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It’s Important to Prepare for the ACA Cadillac Tax Hike Now
Even Though It’s Been Delayed for Two Years
Presentation Summary Part 2:
Recently two employee benefits experts presented to a couple hundred Northwest employers featuring ERISA attorney Iris Tilley from Barran Liebman, and Sarah Friend, Employee Benefits Consultant at The Partners Group. Iris Tilley advises employers in all aspects of employee benefits. She practices law in Oregon and Washington and often speaks and writes about employee benefits topics, including health care reform. Sarah Friend also regularly presents on the Affordable Care Act, having worked in the employee benefits business for over twenty years.
Best Not to Overreact
The Cadillac Tax is still a hot topic even though it’s been delayed two more years. We can’t presume it won’t go forward, and now is the time to plan and take advantage of this delay. Employers are already scaling back their health plans to avoid the tax, however it’s important not to overreact by pulling back too much… 17% of employers made changes in 2015, and quite a few more, 40%, are seriously considering making changes in 2016.*
One of the Most Significant Revenue Generators of the ACA
Many of the ACA revenue generators are in essence based on penalties, and the Cadillac Tax is one of the most significant revenue provisions to fund the ACA. The $87 billion dollars projected from this tax revenue will likely be reduced to close to nothing as long as employers can avoid it. Employers are already paying so much for benefits, that adding in this extra payment is really not viable for many. Consequently The Partners Group is seeing many of our employer customers readjusting how they’re offering their health benefits in order to control costs and avoid the tax. 24% of our customers and prospects in Washington and Oregon were feeling very concerned about the affects of the Cadillac tax on their employee health plan offering in spite of the delay; 50% were somewhat concerned; and 22% were not very concerned, according to a recent poll conducted by The Partners Group in February, 2016**. Many clients of The Partners Group are beginning to make small modifications in preparation for the enforcement of the Cadillac tax, including altering bargaining agreements to allow for changes to the contract based on final regulations.
Adequately Prepare for this Looming Tax
This article is designed to help keep employers informed and up-to-date in order to adequately prepare for this looming tax, including:
- What does the Cadillac Tax really mean?
- What employers should be thinking about now to help control this cost in the future
- The future of the ACA
- Leading presidential candidate predictions– What they would do
Cadillac Excise Tax—Effective
The Big One! One of the most significant revenue provisions to fund the ACA
The original intent of the tax was to discourage companies from offering rich health plans instead of higher wages. The tax ultimately puts a cap on the amount of tax free benefits, and imposes a limit on the value of “tax free” benefits that employees can receive through their employer sponsored health plans. The “tax free” classification of employee benefits has been one of those areas that has been getting a lot of discussion in the last few years. According to Iris Tilley, ERISA Attorney at Barran Liebman, “I think the IRS looks at employee benefits and health care as one of those things that snuck through over the course of time.”
Let’s look at exactly what the Cadillac Tax means, and why it has been delayed from the extended effective date of 2018 to 2020. It’s certainly still on the horizon for planning purposes. Especially for those of you who have collective bargaining plans, you are all probably thinking about this even more as you’re putting agreements into place that stand until 2019 or 2020, for a prolonged collective bargaining agreement.
- Part of the 2010 ACA legislation
- Originally intended to take effect in 2013
- Immediately delayed until 2018 following the ACA’s enactment
- Now it’s extended to 2020 based on the 2016 federal budget bill
- Both parties are now calling for its repeal
There is hope for the future that the Cadillac Tax may disappear, however it is not a sure thing. As you may have noticed by following the ACA, there have been delays on every single item that was supposed to have gone into effect. According to Tilley “Based on the reading I’ve done, I believe it was delayed in order to avoid turning it into a big fight. There is no doubt the approved delay was to get through the 2016 elections without a stalemate. Basically the issue is being tabled for discussion until later on, and again we’re keeping our fingers crossed that it will ultimately disappear.”
The Cadillac Tax = 40% excise tax on high-cost health coverage.
If the cost of coverage exceeds the amount set by this tax , you have a 40% tax on the premium that is in between what the Cadillac Tax says the top amount should be, and what it actually cost. Thus it’s not a 40% tax on the full amount. It is a 40% tax on the difference between what the Cadillac Tax thinks you should be paying and what you’re actually paying.
The Cadillac tax applies generally to coverage under a group health plan excluding stand alone vision and dental programs, and those programs paid exclusively with after-tax dollars by the employee
The tricky thing is, as we’ll be discussing further down, the amount you use to determine the Cadillac Tax includes everything imaginable. It applies to generally the entire coverage under a group health plan, excluding standalone vision and dental programs. This is definitely an annoying piece of how it’s set up right now.
“Don’t assume the Cadillac Tax will be repealed – start monitoring and planning NOW to take advantage of the two-year delay”
There is no exception for Grandfathered group health plans
There’s also no exception for grandfathered group health plan coverage, however very few grandfathered plans exist out on the marketplace right now.
The Cadillac Tax was intended to be a significant funding mechanism for the ACA
Other than the Medicare tax, which we don’t really get into here, it was really designed to be the significant funding mechanism. Consequently if it disappears entirely, that would have a pretty big impact on the ACA’s overall fiscal viability moving forward.
Cadillac Excise Tax—Considerations and Strategies:
We’re really trying to balance all the “what if’s”, and one is the threshold amounts of $10,200 for individuals and $27,500 for families. We have to use those amounts in our examples here because they are the only numbers we have. However we are all expecting those thresholds will be raised if the Cadillac Tax moves forward. That increase is going to represent basically 10 years of health care inflation, although we don’t know what those numbers are going to be. As a result we’re just balancing that, since we can’t presume the Cadillac Tax is not going to go forward. We have to start making plans without being so reactive that we strip down plans now based on arbitrarily low thresholds that were included in the original law.
Employers need to continue to monitor their plan design and value very closely. This includes monitoring against those original thresholds, and analyzing where there are risks of potentially exceeding that Cadillac Tax today. Hopefully there will be some additional breathing room once those final thresholds are published.
– Maintain stand-alone vision and dental plans
Those groups who don’t have stand-alone vision and dental plans need to work towards unbundling vision and dental so that we can avoid at least the cost of vision and dental, which we know are smaller portions of the overall cost. Anything that we can strip out of that calculation will help an employer not exceed those Cadillac Tax thresholds. Thus really maintaining and creating stand-alone vision and dental plans if they are currently considered bundled with the medical plan.
– Consider changing voluntary benefits from pre-tax premium payment to post-tax (accident, critical illness, cancer policies)
The other consideration involves an employer who has any employee paid voluntary plans that would be allowed to be pre-taxed. Those plans typically include critical illness plans, cancer policies, and hospital indemnity policies. If we have those in place and employees are paying those premiums with pre-tax dollars, that is something that we really want to examine. The purpose is to help avoid, where we can, the cost of these types of coverage that are sending you over the threshold and triggering a tax.
– Manage FSA plan closely – many employers consider eliminating this option an easy fix if other applicable coverages are pushing the limit
We anticipate for many employers, let’s say the cost of all their coverage allows only a $1,000 gap between the value of their medical plans, and other plans that have to be included in that calculation and the threshold. Consequently if their medical FSA cap is $1,000, no employee would be allowed to contribute more to the medical FSA that would potentially trigger that threshold. Therefore if the Cadillac Tax moves forward, unfortunately for all of us who love those FSAs, they are going to be the one that is easiest to pull and change every year until at some point we may not see medical FSAs in the future.
– Reduce or eliminate employer contributions to HSA or HRA, again if that is potentially causing an employer to exceed that Cadillac Tax threshold.
– Don’t assume the Cadillac Tax will be repealed – start monitoring and planning NOW to take advantage of the two-year delay
Regardless of your political beliefs and what you believe the election might bring, don’t assume the Cadillac Tax will be repealed as you manage your plans, even though it has bipartisan support. Friend said “Over the last six years we have had many surprises come out of left field in spite of what we were anticipating was going to happen with the ACA. Now is the time to plan and take advantage of this two year delay. Work closely with your TPG employee benefits consultant and with legal advisors like Tilley to make sure that you understand as much as you can about the information that is available now. This will help you appropriately plan for 2020, especially for those groups who have collective bargaining agreements (CBAs) in place. Make sure you have language that will protect and provide the flexibility to react in the event that the tax does come to pass, and have CBAs that perhaps stretch over 2020.”
– Educate employees so they are in the loop
Just like all of you who are really interested in this topic, your employees are hearing about this in the news. Employers need to keep their employees informed about what this means, and the potential effects on their benefits.
– Identify potential strategies and give plenty of notice if a change will be made to avoid tax liability
– Communicate, communicate, communicate! Ask questions not just to your own employees, but also to your advisors. We have done a lot of modeling where employers current premiums are bumping up against the Cadillac Tax. This is interesting information, however since we expect the thresholds to increase, we’re trying to balance a lot of information and help employers avoid overreacting and pulling back on benefits immediately.
“Since we expect the thresholds to increase, we’re trying to balance a lot of information and help employers avoid overreacting and pulling back on benefits immediately.”
– Public support for the ACA has dipped
According to the most recent Kaiser Family Foundation Poll:
- 46% of Americans are viewing the law unfavorably
- 40% viewing it favorably
- In the middle are people who don’t have an opinion
– Increasing costs of exchange health coverage continue to frustrate individuals
A lot of people were initially thinking were going to potentially get really good rates for individual coverage on the exchange, and that hasn’t panned out as well as it should have.
– Some aspects of the ACA remain popular
- Ban on preexisting-condition exclusion
- Dependent coverage through age 26
The issue is that rates have not been coming out where individuals might expect them to be, and also this has been a huge administrative burden for employers. As a result, support for the ACA has been considerably dipping.
The Future of the ACA — Current Political Status
– House vote to repeal ACA
- The House has voted to repeal the ACA several times now, most recently on January 6th, 2016
- President Obama vetoed, and Republicans did not have sufficient votes to override the veto
Until there is a change to administration, we are going to see the ACA continue. Simply the fact that the ACA requirements have been rolled out over six years with many already in effect, it is incredibly difficult to fully repeal the ACA at this point.
- Alternatives to repeal
- Republican representatives have publically stated that the party needs to look at ACA replacements in the place of an appeal
- Some aspects of the law are popular
- Republican representatives have publically stated that the party needs to look at ACA replacements in the place of an appeal
- The rollout of ACA requirements was always designed to make it difficult do a straight repeal
Tilley said we either are going to potentially see an ACA replacement, or she anticipates if we have a change in administration from Democrat to Republican, we may also see no funds contributed to the ACA. Consequently the ACA continues to be in effect but there are no enforcement dollars behind it. This makes it really difficult for anyone to actually get in trouble for violating any provision of the ACA.
The Future of the ACA — Election
– Obama term to end January 20, 2017
- Remainder of the term will be used to push through priority regulation
- Key components of ACA are in place
- DOL fiduciary rules are priority
In looking at a crystal ball at what each leading candidate would do:
- Donald Trump: Would repeal
- Ted Cruz: Has previously endorsed repealing only Title I
- Marco Rubio: Would repeal and replace the ACA
- Governor Kasich: Would repeal
- Hilary Clinton: Would continue to enact the ACA
- Bernie Sanders: Would replace the ACA with a single-payer program
The Future of the ACA — 2016 & 2017
Two significant pieces of ACA regulation remain outstanding:
1. Cadillac tax (delayed until 2020)
2. Nondiscrimination for self-funded plans vs. fully insured plans
The nondiscrimination rules for fully insured employers currently apply to self-funded plans, but they were going to apply to fully insured plans which would mean that fully insured plans couldn’t have different waiting periods for highly compensated employees. This means you can’t have executives be benefit-eligible at their date of hire, and have everyone else wait sixty days. Also you couldn’t have a richer benefit structure for highly compensated employees, nor a management carve out plan, which especially is common for smaller employers who have fully insured plans.
Accordingly this issue of nondiscrimination rules applying to insured plans was going to have a big impact on a lot of employers. However, we have seen it put on the backburner and not moving. Tilley said “I don’t anticipate that we’re going to see much happening around it this year since we’ve had total silence from the administration for the past six years. Other than the extension from 2012 we haven’t heard a thing. It just never seems to be an important enough priority.” Tilley also stated “My prediction is I don’t see nondiscrimination testing, which is the big outstanding issue, coming out this year. It doesn’t seem to be a priority either. Whereas we have these pending DOL fiduciary rules that are a priority, so I imagine those will come out first.”
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*International Foundation of Employee Benefit Plans annual employer survey
**The poll conducted by The Partners Group consisted of responses from 44 customers and prospects in the Northwest.
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