What the ‘Cadillac tax’ means for municipalities
By Paul Mulkern
One provision of the Affordable Care Act that is beginning to garner attention and debate is the so-called Cadillac tax, a 40 percent excise tax that will be imposed upon group health plans that offer benefits greater in aggregate cost than certain statutory thresholds.
The tax was due to take effect in January 2018, but last month it was delayed by two years, to 2020. It will apply to group health plans offered by all employers – whether private, governmental, nonprofit or church-based – and will apply to insured coverage as well as self-funded coverage.
The tax is of particular concern for municipal employers across the country, which historically have used benefit plans to attract and retain quality employees and are locked in to health benefits that were subject to collective bargaining. The higher cost of health care in Massachusetts, relative to other regions, puts municipalities here at an even greater disadvantage when subject to a nationwide threshold for the tax.
Interests across the political spectrum are calling for the repeal of the Cadillac tax, including the MMA, the National League of Cities, and other prominent municipal and labor organizations. But Congress has yet to organize around a viable proposal.
The government is relying on the tax as a central tool for financing the ACA, so if it were eliminated, an alternative revenue source would need to be established. As there is currently no agreement on an alternative source, the tax appears likely to be implemented in 2020. So it’s important for municipalities to understand its nuances in time to make decisions and adjustments.
One major challenge with the tax involves just how low the statutory cost threshold is for total plan cost. For individual coverage, it’s $10,200, and for family plans, it’s $27,500.
While these thresholds may have seemed hard to reach when the ACA was enacted in 2010, rampant medical inflation has rendered them only too reachable. Adjustments for inflation are included in the statutory scheme, but those adjustments are widely considered inadequate.
In the first year under the tax, the thresholds will be adjusted if the premium rate for the previous eight-year period of a designated plan offered to federal employees increases by more than 55 percent. In the following year, the threshold will be increased by the percentage change in the Consumer Price Index for Urban Consumers (CPI-U), plus 1 percent. For succeeding years, the threshold will be adjusted only by the annual percentage change to the CPI-U.
With medical costs increasing at an annual rate of 7 percent to 8 percent, and the CPI-U increasing at less than 1 percent, it’s clear that nearly all health plans eventually will exceed the adjusted thresholds.
Calculating cost of coverage
The aggregate cost of coverage an employer provides includes the full premium cost of that coverage (including both employer and employee shares), as well as all amounts contributed to tax-advantaged benefits such as Health Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), and most likely Health Reimbursement Accounts (HRAs). Costs of dental and vision care coverage will also be included if incorporated in the comprehensive health coverage, but not if offered on a stand-alone basis.
Adjustments to thresholds
In addition to the general inflation adjustments described above, the statute provides for several other adjustments that will apply, separately, to different employers:
A. Age and Gender Adjustment: This adjustment applies if the age and gender characteristics of an employer’s workforce differ from those of the national workforce. To facilitate this calculation, the IRS is formulating tables that will compare demographics within an employer’s workforce alongside numbers for the national workforce. As the municipal workforce is generally older than the national workforce, MIIA and MMA members will hopefully realize these threshold increases.
B. Adjustment for Qualified Retirees: The thresholds will increase for individuals who are:
a. receiving coverage by reason of retiree status,
b. age 55 or over, and
c. not eligible for benefits or enrollment under Medicare.
In these cases, the threshold for qualified retirees enrolled in individual coverage will increase by $1,650 and for those enrolled in family coverage by $3,450.
C. Adjustment for High Risk Professionals: Thresholds will be adjusted (by the same amounts as for retirees listed above) for individuals enrolled in plans where the majority of covered employees are engaged in a high-risk profession (including police, fire and ambulance/rescue employees, and, possibly, public works employees). In Massachusetts, police, fire and ambulance employees – and public works employees if the IRS can be persuaded to classify them as “employees within the construction industry” – comprise far less than a majority of a typical municipality’s benefits-eligible employees. Thus, unless the IRS allows municipalities to subdivide health plans to include sub-plans where the public safety employees comprise the majority, cities and towns may lose the benefit of this adjustment.
While regulations must be promulgated to address myriad unresolved issues, none has been issued yet. The IRS has issued two notices in 2015 that merely seek input regarding the development of regulations.
Cadillac tax strategies
The two-year delay of the tax may provide a sense of relief, but in actuality it is more important than ever to act now to mitigate the damaging impact that the tax will cause. Strategies that municipal leaders may consider include the following:
• Reduce the richness of plans by increasing out-of-pocket payments such as copays and deductibles and/or implementing co-insurance features
• Limit or eliminate FSA, HSA and/or HRA programs that count toward aggregate cost
• Eliminate high-cost plans
• Adopt lower-cost limited network plans
For Massachusetts municipal employers, any significant steps for reducing aggregate cost typically cannot be taken without collective bargaining – with the exception being changes that can be made pursuant to Chapter 32B, sections 21 and 22, of the General Laws. Under these two sections, municipal employers may include – as part of their health plans – co-payments, deductibles, tiered provider network copayments, and other cost-sharing plan design features that are no greater in dollar amount than those features offered in the Group Insurance Commission’s most popular plan.
Because the GIC’s plan design features have changed in the past two years, the procedure established in state law may prove beneficial even for employers that have used it previously. And if the GIC must make further plan design changes to reduce exposure to the excise tax, municipal employers will be able to replicate those changes pursuant to the procedure laid out in sections 21 and 22.
For more information on the ACA and municipalities, visit MIIA’s special ACA Resources page at www.emiia.org.
Paul Mulkern is a privately practicing municipal labor law attorney.