While many of the early compliance activities for The Patient Protection and Affordable Care Act (ACA) are now behind us, the next major provision coming is the 2018 excise tax, often referred to as the "Cadillac tax."
Per the ACA, employers are subject to a 40%, nondeductible tax on the excess benefits of individuals whose plans are valued at more than $10,200 and family plans valued at more than $27,500.
While final regulations have not been issued, the Internal Revenue Service released a preliminary document in February 2015, with requests for public comment by May 15th. This release serves as a reminder that the excise tax is fast approaching. And though we know little about it, the tax is one of the most significant ever for employers.
From a strategic perspective, employers should consider the excise tax a real business risk that requires careful scenario planning and the development of an organized and well-planned glide path to stay below the 2018 limits.
Due to the uncertainties, planning and decision-making for the ACA will be like driving a car at night: You can see only as far as your headlights go, but you can make the whole trip that way. Here's what we can see right now:
Nearly half of employers will trigger the excise tax in 2018
Towers Watson's analysis of the employers in our financial database shows that even when based on a calculation of just medical and drug benefits, 48% of employers with 5,000 or more employees are likely to be subject to tax. Further, avoiding the excise tax is not a one-time event; employers will need to demonstrate that they have stayed below the thresholds for individuals and families every year from 2018 on.
Annual health care cost increases also must be managed
The good news is developing a glide path for avoiding the excise tax has the added benefit of controlling base cost of health benefits. An effective glide path should include improving workforce health, delivering better care, and using high-value techniques that lower unit cost, engage employee-patients and leverage new technologies and health benefit delivery channels. In addition, cost and value must be aligned, with value defined as the health outcome or result per dollar spent.
Beyond managing cost, staying below the thresholds will require changing health care strategies to address the following factors, at a minimum:
• Utilization of health care goods and services
• Employee health status and risk factors
• Optimal management of care and chronic conditions
• Maximization of opportunities as provider re-contracting and reimbursement methods shift from discounts to value
• The potential use of nontraditional benefit delivery channels such as private exchanges for actives, and especially for Medicare-eligible retirees where the opportunity available through the private exchange model is immediate and adds significant value for employers and retirees.
Will the excise tax be modified or delayed?
The absence of detailed regulatory guidance around the excise tax – which is months if not more than a year away – gives rise to speculation that some parts of it will be modified. However, we advise employers to act definitively on the law as it stands now.
While some of the specifics are unclear, what is clear is that staying below the excise tax levels (or any alternative) will inevitably require optimal health plan performance and improvements in workforce health. For many employers, it will also require a shift to significantly greater point-of-care cost sharing (often via high-deductible plans accompanied by a tax-advantaged health savings account, for example), as well as an emphasis on all of the factors noted earlier.
Randall K. Abbott is a North American leader and senior strategist in Towers Watson's Health and Group Benefits practice.