United States: Stay On The Road To Cadillac Tax Planning

Your next top health care priority will be the Cadillac tax. Although the tax was recently delayed for two years, employers in all industries need to develop a strategy to comply and/or take action to mitigate their exposure.

Background

The Cadillac tax, a 40% excise tax under the Affordable Care Act, applies to medical premiums exceeding premium thresholds and will significantly affect employers. For 2018, these thresholds were $10,200 (employee-only coverage) and $27,500 (family coverage), to be adjusted in future years. Based on current medical trends, many plans are expected to exceed these thresholds and generate significant revenue for the federal government. All health plans, whether self-insured or fully insured, will be affected. Since employers are responsible for paying the tax either directly or indirectly, they need to understand their plan's related risks.  

In December 2015, Congress passed a revision to the Cadillac tax as part of the Consolidated Appropriations Act, 2016. The tax changed in two important ways:

  1. It was delayed from 2018 to 2020.
  2. It was changed to tax-deductible from non-tax-deductible.

The delay allows the government to propose regulations for comments and gives employers more time to mitigate their exposure.

Many people are speculating that the Cadillac tax will continue to be delayed or even be repealed. There's too much at risk to assume the Cadillac tax won't take effect, so employers who depend on that possibility and wait to do anything will probably be too late to mitigate the impact.

What you need to know

Mitigating Cadillac tax-related risk can take years. Although changing the plan design is easy, considering external factors is crucial. For example, the medical plan is a critical component of many employers' recruiting and retention strategy. In addition, plan design changes often shift more costs to employees, who will be upset about paying more out-of-pocket. Finally, if the plan is too expensive for employees, they may avoid medical care, leaving ailments undiagnosed and uncontrolled.

Some medical plans may already provide low-level benefits and still exceed the tax's thresholds, so cutting additional benefits may not be a solution. The tax is not necessarily imposed on a plan that has a high or luxurious benefit level but merely applied to the amount exceeding certain premium thresholds. Medical premiums are determined by multiple factors that are often beyond the employer's control, including plan design, employee demographics (age and sex), geographic location, claims experience and utilization. A plan with low-level benefits may still exceed the thresholds because it has poor claims experience (organ transplants, premature or multiple births, cancers, and so on). As a result, reducing exposure may require multiple actions.

What you need to do

To mitigate exposure, take these three steps:

  1. Develop a strategic plan.
  2. Identify challenges.
  3. Communicate with employees.

Develop a strategic plan: This requires you to determine how you will reduce premiums and exposure to the Cadillac tax. There are two approaches:

  1. Reduce/cut medical benefits -- Increase employee cost-sharing (deductibles, co-insurance and copays) and/or cut benefits (exclude coverage for vision, infertility, gastric bypass, and so on).
  2. Create healthy plan participants -- Encourage plan participants to live healthy lifestyles, which may lower long-term costs through wellness programs, screenings and so on.

Identify challenges: Changing a medical plan design can directly affect employees' morale, personal finances and health. Cutting benefits may be the easiest and quickest way to reduce premiums, but it can cause significant employee relations problems. A medical plan can be a critical component of an employer's total rewards strategy and a recruiting and retention tool, so cutting benefits may create a competitive disadvantage with peers and the marketplace.

Creating a culture of health through wellness programs, screenings and education can improve employees' long-term health and reduce the cost of a medical plan. But to change their behavior, employees must be engaged. In addition, realizing savings can take several years.  

Employers with unions must factor in collective bargaining agreements, which can lock in benefit levels and plan designs for several years. As a result, the Cadillac tax must be considered for any new contracts and clearly outline whether participants or employers are responsible for the tax, how the tax will be paid and how to reduce exposure. This creates a labor relations challenge since in most cases, plan benefits will be reduced and/or the burden for the tax may shifted to the union member.

Communicate with employees: Employees need to know how the Cadillac tax affects them and how the employer plans to reduce costs such as changing plan design, lowering benefits levels or instituting aggressive wellness programs. An employer who waits until the last minute — fall 2019 — may need to slash benefits or increase employee cost-sharing. If there is little to no communication, employees will be unhappy about changes.

The Cadillac tax will be a significant tax liability for employers and require careful planning to mitigate risk.  Now is the time to start involving stakeholders so that they understand the tax and the reasons for change. With a fully engaged workforce participating in wellness programs, employers can lower health care costs and mitigate their Cadillac tax exposure without compromising benefits. Communicating with employees helps them to understand — and even accept — why changes are being made.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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