Employers scramble to avoid Cadillac tax in 2020

Many employers have begun reducing benefits and/or shifting costs now in order to avoid the upcoming excise tax on high-cost health plans, according to speakers at a recent policy forum held by the Employee Benefit Research Institute (EBRI). As per section 9001(a) of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), the excise, or “Cadillac” tax, is a 40 percent tax on the total cost of health coverage, and it includes costs borne by both employers and employees. The so-called cost of coverage includes contributions to flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), and health savings accounts (HSAs), for which worker contributions are made on a pre-tax basis. Also included is coverage for on-site medical clinics, which could create a disincentive for employers who currently have on-site clinics to keep them open. The implementation of the tax, which was delayed from 2018 to 2020, is also predicted by some experts to provide an incentive for employers to switch from offering HSAs with pre-tax contributions to HSAs with after-tax contributions.

How Cadillac tax is supposed to work. According to Paul Fronstin, director, EBRI Health Research and Education Program, who spoke at the forum, proponents of the Cadillac tax say that it will accomplish two goals, by mitigating the rising cost of health care and by generating tax revenue that will pay for other ACA provisions. It is assumed, Fronstin said, that the tax will prompt employers to reduce the comprehensiveness of health benefits, which, in turn, is expected to lead to reduced health insurance premiums and health care services use.

Fronstin added that another underlying assumption driving the Cadillac tax is that “workers over-insure because they prefer nontaxable premiums and health coverage to using taxable wages for out-of-pocket spending on health care services.” Because the tax is aimed at reducing the comprehensiveness of health care coverage, workers will then be forced to use after-tax dollars for more services. This is expected to reduce the use of services, thereby reducing health care costs and premiums, and, in turn, increasing worker wages. Fronstin pointed out, however, that no clear evidence exists that shows decreasing health care costs will really result in higher wages.

In fact, Fronstin said that EBRI research has shown that increased cost sharing via consumer-driven health plans (CDHPs) not only reduces outpatient visits and prescription drug refills, it also reduces recommended cancer screenings and medication adherence. Evidence also exists, he said, showing CDHPs contribute to an increase in emergency department visits.

Why some want to repeal tax. Speaking at the EBRI forum, Katy Spangler, senior vice president of health policy for the American Benefits Council (ABC), a trade association for mostly large employers, said that ABC is fighting to repeal the tax for a number of reasons. These include ABC’s assertion that the tax will eventually affect all 175 million Americans with employer-sponsored health coverage, since the threshold values for coverage that triggers the tax are tied to consumer inflation. She also criticized the Cadillac tax for forcing employers to shift costs onto employees in the form of higher deductibles and copays, and added that the tax applies to benefits such as wellness plans that help keep employees health and manage costs.

Approaches under consideration. Two speakers at the EBRI forum described approaches some large employers are starting to take in anticipation of the 2020 implementation of the Cadillac tax. Kimberly Young, head of employee benefits at Booz Allen Hamilton, said that when the company evaluated its health insurance programs, it discovered that it had “a completely platinum program design” and would most likely be subject to the tax. It was also found that a small share of Booz Allen Hamilton’s workforce accounted for a high share of health costs. Because of that, Booz Allen Hamilton has made a number of changes, including launching a wellness program with maternity awareness campaigns, standing and treadmill desks, and local fitness classes. The company also instituted the implementation of “Teladoc” telephone access for care coordination and prescriptions for non-emergency care, since many workers would not go to doctors’ offices during work hours because of client responsibilities. Young added that when the company expanded financial incentives in 2016 for wellness programs, there was a sharp increase in participation. Three thousand employees participated in 2015 and over 10,000 participated in 2016.

Richard Stover, principal and consulting actuary for Xerox HR Services’ Knowledge Resource Center, reported that the employers he is currently working with are not seriously considering the two most extreme choices employers have for avoiding the Cadillc tax, which are fully absorbing the costs of the tax or dropping health benefits entirely. The only viable options left, he said, are improving plan efficiency, shifting costs, and eliminating ancillary health care benefits.

Stover noted that 60 percent of employers surveyed by Xerox HR Services did not know what impact their wellness programs were having on employee health, but, of those that did measure the impact of such programs, 69 percent saw a reduction of two percent or more in health care cost trends. Even that small reduction could have an impact on the amount of excise tax an employer might have to pay, Stiver advised.

Stover also said that one approach most employers seem to taking in response to the Cadillac tax is shifting costs onto employees. Higher deductibles and cost sharing are the easiest ways to create a significant reduction in health care costs, he added.

Stover predicted that, “as the law is currently structured, FSAs have a very short lifetime.” This is because FSAs are particularly likely to trigger Cadillac tax provisions, meaning that employers have an incentive to eliminate them.

There is no effective way, according to Stover, for employers to do away with health benefits entirely and replace those with higher compensation, without the higher compensation becoming taxable. He reported that most employers he works with are not actively considering the end of their sponsorship of health care plans.

Stover also said that employers are eager to avoid the tax, not just because of the cost, but because of the regulatory burden. Although final IRS regulations on the excise tax have not yet been issued, it can be assumed that determining and calculating the tax, along with allocating it to coverage provider to make payments could be complex. Stover added, “Even if you trigger the tax to a small amount, that could generate a significant amount of additional work and effort.”

SOURCE: EBRI Notes, “The Excise Tax on High-cost Health Plans,” March 2016, www.ebri.org.

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