Even though implementation is still a few years off, every time we talk to groups of NAHU members and also policymakers lately, the subject of health reform’s looming Cadillac Tax comes up. So, we thought we’d take some time this week to address the issues NAHU has with this coming burden on employer-sponsored coverage. To review, as one of the financing mechanisms of the health reform law, beginning in 2018 there will be a 40% excise tax on health benefits companies provide to their workers if the cost for those benefits is above a certain threshold. In 2018, the tax will hit employer-sponsored plans valued at more than $10,200 for singles and $27,500 for families and the threshold amount will rise each year, but the cost-index used is not explicitly tied to medical inflation. This requirement will apply to all employer-group plans, including those that are self-funded and fully insured. Self-funded plans will pay the tax themselves, whereas fully insured groups will rely on their issuer to pay the tax and can expect to see the tax cost passed through in their premiums.
The Cadillac Tax represents a profound shift in the way Washington, D.C., has historically treated employer-sponsored coverage and is a significant threat to the current tax exclusion for the value of employer-sponsored benefits. While there is a wide-ranging political effort underway to repeal the Cadillac Tax before it happens (and NAHU is actively involved in that effort) the IRS has already begun the process of laying out some of the tax’s implementation issues in guidance issued on February24. Clarifying these issues ahead of time is particularly crucial for many types of employers (and their brokers) who work in contracted plan situations that require advance planning and can be negotiated years ahead of time. As we reported in the March 6 Washington Update the new IRS guidance does not contain many answers, but instead reviews statute and attempts to clarify and seeks comments on what types of plans will be subject to the tax, how applicable coverage costs will be determined and how the annual statutory dollar limit to the cost of applicable coverage will be applied.
One of the most significant issues NAHU has identified with the guidance is how employee contribution to account-based plans like HSAs, FSAs and HRAs may be valued. The law specifies that employer contributions must be counted towards plan value and this guidance suggests that pre-tax employee contributions will be too. The guidance indicates that post-tax employee contributions will not count and seeks comment on this idea. NAHU has significant concerns about counting employee contributions at all and believes if implemented it could be a counter-intuitive game-changer for the consumer-directed healthcare group marketplace.
Other issues in the proposed guidance include how self-funded vision and dental plans will be valued. The law makes it clear that fully insured plans do not count towards the total, but the treatment of self-funded plans is ambiguous. NAHU believes that it is essential that all stand-alone vision and dental plans be excluded and also feels there is an issue of fairness regarding integrated plans, given the essential health benefit requirements for children’s dental and vision coverage in the small group market. The valuation of employee assistance programs (EAPS) and work-site clinics are two additional issues the IRS has raised and that we plan to comment on.
With regard to the determination of the applicable coverage costs, NAHU is very interested in how the IRS will determine each plan’s aggregate cost, as the calculation methods allowed could make the difference for a wide range of plans and will be the key brokers need for effective plan design in the years ahead. Currently, the IRS seems to be leaning towards the use of a variation on the COBRA rate calculation formula. However, the law allows for adjustments for the various ages of people on the plans, which could be problematic given the current limitations on composite rates particularly for smaller groups. Also, it remains unclear how adjustments for geography and high-risk occupations will be applied.
Comments on this guidance are due on May 15 and NAHU is actively seeking member input in the development of this letter. If you are interested in reviewing the issues and providing specific examples from your clients to help support our points, please contact email@example.com.