The Obamacare ‘Cadillac’ Tax will be coming
Unless changes are made to the state employee benefits plan, officials say the plan is going to be hit with a huge federal tax burden — a burden that’s going to double every year.
The so-called Cadillac Tax is a provision in the Affordable Care Act that, beginning in 2018, that imposes a 40 percent tax on the premiums paid over ACA established thresholds.
Those “rich” plans are typically offered to workers covered by strong unions and to corporate executives.
But PEBP Executive Officer Damon Haycock said the tax also hits entities such as governments who can’t pay as well and, instead, offer strong benefit packages to attract and keep employees.
Its entities such as the Public Employee Benefits Program, he said, are the ones “that are going to be hit by this excise tax if we don’t make changes.”
According to projections, including medical inflation, presented by Chief Financial Officer Celestina Glover, the tax would hit two groups of participants — non-state retirees and employees in the HMO plan — the first year, each for about $450,000.
“All said and done, it’s a million dollar liability,” Haycock said.
It gets worse, he said, pretty much doubling each year after 2018 until the tax liability reaches more than $12.6 million in plan year 2022 with all active and retired participants in both the consumer driven plan and the HMO plan paying the excise tax.
On top of that, Haycock said the federal government is still working on regulations to implement the requirements, which means any decisions PEBP makes may have to be revisited. He said IRS hasn’t even spelled out whether the tax takes effect in January 2018 or with the fiscal year in July 2018. But he said the program has to start preparing now.
There’s also a bill introduced by Sen. Dean Heller, R-Nv., and others that would repeal the Cadillac Tax, but Haycock said he doesn’t know what its chances for passage are. He said the problem with repeal was the excise tax was used to balance the cost of Obamacare with expected revenues of about $80 billion a year.
“Here’s what we’re not going to do,” he said. “We’re not going to stick our head in the sand and hope it goes away but we’re also not going to yell fire in a movie theater and say we need to do something drastic.”
To that end, he said, he and his staff are preparing options to present to the PEBP Board at its November meeting.
Haycock expressed confidence those incremental changes brings plan costs down enough to keep total premiums below the line and avoid the tax.
“Today it’s not a crisis,” he said. “It’s a financial problem and we can create solutions. We’re going to present incremental changes to the plan that aren’t drastic.”
He said those changes won’t be limited to reductions in benefits but will include “a large laundry list of opportunities to reduce costs.”
He described the excise tax as “an ugly tax.”
It imposes a 40 percent tax on every premium dollar paid above a certain limit — $10,200 or $850 a month in the first year for individual participants. The limit is raised for inflation after that.
At present, he said, that won’t hit state workers in the consumer driven plan who get a subsidy of about $700 a month, well below the line. But that gap will close in coming years. He said lowering the state subsidy wouldn’t fix the problem because the total cost would remain the same, making the employee bear more of the cost.
The total premium includes not only the state subsidy but what the participant pays and state contributions to such things as Health Savings Accounts.
“The short story is the state subsidy is not the totality of the cost of the health plan,” Haycock said.
On top of everything else, the PEBP plan has been enriched a bit over the past few years in an effort to spend down about $100 million in excess reserves. The board lowered deductibles, increased life insurance contributions and made other changes to the tune of about $30 million a year.
As a result, Haycock said, more participants are using benefits, further increasing the cost of the plan.
“We don’t have another full year of reserves to burn down at the existing plan rate. Now we have a $30 million hole to make up, we have the excise tax problem and (medical) costs increasing 20 percent since last year.”
If the tax doesn’t go away, he said somebody has to pay it.
“The Legislature is not going to want to pay for it so, who will ultimately pay for this? The participant will. This really hurts Joe employee, Joe retiree,” he said.
He said he’s urging all stakeholders to help get creative about how to solve the problem — and the board to begin making those changes as soon as possible to avoid having to do major changes all at once.
“The idea isn’t to find one bullet that slays the excise tax monster,” he said. “We want to make sure we have multiple options — plan design, how we contract, how we manage reserve levels. Nothing is off the table now.”