CFOs Seek to Avoid Bite of Health Law's ‘Cadillac Tax'

Levy on high-cost coverage, which starts in 2018, creates dilemma for employers

By Kimberly S. Johnson and Maxwell Murphy
May 25, 2015 8:14 p.m. ET

Finance chiefs grappling with rising health-care costs face a new dilemma: how to avoid paying hefty taxes on generous employee health-care plans.

The Affordable Care Act calls for an excise tax on high-cost health plans, starting in 2018. The tax is meant to help fund insurance for previously uncovered Americans through the new health law.

The levy, often called the “Cadillac tax,� is 40% a year on the amount by which employer-sponsored plans exceed government-set thresholds.

These cost thresholds begin at $10,200 for individual coverage and $27,500 for family coverage. The cost is the total amount both the employer and employee pay in premiums.

The tax is expected to generate $5 billion in revenue in 2018, then $34 billion by 2024 as more plans reach the thresholds, according to the Congressional Budget Office.

Waste-management company Action Environmental Group, based in Teaneck, N.J., could face a $400,000 bill from the government for triggering the tax, based on coverage it provides for 350 of its employees and their families.

“To me it's a penalty for giving our employees a generous benefits package,� said Chief Financial Officer Brian Giambagno.

The private-equity-backed company, which has roughly $260 million a year in revenue and operates in New York and New Jersey, hired a consultant last year to look at its health-care costs and estimate how much tax it would have to pay.

Action Environmental briefly considered doing away with employee health coverage altogether to save money. “I'd be lying if I said we haven't had that discussion,� said Mr. Giambagno.

So far this year, executives of 13 publicly traded companies, including CVS Health Corp. , have talked about the Cadillac tax in conference calls and investor presentations, compared with eight companies during all of 2014, according to a Wall Street Journal review of FactSet transcripts. Benefits providers such as Aetna Inc., Wageworks Inc., Towers Watson and CVS Health are among the companies that have discussed how the tax would affect overall business strategy.

“Employers will do what they need to do to stay under that threshold,� said Larry Merlo, chief executive of CVS Health, at an investor conference last week.

According to a March survey of 562 human-resources and benefits officials representing U.S. companies, just 23% said they wouldn't hit the excise threshold because their companies don't have high-cost plans. A mere 2.5% said that they would pay the tax.

About 34% said in March that they were taking action or had taken action to avoid the levy. That compares to 24.5% of 624 respondents surveyed in 2014.

Businesses likely will shift to lower-cost insurance plans to avoid the levy, the CBO says. Some already are moving in that direction to stem health-care costs, which have risen by an average of 7% a year over the past 15 years, according to benefits consultant Mercer.

To avoid the tax, or lessen its bite, many companies intend to move to high-deductible health plans that require their employees to cover significantly more expenses out of pocket before insurance coverage kicks in.

At Medicines Co., a biopharmaceutical company whose drugs treat acute illnesses, executives are analyzing how to avoid or minimize the Cadillac tax. The Parsippany, N.J., company used to pay 100% of employee premiums, but now pays 80% to 90% of the costs, said Glenn Sblendorio, its CFO.

In recent years, Medicines has raised employee contributions to its health plans to deal with rising costs. But while reducing the employer-paid portion of the coverage saves money, it won't help the company circumvent the coming excise tax on employers because the tax is based on the full cost of the plan, not just the employer contribution.

“Our company develops ways to prevent people from dying,� said Mr. Sblendorio. He said that would make it hard to cut health benefits, adding: “We're probably going to bite the bullet� and pay the excise tax.

The Cadillac tax could be changed, delayed or eliminated. Most congressional Republicans and many Democrats oppose it, and some presidential hopefuls have said they would do away with the whole health-care law.

CFOs, however, say they must plan for the Cadillac tax in its current form. Cisco Systems Inc. doesn't want to trigger the tax based on the roughly 33,000 U.S. employees it covers. The networking-gear maker, based in San Jose, Calif., offers its workers a plan with a high deductible in addition to its standard plan, said CFO Kelly Kramer.

About 30% of workers switched to the high-deductible option, she said, and they received a stipend for their health-savings accounts to offset the larger deductibles.

Instead of passing costs on to employees, some companies might simply raise the price of their products and services, passing the costs on to their customers.

Many companies would save money if they simply dropped their employer-sponsored health insurance, leaving employees to buy coverage from the new individual health-insurance exchanges. But companies with 50 or more full-time workers are required to provide employee coverage under the law, or face annualized federal penalties of $2,000 for each full-time worker after the first 30.

And, because many businesses need to attract and retain talented employees, their executives rule out the idea of dropping employee health-insurance coverage.

The average company providing health-care coverage pays for 72% of insurance expenses, according to a survey released last week by audit firm Grant Thornton LLP and nonprofit research group Financial Executives Research Foundation Inc.