Tap the Brakes: Cadillac Tax Delayed, but Challenges Remain
As 2015 was winding down, Congress pushed back the effective date of the “Cadillac tax” two years. The much-debated provision of the Affordable Care Act (ACA) will now take effect on January 1, 2020, instead of January 1, 2018.
As originally conceived, the Cadillac tax was supposed to affect only particularly generous, or “luxury,” health care plans. But many analysts believe it will, either immediately or eventually, impact quite a few “nonluxury” plans as well.
For employers, the immediate road ahead is now free of a particularly looming threat. But, before you get too excited, tap the brakes: There are still plenty of health care challenges with which to contend.
Deductibility of the tax
Most Cadillac tax opponents hope that, when the delayed 2020 effective date draws near, Congress will do away with it entirely. And they just might get their wish. There’s much opposition in Congress to the provision, and now opponents outside of government have two more years to press for full repeal.
But, even if the Cadillac tax isn’t fully repealed, the 40% excise levy will now be a pretax expense when it goes into effect. This change was folded into the Consolidated Appropriations Act of 2016.
Threshold index reform
Another bit of good news is that the indexing of the Cadillac tax triggering thresholds will continue, even as the effective date of the provision itself is delayed. Critics of the original indexing formula complained that it wouldn’t have reflected the actual increases in the cost of health care benefits. And this disparity was highlighted in an analysis by the Kaiser Family Foundation last year.
As background, the value of employer-sponsored coverage for Cadillac tax purposes includes not only the health care plan itself, but also:
- Employer and employee contributions to Flexible Spending Accounts,
- Employer (and possibly employee; this question is unresolved) contributions to Health Savings Accounts,
- On-site medical clinics, and
- Many other forms of coverage.
The Kaiser study projected that, by 2018, when Cadillac tax thresholds were scheduled to be $10,200 for self-only coverage and $27,500 for other than self-only coverage, 26% of employers would have faced Cadillac tax penalties if they didn’t make substantial plan design changes. This percentage was projected to rise to 42% by 2028.
So, in addition to pushing back the effective date to 2020, Congress authorized the Comptroller General of the United States and the National Association of Insurance Commissioners to analyze whether the indexing formula can be made more accurate.
For now, employers still face the same pressure that they would have faced even if Congress hadn’t acted: keeping their health care costs from escalating ever higher. Many forward-looking organizations are focusing on the following cost-saving opportunities:
Redoubling efforts to improve employee health. Newer plan designs — such as integrated health care models that tie together basic medical services with dental, vision, behavioral health and disability management — hold promise for cutting costs through improved care coordination.
Imposing spousal surcharges. By applying higher cost-sharing formulas, many employers are discouraging spousal coverage when a spouse can be covered under another employer’s plan.
Exploring defined-contribution plan design. Some employers are looking to set fixed limits on their shares of employees’ health costs, as they do in the retirement plan realm with 401(k) plans. The challenge, of course, is doing so without violating the ACA’s minimum value requirements.
Emphasizing employee engagement. Many employers are bolstering efforts to motivate employees to assume greater responsibility for choosing their health care providers on the basis of quality data and reasonable costs.
The necessity of balance
The delay of the Cadillac tax’s imposition gives you some breathing room in evaluating and designing your health care plan. And the possibility of its permanent repeal should give you some hope.
But, in the meantime, the burden of staying compliant with a myriad of other ACA provisions remains heavy. Work closely with your financial and benefits advisors to balance the necessity of providing meaningful benefits to your employees with the business imperative of managing the costs of doing so.