‘Cadillac’ Plans Aren’t Affordable Care

The excise tax on rich health-benefit plans slated to take effect in 2018 could be ruinous for some companies. Is it time to start worrying?

Among the costs of complying with the Affordable Care Act, one potentially big-ticket item is far enough in the future that there is perhaps little cause for alarm. But it may not be a good strategy to sit idle for long, some experts say.

Employers that trigger the “Cadillac tax” could suffer severe financial effects. The controversial ACA provision will, starting in 2018, require self-insured companies to pay a 40 percent excise tax on the value of group health benefits — the total cost of coverage including both the employer’s and employees’ shares — that exceeds a threshold amount.

The tax applies to group plans offered by fully insured employers as well, but the law requires insurers to pay it. Those organizations won’t get a free pass, though. Observers agree it’s a forgone conclusion that insurers will pass that cost to their group customers.

A vintage pink Cadillac.

The Cadillac tax is much less pretty than this vintage pink Cadillac.

As the legislation is currently written, plans that cost more than $10,200 for individuals and more than $27,500 for families will be subject to the tax. Those thresholds may be altered before 2018 based on medical-cost inflation, and also may be adjusted for people in high-risk professions or those over a certain age or of a certain gender, according to a United Healthcare fact sheet.

Answering a recent Towers Watson survey of 420 benefits managers at employers with more than 1,000 workers, 44 percent of the managers said they are “very confident” they will trigger the tax if they don’t prepare for it by making changes to their health-care programs. Seventeen percent said they are “somewhat confident.” Thirty-one percent said the Cadillac tax will have a “significant influence” on their health-care strategy by 2015.

Changing plans enough to avoid the tax may be a rigorous exercise that transfers significant additional cost burden to employees. But what will constitute “preparing” to come in under the threshold, given that most employers are already making changes to their plans each year to keep up with rising costs?

“The excise tax provides a specific dollar goal, whereas most companies today don’t have a specific long-term cost goal,” says Tom Billet, a Towers Watson senior consultant. “To use a football analogy, it’s the difference between starting the game with a goal of scoring as many points as possible versus being behind by two touchdowns with three minutes left and knowing you have to score 14 points or you lose the game.”

7 thoughts on “‘Cadillac’ Plans Aren’t Affordable Care

  1. Given current costs for plans with the coverages mandated by ACA, isn’t it possible that increases in health care costs could drive the cost of coverage for even today’s basic plans up enough to hit these thresholds?

  2. Yes, I would say that’s quite possible, though I think it’s far more likely that the thresholds will be moved higher or the Cadillac provision of the ACA will be repealed.

  3. I find it amusing/concerning that Gruber would conclude that should someone choose the salary, as opposed to the insurance benefit, somehow we would in buy more of it?? The $ (from the extra salary less taxes) could be used in a variety of ways that we most likely be pumped back into the economy….not a bad idea.

    I do think that a “total compensation package” should be considered by both the employer and the employee in terms of its comparison. This is obviously not the only consideration, but it should be a significant piece of the decision-making process on the part of all sides.

    The underlying issue (the Elephant in the room) is the frequency of hidden disparity in compensation. That issue needs to be addressed. Having been in the corporate world for many decades, I realize that someone will figure out a way to disguise what’s really happening, and figure out a “work-around” to virtually any rule/regulation that is put in place, but unless we continue to monitor, and hack away at this problem, the issue will only procreate with ultimately a bad result.

  4. The writer points out that the Cadillac thresholds may be adjusted for age and gender, however the cost factors have no regional adjustment factors. The differential in healthcare costs and insurance premiums across the United States is significant and utilizing the same rates in Santa Fe, New Mexico and New York, New York is foolish from an underwriting perspective, but will certainly fulfill the administration’s objective of generating revenue to support this legislation.

  5. I find it perplexing that the final and most important point is that the current tax system “causes excessive health care consumption”, yet ACA mandates that young, healthy people who currently don’t consume much health care must purchase health insurance. Isn’t this also considered “excessive health care consumption”? Or are they merely supposed to purchase the insurance, but never utilize the benefits? Flawed argument, but what can be expected — Gruber helped write the flawed law.

  6. Sounds like time to start looking for loopholes.

    Can a company get around the Cadillac plan tax by switching to a high deductible plan thus reducing the cost of the health insurance plan and instead providing a large company contribution to an HSA account for the employee?

  7. Sounds like time to start looking for loopholes.

    Yeap , you are right. This is what companies will do.

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