While most ACA watchers are preoccupied with the ongoing malfunction of the federal Marketplace, we’re using the downtime to help businesses better understand other parts of the law that affect them.  The ACA imposes a 40%, non-deductible excise tax—dubbed the “Cadillac Tax”—on certain high-cost health insurance plans.  The Cadillac Tax doesn’t take effect until 2018, but it’s not too early to start thinking about how the tax works and how you might avoid it.

The Cadillac Tax will equal 40% of the amount by which value of the plan exceeds an annual limit.  For purposes of the Cadillac Tax, the plan value will be determined using rules similar to COBRA premium rules, and includes the aggregate value of all active employee group health plans (including, e.g., FSAs, MSAs, and HSAs), other than certain excepted benefits.  For 2018, the default annual limits are $10,200 for individual coverage, and $27,500 for a family.

The annual limits are subject to several upward adjustments, the most important of which will probably be the “Health Cost Adjustment Percentage,” or HCAP.  The HCAP will be determined by measuring the percentage by which the cost of the Blue Cross/Blue Shield Federal Employees Health Benefit Plan (FEHBP) increases from 2010 to 2018.  The HCAP is the amount by which that total growth rate exceeds 55%.  For example: if the cost of the FEHBP increases by 50% from 2010 to 2018, then the HCAP will be zero.  If the increase from 2010 to 2018 is 70%, then the HCAP will be 15% (70% – 55% = 15%), and hence the HCAP-adjusted annual limits will be $11,730 and $31,625.  Because of the HCAP, it’s impossible to say today what the actual annual limits will be in 2018.  But we feel pretty safe in predicting that the HCAP will be greater than zero, and that the actual limits will be higher than the default figures of $10,200 and $27,500.

There are other adjustments, too.  For employees in certain “high risk professions” (e.g., police officers, firefighters, EMT’s, and certain utility workers), the annual limits will be increased by $1,650 and $3,450.  Employers whose workforces are disproportionally older and female may get another upward adjustment in the annual limit (although the IRS has not yet told us just how this adjustment will be calculated).  And, for 2019 and later years, the annual limits will be indexed by the Consumer Price Index for All Urban Consumers (CPI-U).  (Note, too, that all of the potential adjustments to the annual limit are one-way ratchets: they can only make the annual limits increase, not decrease.)

The Cadillac Tax as currently written applies to all employers, including public-and private-sector employers, and including those with less than 50 full-time equivalent employees.  When the Cadillac Tax takes effect, all employers will be required to compute and report to the IRS the value of their plans, the “excess benefit,” if any, and the allocation of the tax as between the employer and any providers that may be liable for a portion of the tax.  Failure to correctly compute and report the “excess benefit” and associated tax can expose the employer to penalties, plus interest.

Of course, a health care plan can be “rich” for any number of reasons.  It might provide coverage for very expensive procedures not covered by other plans, such as in vitro fertilization.  The plan may have very low (or zero) deductibles or cost sharing.  It may pay providers better than its peers.  Or, the group covered by the plan may simply consume a lot of health care.  Up to a certain point, employers may simply pay any applicable tax, and pass the tax through to their employees in the form of increased premiums.  But due to the hefty tax levied on so-called “excess benefits,” that strategy is likely to be feasible only up to a certain point.  We expect employers to move decisively over the next few years to eliminate their exposure to the Cadillac Tax.  Here are some potential strategies to consider:

  • Offer excepted benefits (long-term care, dental, and vision plans) through stand-alone plans;
  • Shift costs to employees, in the form(s) of higher deductibles, co-pays, and/or cost-sharing, to reduce or eliminate the “excess benefit”;
  • Reduce or eliminate coverages not necessary to maintain “essential health benefits” to reduce or eliminate the “excess benefit”;
  • Reduce or eliminate out-of-network benefits;
  • Implement incentives and care management plans (e.g., wellness incentives, workplace clinics, telemedicine, etc.) with proven value, in order to reduce the costs of care, especially those associated with chronic conditions; and
  • Like Wal-Mart, offer a medical travel benefit to those willing to travel to low cost, high-quality care providers.

We’re studying other ideas as well.

Are you driving a Cadillac?  Not a Cimarron, but maybe one of those killer CTS-V sedans?  If so, you’re probably going to want to trade it in for a Chevrolet before 2018.