The Cadillac Tax is Forcing Action Well in Advance of 2018

The Cadillac tax has roused its share of passionate critics, and efforts to repeal the tax have been gaining momentum with bi-partisan support. As the IRS seeks commentary to resolve the murkiness within the regulatory language, a number of new research studies are calling attention to the tax’s potential impact on employers and the challenges it raises.

The Basics
The Affordable Care Act’s high-cost plan tax was dubbed the “Cadillac tax” because its original intention was to reign in “overly generous” health benefit plans offered by large employers. In a nutshell, it places a 40 percent non-deductible tax on health benefit plans that exceed a certain threshold beginning in 2018. The threshold for 2018 is $10,200 for individual coverage plans and $27,500 for all other plans, and then it increases annually with inflation. The Congressional Budget Office estimates that the tax will generate approximately $87 billion in revenue over the next decade, which will help pay for the Affordable Care Act’s subsidized plans.

While the tax isn’t set to kick in for several years, employers are already making moves to get costs down to get under the threshold. And, as is the case with most changes to the health care system, many are finding the solution isn’t quite so simple.

The Problems
Two of the major challenges:
  • High cost plans aren’t just restricted to “overly generous” large employer plans. The reality is that some organizations employ individuals who have more expensive health issues that drive up the cost curve, regardless of the plan changes they are making. Unions have also been very vocal opponents of the tax, as union members often receive generous health benefits in lieu of wage hikes that can be more difficult to secure. It’s already a major focus of the UAW’s negotiations with several large automakers, with which it has a four-year contract expiring in September. Other labor unions are considering strategies as well.
  • Health care costs keep rising, regardless of plan adjustments. A recent Kaiser Family Foundation analysis estimates that 42 percent of employers will have plans in which costs will exceed the tax’s threshold for some or all employees by 2028. Further, they expect that 100 percent of employers will eventually be impacted by the tax, assuming that health plan premiums continue to grow faster than inflation, which has been the case. The dollar level triggering the Cadillac tax increases only in relation to the Consumer Price Index, which grows much slower than medical costs.
Another survey from the National Business Group on Health illustrates the challenge of rising health care costs for large employers. It found that employers are projecting a six percent increase in health care benefits costs in 2016, but intend to keep increases to five percent by making plan changes such as increasing cost-sharing provisions or adopting consumer-directed health plans. Without additional changes to control costs, nearly half say at least one of their health plans will trigger the Cadillac tax.

What does this mean for employers? Regardless of what happens with the Cadillac tax, organizations must find a way to better stratify their health care risks. They must elevate their actions to better manage the risks that are driving up costs, instead of restricting their focus to plan changes. We’ll cover more about how this can be accomplished in a subsequent blog post.