In 2018 a 40% excise tax will be imposed on plan costs that exceed pre-determined dollar limits laid out by the Affordable Care Act. Employers and their benefit advisers have already begun to take steps to avoid or mitigate so-called “Cadillac” tax exposure. Here are eight strategies Wells Fargo Insurance Services suggests to ensure employers minimize their tax risk.
1. Reduce the medical plan design value.
This is where many plan sponsors will first turn, because it’s simple and effective, says Daniel Gowen, senior vice president and an employee benefits national practice leader for Wells Fargo Insurance Services USA. Employers need to be careful that they don’t reduce the plan design benefits to levels that are too low. Otherwise, they risk dropping the plan design below the 60% actuarial minimum value standard applicable under the ACA’s employer play-or-pay mandate.
2. Consider other plan modifications.
Rather than just reducing the plan design, employers can consider alternative plan changes. Examples include a reduction in the size of the provider network, a shift to a value-based plan design structure, or the promotion of medical tourism.
3. Increase health and productivity measures.
Another way to reduce costs is to improve the health of the covered population. Investing in more robust wellness and care management programs, along with more analysis of the health drivers using data warehousing tools, can propel savings and help lower the trend of the plan, says Gowen. This will help employers stay under the penalty thresholds longer.
4. Manage funding of HSA account-based plans.
As of now, pre-tax contributions to HSAs will count toward the tax calculation. Eliminating, reducing, or moving contributions to post-tax will help lower plan costs subject to the tax. An employer eliminating HSA contributions furthers the strategy of reducing the plan design value of the core group health plan, but in turn erodes their support of consumerism, says Gowen, adding that such a tactic would require careful communications. Alternatively, he adds, making HSA contributions uniformly through the year rather than by lump sum would be less disruptive than eliminating contributions.
5. Optimize plan rate tiers.
Many plans have their rates set on a three- or four-tier basis. The cost thresholds for the tax are only two-tier (self-only and other than self-only). Since the tax owed is assessed per individual, Gowen says there may be an opportunity to convert rates to a two-tier basis and re-calculate the difference between single and family rates to either avoid or reduce the tax.
6. Restrict spousal coverage.
Gowen says his firm has seen an ongoing trend where employers do not allow employees to elect spousal coverage if their spouses are eligible for benefits elsewhere. A softer approach may be to impose a spousal surcharge, which might discourage the enrollment of spouses.
7. Have employees pay excepted benefits on a post-tax basis.
Products such as accident, critical illness, or cancer insurance are becoming more common, and if these benefits are paid post-tax by the employee, they do not aggregate toward the excise thresholds.
8. Establish dental and vision plans as stand-alone benefits.
If the dental and vision benefits are integrated into the medical plan, their costs will be included in the tax calculations. If separated from the medical plan and provided on an insured basis, they will not be included.