Businesses Preparing for ‘Cadillac Tax’
St. Louis — Thought you had seen the end of major controversy over the Affordable Care Act? Think again. One of the last pieces to take effect promises to soon reignite the fierce debate on President Obama’s landmark health overhaul.
It’s known as the “Cadillac tax” — a hefty surcharge on relatively generous employer-sponsored health insurance. The tax won’t take effect until 2018, but many businesses are already bracing for it.
Some estimates project roughly one-third of American businesses will need to pay the tax on some health plans during the first year. As time goes on and health costs increase, many more businesses will be required to pay up.
“We’ve been hearing from our clients that they plan to do everything in their power to try to avoid that excise tax for as long as they can,” said Tim Simpson, a senior consultant with Mercer in St. Louis.
Starting in 2018, a 40 percent tax will be levied on employer-sponsored health plans that exceed an annual limit in spending on premiums. The tax will be assessed on every dollar above a $10,200 threshold for individual coverage and $27,500 for family plans.
The tax is designed to drive down overall health care spending by curbing generous plans that encourage people to use more services than necessary. But some insurance brokers and analysts warn that the tax will cause employers to dramatically reduce benefits or drop them altogether.
“It’s a shame because it is not the right thing for the employee, and the intention of the law was to get covered,” said Emily Bremer, a partner at insurance brokerage and consultancy Bremer Conley. “They are going to have to address this issue, or you will see employers leaving the benefit business in droves.”
The Cadillac tax will affect many businesses, but those who operate in high-cost areas will bear the brunt.
Experts say the tax’s threshold will not rise fast enough to keep up with health care inflation. That means businesses who escape the tax in the early years could still be on the hook at some point in the next decade. Simpson estimated that almost every one of his clients would need to pay the tax by 2022. Aon Hewitt, a benefits consultant, estimates a business that was taxed on $200 in excess premiums in 2018 would be taxed on $9,000 in 2027.
With that reality, some companies are already taking steps to shield, or least postpone, the tax’s effect.
Rebecca Feldman, a senior vice president at Aon Hewitt, said some firms are shifting to plans with higher deductibles and copays to help drive down premiums. She also said businesses were restructuring benefits, such as limiting contributions to health savings accounts, as a means to delay the tax’s effect.
Others though are kicking the can down the road, hoping Congress intervenes.
“Some are taking the approach they might as well continue offering what we want now and deal with it later,” Feldman said.
Some brokers are advising their clients to hang tight to make sure the Cadillac tax even takes effect. The final guidelines haven’t been issued, and there’s talk in Congress of repealing or significantly altering the tax after the 2016 election.
“I think the current course of action is to monitor the situation until we get further advice from the IRS as well as a consensus of political support for or against the policy as it stands,” said J.J. Flotken, partner at Caravus, a St. Louis-based brokerage firm.
Other companies, though, don’t have the option to take a proactive approach because they are locked into a multiyear collective bargaining agreement for worker health benefits. Unions have been one of the most outspoken critics of the Cadillac tax out of concern it will cause employers to reduce health benefits for their members.
Shaun O’Brien, assistant policy director with the AFL-CIO, said the tax is already affecting collective bargaining negotiations with employers looking to shift a larger share of medical costs on to workers.
“We are talking about large increases in out-of-pocket costs that we will see, and they will snowball over time,” he said, adding the AFL-CIO favors a repeal of the tax.
But some experts say the tax will just redistribute employee compensation away from health benefits to higher wages, as employers look to continue to attract and retain the best workers.
“Over the medium term, ultimately you still have to pay people what they are worth,” said Tom Miller, a resident fellow at the American Enterprise Institute, a conservative think tank. “If you aren’t paying them in health benefits you have to pay them for wages.”
However the Cadillac tax debate plays out, businesses are still struggling with the roll-out of the Affordable Care Act.
Additional reporting requirements and new health insurance plan designs have placed a significant administrative and financial burden on companies.
The Cadillac tax, some brokers and experts say, may be too much to absorb.
“There’s only so much more that employers can take,” Bremer said.