Last month, I talked about some of the things employers and employees should expect if the Cadillac Tax becomes the law. I wanted to follow up on that piece, as it sparked a lot of meaty conversations with many of our employer clients at ConnectedHealth. Here are some of the questions we received and our response.
What is included in the calculation for assessing the Cadillac Tax?
For “applicable employer-sponsored coverage” (defined in Code Section 4980I(d)) that an employee might have, including but not limited to:
- The full premium for accident and health coverage provided by the employer, which includes the portion of the premium paid by both the employer and the employee.
- Employer and employee salary reduction health flexible spending account contributions.
- Employer HSA contributions, which, as discussed in more detail below, may include employee payroll deduction contributions if the IRS adopts a broad interpretation.
How can Private Exchanges help with a Cadillac Tax?
Quick Answer: Exchanges help change healthcare purchasing behavior. That’s key here. Here’s why….
The goal should not be to completely side step this excise tax in the first year, but rather to reduce your organization’s total exposure. The employee’s mindset is focused on saving money once they enter an exchange, unlike the standard transactional purchasing process they encounter during their normal open enrollment. For example, ConnectedHealth provides a proprietary recommendation algorithm that educates the consumer on healthcare costs and makes them aware if they are over-insured. With an average spread in healthcare costs of over 40% when using private exchanges, organizations can curtail the excise tax cost. Changing behavior is not easily done though — it takes time to change the mindset of a consumer who has very regimented buying behaviors. But with the proper guidance, it can happen.
Can you give us a real-world example?
Take municipal employees for example. They often have a longer tenure than private sector employees. If they have been enjoying the benefit of a top tier, high actuarial value plan with a defined benefit contribution from their employer, shifting to high deductible options with a defined contribution will take a slow transition. The Cadillac Tax is made to proactively change behavior and bridge the gap for the inequality of the health insurance plans for employers. But, like any big shift (especially in healthcare), employers must be ready (when the time comes) to educate their impacted workforce on how these changes may affect them directly.
What are the implications of potential legislative changes coming down the road?
A key factor that many in the employee benefits industry hope to see is taking contributions to spending accounts (i.e., HSAs, FSAs, etc.) by employers out of the Cadillac Tax calculation. With this potential legislation, employers could use these spending accounts as a mechanism to shift costs to an account not affected by the Cadillac Tax and reformat their benefit strategy. ConnectedHealth can give employees the ability to track their spending account information in the same place they enroll and view their benefit information, giving them a all of the tools they need to manage their benefits in one place.
The idea of a complete repeal is unlikely, yet possible. House & Senate Minority leaders are currently working toward a solution to repeal the Cadillac Tax for the benefit of their constituents.
The (CBO) Congressional Budget Office’s original projection of $87 Billion in revenue over the next decade has been recalculated to $69 Billion. With CBO’s projection coming in well short of expected tax revenue, they would have to find alternative ways to make up for the money. Suffice to say, they haven’t figured it out yet. Furthermore, allowing spending account contributions to not be calculated in the formula would further drive their revenue opportunity down and they would be in the same boat.
Is there anything we need to do right now?
No immediate changes are needed given the recent delay, but stay on top of the latest news regarding the tax (and check our blog regularly, too, for updates). Also, you might want to start looking at the plan designs you are offering today, and consider offering more consumer-driven options as part of a holistic package to employees (if you’re not already). This is always a good thing to do regardless of the potential tax. If you don’t have an exchange, diversifying your benefits design is easy handled with one. Also, you can leverage an exchange’s admin portal functionality to stay on top of all ACA compliancy items.