Your employees’ benefits budget may be impacted by an element of the Patient Protection and Affordable Care Act (PPACA) commonly referred to as the Cadillac Tax.1 The Cadillac Tax is an excise tax scheduled to take effect in 2018 that will force health insurance companies—or employers, in the case of health savings accounts (HSA) or self-insured plans—to pay a 40% tax on the difference between the amount the government believes is an equitable price for health insurance and what insurance companies actually charge for a particular plan. There is a strong expectation that insurance companies and plan sponsors will pass this increased expense on to individual beneficiaries in the form of higher premiums.
Along with increasing the flow of revenue to the government to assist in financing the PPACA, this law is designed to financially incentivize employers and health insurance providers to offer health insurance plans that are cost effective and that engage employees in sharing the cost of healthcare.
The idea of engaging employees in their healthcare is intended to bring the concept of capitalistic economics to bear. When we are engaged in the purchase of an item such as a car, we will shop for the best price, the best service and the best product. This compels each retail provider of vehicles to compete with others in the marketplace to secure our business by pricing their vehicles competitively and increasing the quality of the products they offer.
That has never been the case with healthcare. With medical insurance, once a person has selected their health insurance provider from the limited number offered by their employer, the typical consumer is no longer engaged in the product and usually does not know the cost of services until after the fact. If consumers experience more of a financial burden for their healthcare, the hope is that they will then shop for healthcare the way they would any other product and force the providers of such care to compete for their business. This will then compel doctors, hospitals and other providers to offer better prices, better products and better customer service, thus reducing the overall cost of healthcare while increasing its quality.
This concept of free market economics has been proven over and over again for hundreds of years to drive down prices, increase innovation and increase quality. For example, in an effort to increase customer satisfaction scores, compete more effectively and avoid financial penalties by the Centers for Medicare & Medicaid Services (CMS), many hospitals have hired “chief experience officers” (CXOs) from the hotel industry to assist with the development of better customer experiences and, hence, better scoring and increased revenue.
The High-Risk Professions Threshold
High-risk professions are identified in US Code 49801 as law enforcement officer (as defined in section 1204 of the Omnibus Crime and Control and Safe Streets Act of 1968) as well as employees in “fire protection activities” as that term is defined in section 203(y) of the Fair Labor Standards Act of 1938, and individuals who provide out-of-hospital emergency medical care—including emergency medical technicians, paramedics and first responders. For these professions, the threshold at which their insurance is defined as “high cost” is definitively higher than that of other occupations, providing a significant benefit to employers in high-risk professions.
Though the law provides an increased threshold for high-risk professions, there are several aspects of the law’s current implementation that will present additional challenges and costs to you as the employer.
First, each employer will have the responsibility to determine who qualifies for the high-risk profession’s increased threshold and then report that information to the health insurance carrier. This will not be a simple task.
Second, the Cadillac Tax only allows a higher threshold of insurance premiums for these professions as long as the insured has been employed in the high-risk profession for 20 years or more. The IRS has not yet addressed medically retired individuals or those who have otherwise retired before reaching 20 years of service. If you as an employer have a younger demographic of EMS professionals, as many of us do, many of your department’s employees would not qualify.
Third, the wording of the law reads: “Section 49801(b)(3)(iv) provides that an additional amount is added to the dollar limits for an individual who participates in a plan sponsored by an employer, the majority of whose employees covered by the plan are engaged in a high-risk profession or employed to repair or install electrical or telecommunication lines.”
The problem here is whom is defined as the employer. If the city is deemed the employer, then does the city have more than 50% of its employees employed in a high-risk profession such as law enforcement, fire suppression or EMS? In the vast majority of cases, the answer would be no.
How Much Will This Cost Me?
The current definition of high-cost healthcare benefits are healthcare plans that cost more than $10,200 for individuals and $27,500 for family coverage.2 For those in high-risk professions, the thresholds are $11,850 and $30,950 respectively. Thus, to the extent that your employees’ benefits exceed the threshold, insurance companies will likely increase premiums to cover the 40% Cadillac Tax on that differential.3 Of course, the big question is if you and your employees will qualify for the high-risk profession threshold.
The Path Ahead
The IRS is asking for assistance in crafting the rules that will be needed to implement the Cadillac Tax. There will be groups that will pressure Washington, D.C. to exempt firefighters and police officers from the excise tax altogether. There will be other groups that will work with the IRS to craft language that better defines the high-risk profession threshold and who the employer is so more firefighters will qualify for the higher threshold. Several EMS organizations have already provided comments to the IRS.
This article is not designed to provide all of the details regarding the Cadillac tax. For that, you must connect your HR and finance teams, as well as legal consultants, with those familiar with the Affordable Care Act. Reviewing IRS notices 2015-16 and 2015-52 will provide a good basis for understanding the intent and direction of the IRS regarding the implementation of the Cadillac Tax.
1. IRS Notice 2015-16 Section 49801(c) and (2).
2. IRS Notice 2015-15 Section 49801
3. Cigna (2015). Cadillac Tax Fact Sheet. Retrieved on Oct. 5, 2015, from www.cigna.com/assets/docs/about-cigna/informed-on-reform/882320-a-cadillac-tax-sheet.pdf.