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Obamacare Cadillac Tax, Despite Delay, Still Driving Health Plan Changes

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Even though the Affordable Care Act’s “Cadillac tax” on high-cost health plans was delayed until 2020, many employers are still reducing benefits and shifting costs to avoid paying the tax, according to EBRI.

EBRI held a policy forum addressing the potential impact of the tax in December 2015, a few days before Congress voted to delay implementation of the tax from 2018 to 2020. It published a summary of the forum in March.

The tax is a 40% excise tax on the combined employee and employer share of health care coverage when the cost of coverage reaches $10,200 per employee for those with self-only coverage, or $27,500 for employees with family coverage. In determining whether they reach that threshold, employers have to include contributions to flexible spending or health savings accounts when workers’ contributions are pre-tax. Retirees’ health care costs would also be included.

Paul Fronstin, director of EBRI’s Health Research and Education Program, said there are two goals of the tax: paying for other provisions in the Affordable Care Act and mitigating the rising cost of health care.

The Joint Committee on Taxation estimated the tax will collect $91 billion over 10 years, 75% of which will come from workers’ wages that previously weren’t taxed, according to EBRI. The two-year delay will cost about $9 billion in lost revenue.

Potential impacts on workers, according to Fronstin, include reduced health benefits overall, as well as dropped coverage for spouses. He noted that IRS notices indicate that the cost of employee-only coverage will be calculated differently from family coverage, but that there doesn’t seem to be a provision for employee-plus-one coverage.

Employers may be less inclined to offer on-site medical clinics because they will be included in employers’ cost calculations unless the offer only minimal care, he said.

“Workers over-insure because they prefer nontaxable premiums and health coverage to using taxable wages for out-of-pocket spending on health care services,” Fronstin said. “And over-insurance means that more health care services are nontaxable, which leads to higher use of health care services, which then drives up premiums and makes coverage less affordable.”

Fronstin said there’s no evidence that employers will actually offer higher wages in return for less comprehensive coverage, but higher cost sharing will lead to higher tax revenue as corporate profits increase. Katy Spangler, senior vice president of health policy for the American Benefits Council, which wants the tax repealed, said her organization has a “fundamental disagreement” with Congressional Budget Office predictions that employers will raise wages and reduce benefits. She argued that opposition to the tax is not equal to opposition to the Affordable Care Act. “This is about protecting the benefits of 175 million Americans that have employer-sponsored coverage—this is not a debate about whether the ACA is good or bad. This is just about repealing the tax,” she said at the forum.

Kimberly Young, head of employee benefits at Booz Allen Hamilton, said that her firm has started making changes in anticipation of the tax, including changes to retirement benefits. For example, the firm replaced its discretionary profit-sharing retirement plan with an employer matching 401(k). The firm also switched to consumer-driven health plans and HSAs, which would still be included in determining health coverage costs, but has implemented wellness programs to try to keep costs low.

Richard Stover, principal and consulting actuary in Xerox HR Services’ Knowledge Resource Center, said none of the employers he works with are considering the two most extreme options — paying the tax or dropping benefits entirely.

“It’s not so much that employers are focused on one of those exclusive of the others, but rather looking at a combination of different approaches to best reflect the impact or mitigate the impact of the tax,” he said at the forum.

It’s not just a question of avoiding paying the tax, but of the additional burden of complying. “Depending on what the IRS regulations require, the administration of this tax — determining it, calculating it, allocating it to coverage providers to make the payments — is an extremely complex process,” he said.

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