The Tax Man is Coming Preparing for the Cadillac Tax. April 15, 2015

Transcription

1 The Tax Man is Coming Preparing for the Cadillac Tax

2 Presenters Rich Stover, FSA Principal & Consulting Actuary Knowledge Resource Center Dave Ratcliffe Principal Health & Productivity 2

3 Agenda Overview IRS Notice Applicable coverage Aggregate cost Annual limits Tax mechanics Strategic planning Key open issues Note: There are no regulations yet on the excise tax. The analyses in this report are based on our interpretation of the statute and the Technical Explanation. The rules for the excise tax may change before the effective date. Therefore, we suggest using caution when making strategic decisions in advance of the issuance of clarifying regulations. The information contained in this presentation and any accompanying documents does not constitute legal advice; consult with your legal and tax advisors before applying this information to your specific situation. 3

4 Do you intend to pay the tax? 4

5 Overview of the Excise Tax Starting in 2018, a 40% excise tax will apply to each employee s excess benefit, which is the aggregate cost of applicable employer-sponsored coverage that exceeds the limit calculated on a monthly basis For each employee, former employee, surviving spouse, or other primary insured individual Aggregate cost of applicable coverage Minus: $10,200 or $27,500 annual limit = Excess benefit Multiplied by: 40% = Excise tax attributable to that individual The tax is allocated by the employer to insurers, TPAs, PBM and other administrators for payment to the IRS. Insurers, TPAs, PBM and other administrators expected to charge back cost to employer, perhaps with tax gross-up. 5

6 Example While illustrated on an annual basis, the tax is calculated on a monthly basis separately for each employee/retiree. 6

7 Example (cont.) While illustrated on an annual basis, the tax is calculated on a monthly basis separately for each employee/retiree. 7

8 Example (cont.) While illustrated on an annual basis, the tax is calculated on a monthly basis separately for each employee/retiree. 8

9 Applicable Coverage Generally, applicable employer-sponsored coverage Includes: Health coverage excludable from income, including HRA contributions Health FSA employee and employer contributions HSA contributions employer contributions and employee salary reduction contributions Onsite clinics, if considered a group health plan EAP, if considered a group health plan Wellness programs, if COBRA charged Executive physical programs and supplemental medical programs if excluded from income Excludes: Dental and vision under a separate policy, certificate, or contract of insurance (Self-insured dental and vision?) Employee after-tax contributions to HSAs Long-term care Accident and disability benefits Coverage for a specified disease or illness or fixed indemnity coverage (e.g., critical illness and hospital indemnity plans) if 100% employee paid with after-tax dollars Auto insurance Liability and credit insurance Workers compensation 9

10 Impact of Health FSA While illustrated on an annual basis, the tax is calculated on a monthly basis separately for each employee/retiree. 10

11 Impact of Health FSA (cont.) While illustrated on an annual basis, the tax is calculated on a monthly basis separately for each employee/retiree. 11

12 Impact of an HSA While illustrated on an annual basis, the tax is calculated on a monthly basis separately for each employee/retiree. 12

13 Impact of an HSA (cont.) While illustrated on an annual basis, the tax is calculated on a monthly basis separately for each employee/retiree. 13

14 Have you measured the impact of the tax? 14

15 Aggregate Cost Aggregate cost determined under rules similar to COBRA rates Insured plans Premium Self-insured plans Actuarial basis method more complex methodology Past cost method easiest and generally lowest aggregate cost, but limited use Will future guidance require actuarial certifications and/or standard assumptions? Actuarially sound and self-supporting rates Will safe harbor assumptions be provided? Includes employer and employee-paid portions Gross cost Includes employee pre-tax and after-tax contributions 15

16 Annual Limits Initial limits: $10,200 individual / $27,500 family, adjusted by health cost adjustment percentage and indexed to general inflation 2018: health cost adjustment percentage = 100% + (FEHBP BCBS 2018/FEHBP BCBS %) 2019: 2018 limits indexed to CPI-U + 1% 2020+: indexed to CPI-U Higher initial limits $11,850 individual / $30,950 family for: Retirees age 55+ but not Medicare-eligible Employer can elect to combine under and over age 65 retirees Employees in high-risk occupations* or who repair/install electrical or telecommunication lines, if the majority covered by the plan Additional adjustment to limits for plans with age and gender characteristics that vary from national workforce * Law enforcement, fire protection, EMTs/paramedics, long shore, construction, mining, agriculture, forestry, and fishing 16

17 Expected Leveraging of Excise Tax 17

18 Tax Mechanics Will vendors pass along the cost? Since excise tax is not deductible for vendors, will they also gross up for taxes to stay whole? * Excise tax/(1 marginal tax rate) Grossing up increases the cost to employer by about 54% Payments may vary between not-for-profit and for-profit administrators 18

19 What actions have you taken to address tax? 19

20 Anticipating the Cadillac Excise Tax Strategies Absorb the cost Improve plan efficiency Shift cost Eliminate ancillary health care benefits End health plan sponsorship 20

21 Absorb the Cost Absorb the cost Improve plan efficiency Shift cost Eliminate ancillary health care benefits End health plan sponsorship Not a long-term viable strategy unless combined with other strategies to mitigate magnitude of annual excise tax increase Significant cost impact unless other total rewards components and/or wages reduced Current: health approximately 1/3 of fringe 1 Future: other total rewards and/or wage reductions to offset higher health cost 8% 6% 24% 63% 1 U.S. Bureau of Labor Statistics, Employer Costs for Employee Compensation December

22 Manage Cost Three Ways Absorb the cost Improve plan efficiency Shift cost Eliminate ancillary health care benefits End health plan sponsorship Medical tourism Patient-centered medical home/aco Onsite clinics and other services High performance networks Tele-health Transparency tools Plan design enhanced precertification; value based design Program engagement Manage utilization Manage unit costs Promote health Health promotion Biometric screening Incentives Accountability strategies Disease management Behavioral economics Medical and Rx discounts Audits Contract review Performance guarantees Direct contracting ACOs Collectives and coalitions Program and service review 22

23 Trend Reduction from Wellness? Absorb the cost Improve plan efficiency Shift cost Eliminate ancillary health care benefits End health plan sponsorship 69% of U.S. employers who indicated their wellness program had an impact on trend, reported reductions of 2% or more. Reduction of 0-1 trend percentage points per year Reduction of 2-5 trend percentage points per year 12% of U.S. employers who indicated their wellness program had an impact on trend, reported reductions of 6% or more. Reduction of 6-10 trend percentage points per year Reduction of more than 10 trend percentage points per year 23

24 Improving Plan Efficiency Lever to Avoid Cost & Defer Excise Tax Absorb the cost Improve plan efficiency Shift cost Eliminate ancillary health care benefits End health plan sponsorship ACA Excise Tax 38% of large employers impacted in $120B in new taxes Trend Per 1,000 employees: 2% avoids $31M 6% avoids $72M Cost Avoidance : $31M Cost Avoidance : $72M 2,3 1 ACA excise tax estimates from American Health Policy Institute 2014 the Impact of the Health Care Excise Tax on U.S. Employers and Employees 2 1,000 active employee headcount (40% single and 60% family) unchanged from Starting cost based on 2014 Kaiser Family Foundation Employer Health Benefits Survey average single/family rates adjusted by 5% 24

25 Incentives and Trend Reduction Absorb the cost Improve plan efficiency Shift cost Eliminate ancillary health care benefits End health plan sponsorship 2% or > trend reduction Average incentive 30% higher Higher incentives in 9 of 11 categories Premium differential is the most prevalent way to pay incentives 52% use reduction 33% use surcharge 2% or > trend reduction Average incentive 30% higher Higher incentives in 9 of 11 categories 25

26 Shift Cost to Employees Absorb the cost Improve plan efficiency Shift cost Eliminate ancillary health care benefits End health plan sponsorship Market- Based and Excise Tax Avoidance Cost Shifting Reduce medical benefits Migrate to lower plan values Implement HDHP/HSA plan Eliminate employer HSA contributions; eliminate or cap pre-tax employee contributions if subject to the tax Voluntary Benefits Integrate with core Employer subsidy Max. Cost Shift = Bronze Plan (60%) 26

27 Remodel Medical Plan Using Voluntary Benefits as Buffer Absorb the cost Improve plan efficiency Shift cost Eliminate ancillary health care benefits End health plan sponsorship Create more aggressive plan changes (shifting cost) Increased employee deductible and coinsurance cost VB Supp. Health Plan Buffers Accident Plan Hospital Indemnity Critical Illness Plan Employee or Employer Paid L o w e r e m p l o y e r h e a l t h c a r e c o s t R e d u c e e m p l o y e e o u t - of- p o c k e t i m p a c t 27

28 Eliminate Ancillary Benefits Absorb the cost Improve plan efficiency Shift cost Eliminate ancillary health care benefits End health plan sponsorship Employee and employer health FSA contributions will have significant impact Employers will reduce/eliminate employer HSA contribution Employers will limit/eliminate employee pre-tax HSA contributions Employees can make after-tax contributions Loss of employee and employer FICA savings Lower employee participation and savings rates Significant impact on effectiveness of HDHP/HSA programs 28

29 End health plan sponsorship Absorb the cost Improve plan efficiency Shift cost Eliminate ancillary health care benefits End health plan sponsorship Exposed to ACA $2,000/employer shared responsibility assessment Nondeductible, indexed, assessed on all full-time employees Attraction and retention problem unless employer provides additional wages to purchase coverage on public exchange and/or significantly increases other components of fringe Current split 1 Split after ending health plan sponsorship 81% 1 U.S. Bureau of Labor Statistics, Employer Costs for Employee Compensation December

30 Questions?

31 Contact Information Rich Stover, FSA Principal & Consulting Actuary Knowledge Resource Center 500 Plaza Drive Secaucus, NJ Dave Ratcliffe Principal Health & Productivity 1800 M Street NW, 7 th Floor/North Lobby Washington, DC Dave.Ratcliffe@xerox.com 31

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