The last major wave of reform brought on by the Affordable Care Act is set to take effect in 2018. Effective with taxable years beginning Jan. 1 of that year, the excise tax, or “Cadillac” tax, will be imposed on all group-sponsored plans. The law imposes a 40 percent excise tax on plan costs that exceed predetermined dollar limits.
When the act was written, the tax was supposed to affect only a small percentage of plans that offered rich benefits. Unfortunately, with continued rising costs, increasing chronic disease, and an aging U.S. population, by the time 2018 arrives we could see anywhere from 20 percent to 51 percent of plans affected.
In response, many employers are taking steps to avoid or mitigate their Cadillac tax exposure. Here are some strategies that we suggest to ensure employers minimize their tax risk:
1. Reduce the medical plan design value. This is where many plan sponsors will first turn, because it’s simple and effective. Employers need to be careful that they don’t reduce the plan design benefits to levels that are too low. Otherwise, they risk dropping the plan design below the 60 percent actuarial minimum value standard applicable under the act’s employer play-or-pay mandate.
2. Consider other plan modifications. Rather than just reducing the plan design, employers can consider alternative plan changes. Examples include a reduction in the size of the provider network, a shift to a value-based plan design structure, or the promotion of medical tourism.
3. Increase health and productivity measures. Another way to reduce costs is to improve the health of the covered population. Investing in more robust wellness and care management programs, along with more analysis of the health drivers using data warehousing tools, can propel savings and help lower the trend of the plan. This will help employers stay under the penalty thresholds longer.
4. Manage funding of Health Savings Account-based plans. As of now, pretax contributions to HSAs will count toward the tax calculation. Eliminating, reducing, or moving contributions to post-tax will help lower plan costs subject to the tax. An employer eliminating HSA contributions furthers the strategy of reducing the plan design value of the core group health plan, but in turn erodes their support of consumerism. This tactic would require careful communications. Alternatively, making HSA contributions uniformly through the year rather than by lump sum would be less disruptive than eliminating contributions.
5. Optimize plan rate tiers. Many plans have their rates set on a three- or four-tier basis. The cost thresholds for the tax are only two-tier (self-only and other than self-only). Since the tax owed is assessed per individual, there may be an opportunity to convert rates to a two-tier basis and recalculate the difference between single and family rates to either avoid or reduce the tax.
6. Restrict spousal coverage. We’ve seen an ongoing trend where employers do not allow employees to elect spousal coverage if their spouses are eligible for benefits elsewhere. A softer approach may be to impose a spousal surcharge, which might discourage the enrollment of spouses. This approach would have a less disruptive effect on employees.
7. Have employees pay excepted benefits on a post-tax basis. Products such as accident, critical illness, or cancer insurance are becoming more common, and if these benefits are paid post-tax by the employee, they do not aggregate toward the excise thresholds.
8. Establish dental and vision plans as stand-alone benefits. If the dental and vision benefits are integrated into the medical plan, their costs will be included in the tax calculations. If separated from the medical plan and provided on an insured basis, they will not be included.
9. Partner with your insurance broker and employee benefits advisor. Your broker and benefits adviser can help set a realistic expectation of your health care costs and develop a plan that meets your financial goals.
Employers should evaluate these strategies further to determine their effect on their particular cultures and benefits strategies.
Dennis Bass is the managing director of Wells Fargo Insurance in Nevada. He leads a team of insurance professionals who provide consultative services, market negotiations, policy analysis and placement, policy administration, and claims advocacy services to support Wells Fargo Insurance customers prevent and handle data risk. He can be reached at dennis.bass@wellsfargo.com.
