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Why Should I Care About the “Cadillac” Tax?

    Recent studies have confirmed it: employers are changing benefit plan design in ways that are shifting more costs to employees.  A number of trends are clearly identified in the 2014 Medical Plan Trends Report (http://www.highroads.com/resources/white-papers/) from benefits management firm HighRoads and consultancy CEB.

    Why the trend?

    • Employers are responding to rising plan costs; although growing at a slower rate, plan costs are still outpacing the general inflation rate
    • As a transitory move to avoid the ACA’s “Cadillac” tax, scheduled to take effect in 2018

    What are the trends?

    • An increase in the number of high-deductible plans (defined as at least $1250 annual individual deductible and $2500 family deductible; in 2014, High Deductible Health Plans (HDHPs) are 25% of reported plans. The Kaiser Family Foundation reported the number of workers covered by HDHPs quadrupled, from 5% in 2007 to 20% in 2013.
    • More plans with co-insurance (or higher co-insurance than in previous years); 42% of plans now charge a percentage of the provider’s fee for office visits versus a flat-dollar copay
    • Higher out-of-pocket (OOP) maximums (66% of reported plans are now > $2500 for individual, in-network maximums)
    • Increased emergency room copays (the 2014 reported average is $113)
    • Higher percentage of the total premium cost is being paid by employees

    Increased premiums for spouses who have access to other plans i.e., at their own employer; or the elimination of spousal coverage altogether.  The 2014 Aon Hewitt Health Care Survey reports that many employers are scaling back the amount they are willing to contribute for dependent coverage, particularly spousal coverage, with 22% already having reduced their contribution, and another 50% of employers reporting they intend to reduce it over the next five years.  Ten percent of employers report that they’ve already eliminated coverage for spouses and domestic partners who have access to other health insurance, with 49% planning to do so in the next five years.  More companies are also considering a “unitized” approach to premium cost-sharing i.e., an employee covering three children would pay a higher premium than an employee covering one child.

    All of this translates to higher costs (premiums, deductibles, co-insurance, copays, and OOP) and a greater administrative burden for employees.  The report also raised concerns that plan participants will be more likely to delay necessary care as it becomes more personally expensive to them to receive care.

    What is the “Cadillac” tax and why is it driving changes that are obviously detrimental to employees’ financial and medical well-being?

    The Cadillac tax, intended to be a funding mechanism for the ACA, is a 40% excise tax on the value of all participant-elected health care benefits that exceed certain dollar thresholds in 2018 and beyond.  The current annual thresholds are $10,200 for individual coverage and $27,500 for family coverage, but the actual thresholds will be adjusted based on inflation rates for the period between 2010 and 2018, and annually thereafter.  To make matters worse, the tax is not determined by the value of just the medical plan, but rather the aggregate value of all health benefits elected by an employee or family.  This includes the value of tax-advantaged health flexible spending accounts (FSAs), health reimbursement accounts (HRAs), and pretax contributions to health savings accounts (HSAs). 

    The tax applies to both fully-insured and self-funded employer plans and will apply to tax years beginning after 12/31/2017.  The tax is calculated on the value of the plan that exceeds the threshold.  So for a plan valued at $11,000, the 40% tax is applied to the $800 that exceeds the current $10,200 threshold.  For a company with 1,000 employees, the annual tax bill is $320,000 – and that’s at today’s values.  By 2018, that same plan, with a modest 5% increase in premium each year, would be valued at $13,371, and the tax bill is then $1,268,227.  Doesn’t your company have a better place to spend a million-plus dollars than a new excise tax?

    What’s the big deal?  Many people would be surprised to learn that their current plan is considered a Cadillac plan under the ACA.  Even the average health plan costs more than the Cadillac thresholds mandated by the ACA; about $10,522 per employee, according to the Society for Human Resource Management.  By 2018, that number will be far higher based simply on typical premium increases. 

    As a direct result of the looming Cadillac tax, employers are already scaling down the benefits they offer, in order to avoid the tax when it takes effect in 2018.  Others will pay the tax but pass some or all of the tax to employees via higher employee premium contributions.  Either option will cause hardship for those who don’t have a savings nest egg to fall back on in the event of an accident, or for those with a chronic medical condition that requires consistent consumption of medical services or drugs.

    And before you think, “those rotten employers!”, understand this:  The stated intent of the tax is to force consumers with the best health plans to have to pay more costs out of pocket, which, in theory, would force them to make more cost-conscious decisions when it comes to expensive tests and frequent doctor’s visits. So the tax, in the simplest terms, penalizes companies that offer high-end health care plans to their employees, as well as the employees who are the recipients of those plans.  Now, what was the name of that law again?  Oh, yeah – the Patient Protection and Affordable Care Act.  Hmm.