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Health care reform's 'Cadillac' excise tax complicating labor talks

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The health care reform law's so-called “Cadillac tax” on employer health plans doesn't take effect until 2018, but it already is complicating employer contract negotiations with unions.

Under the Patient Protection and Affordable Care Act, a 40% excise tax will be imposed on premiums that, in 2018, exceed $10,200 for single coverage and $27,500 for family coverage. Multiemployer plans, which are collectively bargained plans maintained by two or more employers, must stay within the higher threshold, whether the coverage is for singles or families.

In April, KapStone Paper and Packaging Corp., based in Northbrook, Illinois, proposed replacing its Kaiser HMO and UnitedHealthcare PPO with two high-deductible health plans linked to health savings accounts.

Mill workers in Longview, Washington, represented by the Association of Western Pulp and Paper Workers Union Local 153, rejected the tentative eight-year contract containing the change. Health care is one of several major sticking points, as union workers' last contract expired May 31, 2014. The union would prefer to continue negotiating but has received notice from KapStone that talks are at or near an impasse.

KapStone declined to comment, but in a memo to employees of the Longview plant dated Feb. 9, the company said the two traditional health plans would trigger a $2.7 million tax liability.

Greg Pallesen, AWPPW vice president in Portland, Oregon, argued that most employers are using the Cadillac tax as an excuse to trim benefits.

Labor lawyer Louise Pongracz, a partner with Willig, Williams & Davidson in Philadelphia, said employers may say they can't provide richer benefits, but it's all part of the negotiation strategy. “I think that most employers, when you sit down and negotiate, they say, "Fine, here's the pie: You want it in your pocket, (or) you want it in your benefits?'”

Southeastern Pennsylvania Transportation Authority in Philadelphia is handling it a little differently. Last November, the authority and Transport Workers Union Local 234, its largest labor union with more than 5,000 workers, inked a new contract. While the pact boosts wages by 5% over two years, the two sides failed to come to terms on medical and prescription drug benefits, partly due to uncertainty posed by the excise tax.

“It was just a very challenging issue to try to tie down,” SEPTA Chief Financial Officer Richard Burnfield said.

While the contract runs through Oct. 31, 2016, transportation and union leaders have had a meeting about the next pact. With medical and prescription drug costs rising 8% to 9% per year, “health care and benefits certainly are going to be one of those major issues that we're going to have to talk to between now and then,” Mr. Burnfield said.

Even employers well-prepared for labor talks may find it difficult to predict the effect of the tax, as the IRS has not issued proposed rules for its implementation. An IRS notice published in March, however, suggests that the agency will cast a wide net, including, for example, employees' pretax contributions to health savings accounts in premium cost calculations.

Republicans and some Dem-ocrats in the House of Representatives are backing legislation to repeal the tax but have not said how they would replace the $87 billion in revenue that the Congressional Budget Office projects the tax would generate through 2025.

Steve Wojcik, vice president of public policy at the National Business Group on Health in Washington, said employers are focused on educating members of Congress and the administration on the “far-reaching” implications of the tax.

“In their minds, it was gold-plated plans that were given to Wall Street executives” that would trigger the tax, but in reality “it's even high-deductible plans to the average employee on Main Street America,” he said.

A 2014 Towers Watson & Co. analysis projected that 48% of employers with at least 5,000 employees that offer health plans could be hit by the excise tax in 2018, with 82% affected by 2023.

The tax is to be paid by insurers and third-party claims administrators, which are expected to seek reimbursement from employers.

In the meantime, employers are using all the bargaining tools available to them to avoid painting themselves into a financial corner.

Erin Kartheiser, a partner at Winston & Strawn L.L.P. in Chicago, has several clients negotiating typical three-year contracts that extend into 2018 but still address the tax prospectively. One option is to include language unilaterally reducing benefits if the collective bargaining agreement triggers the tax. Another is to seek to reopen negotiations in 2017.

Ms. Pongracz said limited “reopeners” that deal solely with health care costs are common.

KapStone's proposal to mill workers included such language, Mr. Pallesen confirmed.

“Nobody wants their money to go to the government,” said Linda Mendel, an employee benefits attorney who is of counsel with Vorys, Sater, Seymour and Pease L.L.P. in Columbus, Ohio. That's money that “would either stay in the employer's pocket or go into the employees' pocket,” she said.

Ms. Mendel worries that human resources and benefits specialists at some companies are not fully communicating with their labor relations teams, “so that people are just going in blind to bargaining.”

Most benefits people are very aware of the tax and its impact of labor talks, but some haven't even thought about preparing estimates of the tax's impact, let alone sharing that information with their labor teams, she said.