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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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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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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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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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In their post (“Managing FSAs to Avoid the Excise Tax”), my colleagues Joe Kra and Alayna Kotlyar broke the bad news that, under the ACA’s excise tax rules, FSA contributions will count in the calculation of “cost” for purposes of determining any tax owed. They also pointed out the value of the limited-purpose (dental/vision only) FSA in a post-2017 world. I’d like to elaborate on that point here.

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From about the time the ink dried on the Affordable Care Act, employers have been weighing health plan design changes in anticipation of the law’s 40% excise tax on high-cost plans slated for 2018. As design considerations become more urgent, so do the “dual-track” public policy activities of health plan sponsors (and Mercer) urging Congress to repeal or modify the tax — while simultaneously helping regulators develop workable rules to implement it.

 

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As a final entry in our excise tax series, we wanted to share an analysis that shows why the excise tax has been, from the beginning, the provision of the ACA that has caused employers the most heartburn — and why it will take creative strategies like those described in the Excise Tax Survival Kit to avoid it in 2018 and beyond.

 

In earlier posts, we’ve demonstrated that health plan costs vary widely by geographic region and workforce demographics (as plan sponsors know all too well), and argued that the excise tax will put undue burden on employers in higher-cost areas of the country and on those with less-healthy workforce populations. Based on premium costs provided in Mercer’s 2014 National Survey of Employer-Sponsored Health Plans, we’ve estimated that a third of large employers (those with 500 or more employees) have at least one plan whose cost will exceed the excise tax threshold in 2018 if they make no changes. Because of the way the excise tax threshold is indexed, the percentage of employers at risk will rise every year that medical inflation exceeds the general CPI — which, based on past history, is every year. So no employer can afford to be cavalier about the tax.

 

But what do these high-cost plans look like? Are they really the overly rich plans that economists argue have led to inefficient usage of medical services and increased health costs?

 

It depends on how you define “overly rich.” It makes sense that the richest plan on the public exchange — the “Platinum” plan — would be the type of plan targeted by the excise tax. But, taking a deeper dive into our survey data, we find that fewer than a third of those employer-sponsored plans estimated to exceed the excise tax in 2018 have an actuarial value (AV) of 90% or higher, the definition of a Platinum plan. So are Gold plans considered excessive as well? About half of the high-cost plans in our analysis have a Gold level AV of 80%. But 15% are Silver level plans (AV of 70%), and 7% are actually Bronze (AV below 70%).

 

On the public exchanges, Silver plans are the marketplace standard, accounting for 68% of enrollment as of June.1 These plans are also the basis for determining cost-sharing reduction subsidies on the exchanges, and yet, under employer-sponsored coverage, many of these same plans will be deemed “high cost” and subject to the excise tax.

 

 

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As employers look for ways to address their potential exposure to the excise tax, many have turned to high-deductible health plans as a way to create employees who are better “shoppers” for health care.

 

In some cases, the employer will help to mitigate the higher deductible by making a contribution to a health savings account (HSA), which is problematic in 2018 since HSA contributions are counted in the excise tax calculation, or by offering accident/critical care coverages. However, emerging experience is showing that in many cases, employees are underutilizing HSAs or are not electing the critical care coverage when they might benefit from it. Too many employees are one high-deductible event away from wiping out any savings that they have, and then some. On the other hand, some employees buy a higher level of medical coverage than they need, tying up money that might be better allocated to a 401(k) plan to build retirement savings.

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Employers looking to control health costs and reduce excise-tax exposure face a dizzying array of levers to try. Cost shifting, consumerism, workforce health improvement … and now, accountable care organizations (ACOs). Where do ACOs fit in?

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Since the ACA elevated the topic of health care coverage to mainstream media, savvy employers have taken this opportunity to begin or expand their own health care conversations with employees. The impending excise tax on high-cost plans offers employers yet another opportunity to tap into the heightened attention the media has placed on the cost of health care in the US and translate what that means to their employees.

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As any HR professional knows, managing a total rewards program is a complex balancing act. How do you find the right combination of pay, benefits, career opportunities, and work/life balance to enhance the employee value proposition — the reason the people you want choose to work for you rather than another employer? And while you focus on internal imperatives like retention and maximizing productivity and performance, you must also be continually aware of external factors that can change the equation.

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