In 2010, the Affordable Care Act became law and in 2014 enacted the individual and employer mandates. Since then, the ACA has avoided 50 repeal votes in Congress and two lawsuits in the Supreme Court. Until October, no structural changes were considered — then magically, compromise appears.
On October 7th Congress unanimously passed and President Obama signed the PACE Act into law. On December 18th Congress passed and the President signed into law a last minute budget bill that included 4 major changes to the ACA – two year delay and permanent deductibility of the Cadillac Tax, one year delay of the HIT tax and a two year delay of the medical device tax. Wow, even more compromise and good news. What’s going on here? Let’s dig a little deeper, then you can decide.
Legislative victory No. 1 – the PACE Act gives the States (after taking it away) the right to determine the definition of small group instead of requiring it to be defined as employers with <100 employees.
Insight – there was political will on both sides for two reasons – impact on voters and financial stability. Redefining small groups to <100 employees would have negatively impacted the majority of employers in the 51-99 market segment (voters) and those employers who are “healthier on average” and profitable to insurance carriers were responding by transitioning out of fully-insured financing into self- insurance to avoid those cost increases, leaving poorer performing risk behind for carriers (stability).
See also: “10 broker friendly U.S. Senators.”
Legislative victory No. 2 – the Omnibus Bill keeps the government running until September 2016 and delays three ACA taxes.
Insight – this is an election year with much at stake. Congress and the President wanted to avoid a government shutdown and delay three tax provisions which would be used to fund the ACA: Cadillac tax, HIT tax and medical device tax (cost: $36 billion). All three taxes exacerbate the rising cost of health insurance and the Cadillac tax is going to be problematic for employers who provide richer benefits in exchange for lower salaries and wages (typically unions and non-profits).
The Cadillac tax caps the tax exclusion at $10,200 for singles and $27,500 for families then indexes those thresholds at CPI (ordinary inflation). Amounts exceeding those thresholds will be taxed at 40%. The proposed calculation includes ALL health insurance premiums AND healthcare account contributions (FSA/HRA/HSA). Healthcare trend (inflation) is averaging 7-8% so when you do the math, it’s not if you will pay, it’s when. What can employers do to prepare?
There are two financial levers for employers to use – plan design and risk financing.
Most small to mid-sized employers (<500 employees) finance their health insurance on a fully-insured basis. In exchange for 12 months of predictable premium and an annual renewal, they transfer the health risk of their employees/dependents to the insurance carrier. Fully-insured financing is typically more expensive because of carrier profit and premium taxes, such as the HIT tax. To delay the impact of the Cadillac Tax, these employers should strongly consider partially self-funding and using stop loss insurance to mitigate volatility and decrease risk, giving you more control over costs.
Roughly 75% of privately insured Americans are covered by traditional insurance – PPO, HMO or POS. These plans offer higher premiums in exchange for lower cost sharing at the time of service. To delay the impact of the Cadillac tax, employers should consider transitioning their employees into Consumer-Driven Health Plans (CDHP) and High Deductible Health Plans (HDHP). Both lower premiums and CDHP’s offer consumers more value because they are paired with a healthcare account (FSA/HRA/HSA) to pay for out of pocket costs.
Nothing in life is guaranteed except death and taxes. Democrat or Republican, both sides of the aisle want the estimated $300 billion in untaxed compensation most people receive through employer-sponsored health insurance. The Cadillac tax is designed to limit and eventually eliminate that tax exclusion and the federal delay was a timeout for the election, so use this time wisely to get prepared rather than rely on a “hope it goes away” strategy.
Gaunya is principal at Borislow Insurance and an EBA advisory board member. He can be reached at firstname.lastname@example.org.
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