the cost of the plan, then make up for that change by increasing HSA contributions. However, if HSA contributions are included in the tax calculation, that strategy will not solve the problem.
If an employer expects current health benefits to reach the tax threshold, it may want to start making changes over time to make them less jarring to employees. For example, employers can:
Whatever employers decide to do, the important thing is to start thinking about the tax and what to do to avoid it. “Having this conversation now rather than when they are under time pressure when the law takes effect is the most prudent action any employers can take,” said Nimmer.
According to October 2014 findings from an Aon Hewitt pulse survey of 317 U.S. employers, 40 percent expect the excise tax to affect at least one of their current health plans and 14 percent expect it to immediately impact the majority of their current health benefit plans. Of those employers that have determined the impact, 62 percent say they are making significant changes to their health plans, including:
Due to medical costs expected to rise more rapidly than the tax thresholds in the future, 68 percent of the surveyed employers expect the excise tax to affect at least one or the majority of their current health plans by 2023. When asked about future actions they are likely to consider in order to minimize their exposure to the tax, the vast majority (79 percent) expect to reduce plan design richness through higher out-of-pocket member share. More than 40 percent of employers say they are likely or highly likely to adopt cost control strategies, such as
reference-based pricing and narrow provider networks.
Other strategies employers are likely or highly likely to consider include:
Joanne Sammer is a New Jersey-based business and financial writer.
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