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Mercer

Time flies. We can finally see the light at the end of the tunnel for ACA compliance. But the last ACA requirement poses the biggest challenges for most employers, and that’s (drum roll) the excise tax slated to go into effect in 2018. Since today is the deadline for the second round of comment letters to the IRS, we thought it would be timely to kick off a series of posts on this important topic. What will follow over the coming days are pieces written by Mercer colleagues with a broad range of expertise, focusing on tax-avoidance strategies and how the excise tax may affect other HR and business objectives.

 

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Mercer met with Congressional staff on June 11 to provide input on developing legislation that would modify the ACA’s 40% excise tax on high-cost plans. Mercer recently submitted comments to the IRS on how to implement the tax starting in 2018, but more fundamental reform can only be achieved through enactment of new legislation.

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While the recent IRS request for comment on implementing the 2018 excise tax on high-cost coverage gave us insight into what the IRS is thinking, it isn’t the formal guidance that we desperately need. This makes it tough on employers heading to the bargaining table this year. A recent article in The Wall Street Journal highlights the challenges facing the big three automakers as they prepare to negotiate this summer with the UAW, which historically has been very protective of its members’ health benefits. In other words, benefits are rich and costs are high. The law imposes a 40% excise tax on the annual cost of health plan premiums above $10,200 for individual coverage and $27,500 for family coverage. While it’s not clear whether UAW workers are enrolled in plans with costs that currently exceed the threshold, the employers and the UAW are concerned that, if costs continue to rise at their current rate, by 2018 the plans could face significant penalties. If they do, who pays?

 

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Despite last week’s cold snap, the bloom of cherry blossoms along Washington DC’s Tidal Basin is now under way – a peaceful sight that belies this stormy moment in Congress, where new healthcare legislation is being debated and the headlines seem to shift from moment to moment. However, one thing is for sure: any legislation affecting the US healthcare system must consider the impact on employer-sponsored health insurance – the source of coverage for 177 million Americans, 16 times the number enrolled in public exchanges.

 

That’s why the leadership of MMC companies Mercer and Oliver Wyman created a health policy group to help formulate MMC’s views on ACA repeal-and-replace legislation. Our efforts led to the issue of a policy paper that showcased original Mercer research on changing the tax treatment of employer-sponsored coverage.  

 

Last month, we took this research to the US House of Representatives to meet with policymakers actively working on the newly proposed American Health Care Act, or AHCA. We demonstrated that the excise tax on high-cost plans, currently law under the ACA, is not an effective method of penalizing rich “Cadillac” plans because plan design is only one factor affecting plan cost and often less important than location and employee demographics. 

 

This would also be true of a cap on the employee individual tax exclusion for employer-provided health benefits, a provision included in an early draft of the AHCA and favored by powerful voices such as House Speaker Paul Ryan (R-WI), House Ways and Means Chair Kevin Brady (R-TX) and new HHS head Tom Price. Mercer had also modeled the impact such a cap would have on the effective tax rates of Americans based on their income. The hardest hit, by far, would be lower-paid workers with families. Some staffers faced with this information for the first time were visibly struck.

 

When the bill was released for mark-up, the cap on the exclusion was not included, and the Cadillac tax was delayed until 2025 (and possibly 2026). But while we were pleased with this outcome, we also knew the bill was a long way from becoming law and the cap could easily resurface.  

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We collect a lot of data in Mercer’s National Survey of Employer-Sponsored Health Plans (as those of you who have taken the survey well know — sorry and thank you!), but each year the number we look at first and most closely is the average annual health plan cost per employee. After almost 30 years of studying health benefit cost, we’ve found there are certain trends so predictable that you don’t even think about them anymore. For example, average cost will always be lowest in the South and highest in the Northeast or West. If it’s not, check your work — you’ve mislabeled the data.

 

That’s why we worried about the so-called “Cadillac tax” from the beginning. It was clear to us that factors other than a rich plan design affect plan cost. Geographic location is one, but employers with older workforces also have higher cost. (Our survey doesn’t ask employers about the health risks in their populations, but in general, older people use more health care.) In addition, per-employee cost rises when more employees elect dependent coverage. This graph shows the 2014 average cost per employee for large employers — $11,641 — and how it varies based on location, employee age, and dependent coverage election.

 

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Ever since the ACA was signed into law, the excise tax on high-cost plans has been the number-one concern of employers. The statute defining the excise tax is contained in seven pages of the law. That’s it — seven pages. Don’t get me wrong, what is outlined is complicated. But seven pages is nothing in a law that originally spanned 2,000 pages.

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In an unprecedented move, JAMA published President Obama’s status report on the ACA. In it, the President details the impact of the ACA using charts and data from various sources and offers up some suggestions for what should happen next.

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A question relating to last week’s posts about managing health savings accounts (HSAs) after the excise tax goes into effect prompted an interesting discussion among the authors (and their go-to compliance expert) about the pros and cons of continuing to offer employees the opportunity to make pre-tax payroll HSA contributions. We thought we’d share it in Q&A form so you can follow along. Warning — it gets a little complicated, but that’s the nature of the beast. Welcome to our world.

 

Dee (an astute reader): The vast majority of employers that offer HSA-qualified high-deductible health plans (HDHPs) offer the ability for employees to make pre-tax payroll HSA contributions and even encourage them to do so. For now, such contributions count towards the calculation of the gross cost of “high cost” health coverage for excise tax purposes. Should employers take away the pre-tax payroll HSA contribution feature from their cafeteria plans? Otherwise, an HDHP with a lower gross cost than a traditional PPO plan may actually end up triggering a greater excise tax because any employee pre-tax payroll HSA contributions would get tacked on to the total cost of the employer’s health coverage.

 

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The ACA’s 40% excise tax will apply to “high cost employer-sponsored health coverage” as of 2018. “High cost” is defined as $10,200 for single coverage and $27,500 for family coverage. That seems fairly straightforward — until you take into account that the tax is calculated based on the “aggregate cost” of applicable employer-sponsored coverage over the threshold, not just medical premiums.

 

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Employers have made their opinion about the excise tax clear. There is another Affordable Care Act (ACA) provision, however, that irks them nearly as much: the employer mandate. In our recent survey of 644 employers, we asked employers what changes they would like to see made to the ACA. Repealing the excise tax was first, with 85% in favor, but repealing the employer mandate was second, favored by 70%. It’s not that employers don’t want to offer coverage; it's that proving they offer coverage is so much work.

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Since the earliest days of the excise tax, we’ve been explaining to policymakers, the media, and anyone who would listen that the cost of health care coverage is driven by many factors other than the richness of the plan design. Geographic location is just one of the more obvious. As anyone who lives in New York City or San Francisco can tell you, some places are just more expensive than others. And cost-of-living is just one factor affecting prices in a given health care market – competition and variations in provider practices come into play as well. So you’d think we’d be pleased by the recent announcement, discussed in this Business Insurance article, that the administration is now proposing revisions to the excise tax to address cost variations by state. Unfortunately, it is not an adequate fix for the geographic cost differences. In its upcoming 2017 federal budget, the administration will propose that in any state where the average premium for “gold” coverage on the state's individual health insurance marketplace exceeds the Cadillac-tax threshold under current law, the tax trigger would be set at the level of that average gold premium. First, health care cost varies by market, not state. But in addition, premium rates for individual plans on the public health exchange are generally lower than in employer plans because the networks are smaller and have targeted the lowest-cost providers. Because of this, there may only be a few states where the average gold plan cost is over the tax threshold. Finally, and perhaps most importantly, to use the average cost of a gold plan as a trigger – a plan with an actuarial value of 80%, which is very typical of employer plans today – seems like a low-ball match for an adjustment to the threshold for a “Cadillac” plan.  

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The need to reduce exposure to the excise tax is challenging employers to find new ways to slow health-benefit cost growth. That’s accelerating the pace of innovation in the health care market. Investment in digital health comes in at just over $4B annually, according to the most recent annual report from Rock Health. Just where is that money going?

 

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