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Alliance takes on 'Cadillac' tax

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Employers, insurers, trade associations and unions that have formed an alliance to convince lawmakers to repeal the health care reform law’s 40% excise tax on costly health plans face an uncertain future in Congress.

Under the law, a 40% excise tax is to be imposed, starting in 2018, on health plan premiums that exceed $10,200 for single coverage and $27,500 for family coverage.

In the case of employers that purchase coverage from insurers, the insurers will pay the fee, widely referred to as the “Cadillac” tax. For self-insured employers, third-party administrators will be liable for the excise tax. However, insurers and TPAs are expected to seek reimbursement from employers.

Unless benefits are reduced significantly, few employer plans will escape the tax, according to a 2014 study by Towers Watson & Co. that found that 48% of employers are likely to trigger the tax in 2018, while 82% are likely to do so in 2023.

After 2018, the excise tax trigger will change each year based on the consumer price index. The problem with that linkage is that health insurance costs have consistently risen more than the index.

“This tax does not hit ‘Cadillac’ plans. It hits ordinary plans that are expensive simply because they cover many people whose health costs are generally higher than average — women, older and disabled workers, and families who experience catastrophic health events,” said James Klein, president of the American Benefits Council in Washington and a member of the newly formed repeal coalition, Alliance to Fight the 40.

If the tax is allowed to go into effect, it will “cost employers a lot of money or they will have to change their plan designs.

Both are an inevitable consequence” of the excise tax, said Andy Anderson, a partner with Morgan, Lewis & Bockius L.L.P. in Chicago.

Other coalition members include Cigna Corp., the Council of Insurance Agents & Brokers, New York Life Insurance Co., Pfizer Inc. and the United Brotherhood of Carpenters and Joiners of America.

But observers are split on whether Congress would back repealing the excise tax.

Congressional Democrats worry that repealing the excise tax could open the door to other changes, including repeal of the Patient Protection and Affordable Care Act, said Frank McArdle, an independent benefits consultant in Bethesda, Maryland.

“Supporters of the law fear this could open the door to other amendments,” he said.

Others, though, believe repeal of the excise tax has a good chance.

“We are optimistic about the chances of winning congressional approval,” said Annette Guarisco Fildes, president and CEO of the Washington-based ERISA Industry Committee, which represents primarily large employers. “There is broad bipartisan support for repeal.”

For example, the chief sponsor of a repeal bill introduced earlier this year is U.S. Rep. Joe Courtney, D-Conn., whose bill has more than 125 Democrat and Republican co-sponsors.

As that effort gets underway, regulators have yet to provide guidance on several questions from employers and others about the excise tax.

“We have far more questions than answers at this point,” said Barry Carleton, a senior Towers Watson consultant in Philadelphia.

So far, the only guidance regulators have released came last week, when the IRS affirmed that contributions to health savings accounts, health reimbursement arrangements and flexible spending accounts are to be included as plan costs in excise tax calculations; and in February, when the agency laid out its thinking on several areas related to the excise tax in a request for comments on proposed rules.

For example, the IRS said on-site clinics that provide only minor services would not be considered group plans and would be excluded in excise tax calculations. But the IRS wants comments on whether on-site clinics that provide immunizations and treat workplace injuries should be excluded from the calculations.

The IRS also asked for comments on whether it should allow plan costs above the excise tax trigger for high-risk professions, such as law enforcement officers, firefighters and paramedics.

It also isn’t known if the excise tax trigger can be adjusted to reflect regional differences in health care costs.

Uncertainty about the IRS guidance is worrisome, experts say.

“The clock is ticking ominously. Will there be enough time to enable employers to make plan changes to try to stay under the excise tax cost trigger?” Towers Watson’s Mr. Carleton said.