Unless health care costs can be mitigated, more than 60 percent of large employers' health plans will be affected by a federal excise tax that will go into effect in 2018, according to new analysis from benefit consultant Towers Watson.
The so-called "Cadillac plan" excise tax included in the new health care reform law imposes a 40 percent tax on employer health plan costs exceeding $10,200 for single coverage or $27,500 for family coverage in 2018.
According to Towers Watson data, the current cost of medical coverage for active single and family plans is $5,184 and $14,988, respectively. It's estimated if health care inflation projections stay their course, many employer-plan costs will exceed the tax cap.
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"All it takes to drive costs above the excise tax cap for six in ten employers is an 8 percent average annual cost increase. And, without making plan design changes, that's what many employers are projecting," said Dave Osterndorf, a consulting actuary with Towers Watson. "This rate of increase has been typical for the past several years. We see it as an open question as to whether the recently passed PPACA [health care reform bill] will mitigate cost trends in the near term for employers."
Under the circumstances, a plan with single coverage costs of $11,200 in 2018 would exceed the limit by $1,000 and be assessed a tax of $400. If 10,000 employees were enrolled in that plan, the total tax bill would be $4 million. The tax is paid by the employer either through increased premiums on an insured plan or a surcharge levied by the administrator of a self-funded health plan.
Towers Watson says employers will be forced to either absorb the additional tax or pass some, or all, of it back to employees in the form of higher premiums.
"The original concept of the excise tax was to penalize employers with excessively rich health benefit plans," said Randall Abbott, a senior consultant for Towers Watson. "Assuming even reasonable annual plan cost increases to project 2018 costs, many of today's average plans will easily exceed the cost ceiling primarily directed at today's 'gold-plated' plans."
But if employers can stymie health costs to an annual increase of only 6 percent, this will give them a five-year buffer before hitting the excise tax ceiling.
"These top performers may avoid hitting the excise threshold until 2023 or beyond due to their focus on workforce health improvement, wellness, chronic condition management, and communicating the prudent use of health care goods and services," said Osterndorf.
The good news, Abbott says, is that there's still time to plan for 2018, but reform and the excise tax may have some "unintended consequences." For example, "As employers strive to preserve the affordability of core health coverage, there will be difficult decisions to change or eliminate ancillary benefits like dental coverage and health flexible spending accounts, which are included in the excise tax definition."
There also needs to be clarification on "certain confusing aspects" of the law. Towers Watson notes, for example, it appears that the cost of a self-funded dental plan is included in the tax calculation, but an insured dental plan is not.
Employers also need to be thinking about the potential impact on retiree plans. The tax might not go into effect until 2018, but companies will need to project now what it will do to their financial statements later. "This is one of the more poorly understood impacts of the excise tax – and one that employers are just beginning to address with their actuaries and auditors," noted Osterndorf.
"The excise tax is likely to have repercussions beyond health care plan design and delivery," Abbott said. "To continue to offer sustainable employee benefit programs, employers today will need to look at all areas of employee rewards."
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