How Many Employers Could be Affected by the Cadillac Plan Tax?

Originally posted by Gary Claxton and Larry Levitt on August 25, 2015 on kff.org.

As fall approaches, we can expect to hear more about how employers are adapting their health plans for 2016 open enrollments. One topic likely to garner a good deal of attention is how the Affordable Care Act’s high-cost plan tax (HCPT), sometimes called the “Cadillac plan” tax, is affecting employer decisions about their health benefits. The tax takes effect in 2018.

The potential of facing an HCPT assessment as soon as 2018 is encouraging employers to assess their current health benefits and consider cost reductions to avoid triggering the tax. Some employers announced that they made changes in 2014 in anticipation of the HCPT, and more are likely to do so as the implementation date gets closer. By making modifications now, employers can phase-in changes to avoid a bigger disruption later on. Some of the things that employers can do to reduce costs under the tax include:

  • Increasing deductibles and other cost sharing;
  • Eliminating covered services;
  • Capping or eliminating tax-preferred savings accounts like Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), or Health Reimbursement Arrangements (HRAs);
  • Eliminating higher-cost health insurance options;
  • Using less expensive (often narrower) provider networks; or
  • Offering benefits through a private exchange (which can use all of these tools to cap the value of plan choices to stay under the thresholds).

For the most part these changes will result in employees paying for a greater share of their health care out-of-pocket.

In addition to raising revenue to fund the cost of coverage expansion under the ACA, the HCPT was intended to discourage employers from offering overly-generous benefit plans and help to contain health care spending. Health benefits offered through work are not taxed like other compensation, with the result that employees may receive tax benefits worth thousands of dollars if they get their health insurance at work. Economists have long argued that providing such tax benefits without a limit encourages employers to offer more generous benefit plans than they otherwise would because employees prefer to receive additional benefits (which are not taxed) in lieu of wages (which are). Employees with generous plans use more health care because they face fewer out-of-pocket costs, and that contributes to the growth in health care costs.

The HCPT taxes plans that exceed certain cost thresholds beginning in 2018. The 2018 thresholds are $10,200 for self-only (single) coverage and $27,500 for other than self-only coverage, and after that they generally increase annually with inflation. The amount of the tax is 40 percent of the difference between the total cost of health benefits for an employee in a year and the threshold amount for that year.

While the HCPT is often described as a tax on generous health insurance plans, it actually is calculated with respect to each employee based on the combination of health benefits received by that employee, and can be different for different employees at the same employer and even for different employees enrolled in the same health insurance plan. While final regulations have not yet been issued, the cost for each employee generally will include:

  • The average cost for the health insurance plan (whether insured or self-funded);
  • Employer contributions to an (HSA), Archer medical spending account or HRA;
  • Contributions (including employee-elected payroll deductions and non-elective employer contributions) to an FSA;
  • The value of coverage in certain on-site medical clinics; and
  • The cost for certain limited-benefit plans if they are provided on a tax-preferred basis.

The inclusion of FSAs here is important. FSAs generally are structured to allow employees the opportunity to divert some of their pay to pretax health benefits, which means that they can avoid payroll and income taxes on money they expect to use for health care. Employees often are permitted to elect any amount of contribution up to a cap (which is $2,550 in 2015), which means that the amount of benefits for an employee subject to the HCPT in a year could vary depending on their FSA election.

The amount and structure of the HCPT provide a strong incentive for employers to avoid hitting the thresholds. The tax rate of 40 percent is high relative to the tax that many employees would pay if the benefits were merely taxed like other compensation, and the ACA does not allow the taxpayers (e.g., the employer) to deduct the tax as a cost of doing business, which can significantly increase the tax incidence for for-profit companies. Further, to avoid the perception that this was a new tax on employees, the HCPT was structured as a tax on the service providers of the health benefit plans providing benefits an employee: insurers in the case of insured health benefit plans; employers in the case of HSAs and Archer MSAs; and the person that administers the benefits, such as third party administrators, in the case of other health benefits. While it is generally expected that insurers and service providers will pass the cost of the tax back to the employer, doing so may not always be straightforward. Because there can be numerous service providers with respect to an employee, the excess amount must be allocated across providers. In some cases, it may not be possible to know whether or not the benefits provided to an employee will exceed the threshold amount until after the end of a year (for example, in the case of an experience-rated health insurance plan), which means that service providers may need to bill the employer retroactively for the cost of the tax they must pay. Amounts that employers provide to reimburse service providers for the HCPT create taxable income for the service provider, which the parties will want to account for in the transaction. The IRS has requested comments on potential methods for determining tax liability among benefit administrators, including a way that could assign the responsibility to the employer in cases other that insured benefit plans. The proposed approach could simplify administration of the tax.

To read the full story go to the Kaiser Family Foundation website at kff.org.


'Cadillac' Tax Could Diminish Union Health Plans

Originally posted by Bob Herman on March 3, 2015 on businessinsider.com.

Health plans obtained through union collective bargaining agreements often include much more generous benefits than other employer-sponsored plans. But such benefits are likely to be pared down as the Affordable Care Act's excise tax nears, a new study in Health Affairs contends.

That excise tax, often called the “Cadillac” tax, will go into effect Jan. 1, 2018. A 40% tax will be levied on every dollar of total premiums paid above $10,200 for individual health plans and $27,500 for family plans.

Policymakers included the Cadillac tax in the ACA as a way to raise revenue to fund the law. The Congressional Budget Office estimates it will bring in $120 billion between 2018 and 2024. Most of that will come from higher taxes on employees' taxable wages instead of the tax-exempt insurance benefits.

But the tax also was viewed as a way to reduce the number of health plans that have little cost-sharing and premium contributions, which some argue contribute to the overuse of healthcare. President Barack Obama has been quoted as saying the excise tax will discourage “these really fancy plans that end up driving up costs.” Lavish executive-level health plans and collegiate benefit packages, like Harvard University's, have been oft-cited targets. However, many collectively bargained policies fall into the Cadillac bracket as well.

The Health Affairs study, published Monday, sought specifics about what kind of health benefit packages unions provide for employees. People with union plans have lesser out-of-pocket obligations and don't pay as much per month toward their premium as others with employer-based insurance, but the surprise was “the magnitude of the differences for certain things,” said Jon Gabel, a healthcare fellow at NORC at the University of Chicago and one of the study's authors.

For instance, families in collectively bargained plans paid about $828 per year toward their premium, or about $69 per month, according to the study's surveyed data. That compared to $4,565 for the average employer-sponsored family plan, or about $380 per month, according to 2013 data from the Kaiser Family Foundation.

Cost-sharing requirements also were less onerous in union health plans, the study found. The average annual in-network deductible for an individual in a collectively bargained plan was $203. The average deductible at other employer-based plans was almost six times higher at $1,135.

Although the federal government is considering some flexibility for “high risk” unionized occupations such as miners and construction workers, many employers are looking to get ahead of the excise tax by slimming down benefits.

“For those who are fortunate to have a Cadillac plan right now, it's probably not going to be so comprehensive in the future,” Mr. Gabel said. However, he said, reduced benefits should lead to increased wages to offset higher cost-sharing.

Tom Leibfried, a health care lobbyist for the AFL-CIO, a federation of 56 unions, calls the Cadillac tax “a misnomer” because union plans apply to middle-class Americans with modest wages. The issue should not be about the generosity of health coverage, but rather whether the coverage is appropriate for people based on the health care costs in their geography, he said.

“Trying to control utilization in that way really does amount to a cost-shift,” Mr. Leibfried said. “This is really a middle-class problem.”

Higher compensation supplanting lost benefits is not a sure thing either, Mr. Leibfried said. Indeed, wages and salaries have been mostly stagnant the past decade, barely edging out inflation even as health benefits shrink.


The fast-fading days of retiree health coverage

Employers are trying out all kinds of approaches to better manage retiree health costs, though the day will eventually come when just a handful will offer such benefits to the over-65 set.

That’s the conclusion the Kaiser Family Foundation reached in what is essentially a status report titled “Retiree Health Benefits at the Crossroads.”

Companies once offered retiree benefits as a way of retaining workers but have been chipping away at them for years. One of the more recent companies to make the move was Northrop Grumman, which earlier this month told employees it would use a broker to help them choose from a variety of Medicare supplemental options. 

That's just one of a number of avenues employers are taking.

As Kaiser noted, “several major trends stand out in particular, namely, growing interest in shifting to a defined contribution approach and in facilitating access to non-group coverage for Medicare-eligible retirees, and consideration by employers of using new federal/state marketplaces as a possible pathway to non-group coverage for their pre-65 retiree population.”

The report noted that the number of companies offering coverage of any type to retirees has dwindled, from 66 percent in 1988 to 28 percent last year.

It said even employers that plan to continue providing coverage of retirees are exploring ways to reduce the corporate dollars dedicated to the task.

Though fewer in number, retiree health benefit plans remain an important source of supplemental coverage for roughly 15 million Medicare beneficiaries and a primary source of coverage for more than two million pre-65 retirees in the public and private sectors, Kaiser noted.

The landmark changes brought to health care by the Patient Protection and Affordable Care Act, and the constant revisions of the law, have left employers off balance when it comes to cost-containment measures, Kaiser said. But there are other factors at play that further complicate planning.

For instance, Kaiser says, a consistent push to boost the Medicare eligibility age to 67 could result in companies having to cover their older workers for another two years. That can add up for those with large and experienced workforces.

“In an earlier study, Kaiser Family Foundation and Actuarial Research Corporation modeled the effects of raising the Medicare eligibility in a single year (2014), finding that employer retiree plan costs were estimated to increase by $4.5 billion in 2014 if the Medicare eligibility age is raised to 67. In addition, public and private employers offering retiree health benefits would be required to account for the higher costs in their financial statements as soon as the change is enacted,” Kaiser said in its report.

Options identified by Kaiser for reducing the cost of pre-65 retiree health coverage include “strategies to avoid or minimize the impact of the excise tax (a.k.a. the Cadillac tax) on high-cost plans included in the ACA. Although the tax applies to plans for active employees, as well as pre-65 and Medicare-eligible retirees, there is a focus on pre-65 coverage because of its relatively higher cost. And even though the tax takes effect under the PPACA in 2018, employers must begin to account for any material impact the tax may have on their retiree health programs in today’s financial statements.”

Kaiser also said shifting pre-65 retirees to private and public exchanges, moving to a defined contribution plan, and changing plan design to shift costs to employees are all receiving more attention.

Also, employers are increasingly choosing to trim the cost of drug programs away from plans that provide coverage to Medicare-eligible retirees.

Kaiser concludes that company-sponsored health coverage for retirees will inevitably recede from the benefits landscape.

“Over the next few decades, these trends suggest that employer-sponsored supplemental coverage is likely to be structured differently and play a smaller macro role in retirement security than it has in the past and than it does today.  Relatively fewer workers will have such coverage available in the future, to be sure.”

 

 

Originally posted April 14, 2014 by Dan Cook on www.benefitspro.com.


Private Exchanges May Offer Shelter from Cadillac Tax

Originally posted April 03, 2014 by Allen Greenberg on https://www.benefitspro.com

COLORADO SPRINGS, Colo. – Avoiding, or at least putting off, the so-called Cadillac tax in the Patient Protection and Affordable Care Act is on a lot of employers’ minds.

Speaking Wednesday at the 2014 Benefits Selling Expo, William Stuart, a lead consultant at Wellesley, Mass.-based Harvard Pilgrim Health Care, suggested that one of the best ways to do so is by moving employees to one of the burgeoning number of private insurance exchanges.

That alone won’t do the trick, he said, but shifting to an exchange can help “reset the premium base” and “bend the cost curve” – the two things necessary if employers hope to postpone the pain of the excise tax.

The tax – meant to raise money to offset the government’s subsidies to lower-income individuals and families buying insurance under the PPACA – goes into effect in 2018. It is a 40-percent penalty on premium dollars above $10,200 for individuals and $27,500 for families.

This tax is probably not going to go away,” Stuart said. “It might. But we can’t base our strategy on what may or may not happen.”

The premium levels at which the tax is calculated, he said, will include medical premiums, health flexible spending arrangement elections, health reimbursement arrangements and employer contribution to HSAs. “In other words,” he said, “the law has taken some tools (for reducing or putting off the tax) off the table.”

But options do exist, he said, and the sooner employers act, the better, meaning the later the tax will impact them.

Stuart said brokers should consider encouraging their clients to establish wellness programs. The return on investment is often difficult to gauge on wellness, he noted, but a healthier workforce tends to mean fewer health problems, which helps bend the cost curve.

A narrower provider network can also help, he said, especially one that might exclude teaching hospitals where costs tend to be higher.

Stuart acknowledged people prefer all kinds of choices in which doctors they see or which hospital they might use. But that fades once they realize they can save up to 25 percent of their costs.

Health savings accounts, meanwhile, are another option for employers looking to reduce costs, because they encourage employees to be more careful with their health care dollars.

In the end, however, private exchanges may yield the most dramatic results, Stuart said.

Among their advantages: an array of health plans offering in some cases as much as a 40-percent spread in premium costs.

Once in an exchange, the employee mindset shifts to saving money, rather than simply buying without shopping. People, Stuart said, tend to buy down in an exchange once they realize they might have been over-insured. This, too, helps reset the base.

Aon Hewitt, the large employee benefits consultancy, which last year launched its Aon Hewitt Corporate Health Exchange, recently said the average cost increase for three fully insured large companies in its exchange was 5.1 percent.

By comparison, average cost increases for large U.S. employers are projected to be between 6 and 7 percent in 2014, according to Aon Hewitt’s annual cost trend data report.


CBO lowers health reform 'Cadillac' tax, employer penalty estimates

Original article from businessinsurance.com

By Matt Dunning

The Congressional Budget Office has nearly halved the revenue it expects the federal government to collect from employers through the health care reform law's so-called “Cadillac tax.”

Excise taxes on employers' high-premium insurance plans are expected to generate about $80 billion over the next 10 years, the CBO said Tuesday in a report updating its federal budget projections for fiscal years 2013-2023.

The revised estimate is a nearly 42% decrease from the $137 billion in excise tax revenue that the CBO projected in February.

Beginning in 2018 under the Patient Protection and Affordable Care Act, the Internal Revenue Service will impose a 40% excise tax on employer-sponsored health benefits that cost more than $10,200 for individual coverage and $27,500 for family coverage.

In its report, the CBO said it reduced its estimate on excise tax revenue after examining recent cost trends in employer-sponsored health benefits.

“As a result, we now expect fewer employment-based plans to be subject to the excise tax on high-premium insurance plans and, consequently, have reduced our estimate of revenues from that tax by $58 billion over the 10-year period,” according to the agency's report.

Employer mandate

The CBO also lowered its projections for revenue collected through penalties included in the health care reform law's employer mandate. Under the law, employers with more than 50 full-time workers — defined as employees working 30 hours or more per week — will be required to offer qualified, affordable group health benefit plans to their employees beginning in 2014.

Failure to meet those requirements will result in a $2,000-per-employee tax penalty if an employer's health care plans are not offered to at least 95% of full-time employees and just one full-time employee uses a premium subsidy to purchase coverage offered through a state- or federally-facilitated health insurance exchange.

The CBO projects the federal government will collect about $140 billion from the employer mandate penalties for the 10-year period, down from the $150 billion it projected in February.

The agency said the revision is due mainly to refinements in the IRS' calculation of households' estimated marginal tax rates, which led to a slight increase in the number of the individuals predicted to be enrolled in an employment-based health plan.

However, the CBO also said the projected net decline in the number of lives enrolled in employer-sponsored plans largely offset those gains.

“That slight increase in projected employment-based coverage increases the estimated loss of government revenues from the exclusion from taxation of employers' payments of health insurance premiums for their employees,” the CBO said in the report.