Opinion

Is it a Cadillac Tax or a Chevy Tax? Business Planning Already Under Way to Avoid 2018 Tax

The Affordable Care Act (ACA) imposed a so-called “Cadillac tax” of 40% on plans with costs that exceed a certain threshold. The threshold for the first year, 2018, is set at $10,200 for individual coverage and $27,500 for family plans, and applies to costs expended by the employee and the employer. The threshold will then be increased by consumer price index (CPI) plus one for the first two years and then just the CPI thereafter. The law does allow for adjustments for certain plans, including those covering high-risk workers such as firefighters and police.

Many have called the Cadillac tax the “Chevy tax” since the thresholds are fairly low and may encompass a majority of policies. Towers Watson released a study in 2014 stating that nearly 50% of large employers could be hit by the tax in 2018. And despite the tax’s start date three years in the future, many businesses have started planning on ways to avoid it.

Much of the planning is behind the scenes, with employers thinking about restructuring health benefits in a way that avoids the much maligned tax. This includes spousal coverage surcharges, defined contribution and private exchange benefit planning.

Unions are also starting to change their focus from gold-plated benefit packages to higher wages. For example, the deal between Atlanta Symphony Orchestra musicians and management gives musicians a 6% raise over 4 years, but they also have a new high deductible health plan that increases their prior premiums.

Currently, there is not much Capitol Hill activity related to the Cadillac tax, but that could change.

Insurers, brokers, business groups and other constituencies such as unions have not stormed member offices to try to alter the provision. This is mainly because the provision is not set to begin for several years, and there are bigger fish to fry at the moment such as King vs Burwell, Medicare SGR legislation, and the 21st Century Cures initiative.

A new president in 2016 will also impact the Cadillac tax implementation.

Legislative changes could be sparked by a King fix bill this fall. If the Supreme Court rules with the plaintiff in King vs. Burwell, then federal exchange subsidies will have to be restored. In response, the states, the Department of Health and Human Services, and Congress will likely respond. If the House and Senate try to pass a “bridge” bill that reinstates subsidies, then a Cadillac tax fix could be included.

The non-partisan Congressional Budget Office (CBO) scores the provision as generating $87 billion over ten. This amount is down from initial CBO estimates of $120 billion over ten. Still, $87 billion is a sizeable amount that the government probably does not want to forgo.

Let’s take a trip down memory lane for a minute. The Cadillac tax was included as a part of the Affordable Care Act (ACA) when capping the tax exclusion of employer-sponsored health benefits failed. Many in Congress wanted to tax the funds that employers set aside for employee benefits. When that idea crashed and burned during health reform negotiations, the idea of taxing rich insurance products started to gain steam. In fact, some Republicans were in favor of a Cadillac tax as a cost-cutting mechanism.

Cadillac tax delay or modification of the threshold are the most likely changes on the horizon. That is, a delayed start date (past 2018) or changing the threshold (above $10,200 and $27,500 for individuals and families, respectively) are the most likely “fixes” to the Cadillac tax.

Congress could also change the index, so that the inflationary index is tied to medical, instead of the consumer price index (CPI), which is lower.

Full repeal would have to be offset, representing a significant legislative hurdle.

Other Cadillac tax fix options being discussed include excluding certain services, such as on-site medical clinics, which should be encouraged in the workplace. Creating a safe harbor could exempt plans certified as having 90% actuarial value. Such a policy would help employers in high cost areas that have older, sicker members.

In late February 2015, the Treasury Department issued guidance on the ACA’s Cadillac tax that contained more questions than answers. The guidance included what plans are covered and how to determine costs and apply the statutory limit. The exploratory documents were likely intended to be a learning exercise for the Treasury since the Cadillac tax is complicated and could have unintended consequences.

While many Democrats and Republicans believe the Cadillac tax will bend the cost-curve, the affected groups are opposed to the policy. These same groups have a big voice on Capitol Hill: health insurers, unions and big businesses. Repealing the revenue generating Cadillac tax is unlikely, but changing the parameters — so that true gold-plated benefits are impacted — is likely the best path forward.

Ipsita Smolinski is Managing Director for Capitol Street, a healthcare research and consulting firm in Washington, DC.

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