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The Affordable Care Act May Impact your Employee Benefits Budget!

The Cadillac Tax will force health insurance companies, or employers in the case of health-savings accounts (HSA) or self-insured plans, to pay a 40% tax on the difference between the amount the government believes is an equitable price for health insurance and what insurance companies actually charge for a particular plan.

There is a strong likelihood that the insurance companies and plan sponsors will then pass the increased expense on to individual beneficiaries in the form of higher premiums.

What the Cadillac Tax Is Designed to Accomplish

Along with increasing the flow of revenue to the government to assist in financing the Patient Protection and Affordable Care Act (PPACA), this law is designed to financially incentivize employers and health insurance providers to offer health insurance plans that are cost effective and that engage employees in sharing the cost of healthcare.

The idea of engaging employees in their healthcare is intended to bring the concept of market economics to bear. When we are engaged in the purchase of an item such as a car, we will shop for the best price, the best service and the best product. This compels each retail provider of vehicles to compete with others in the marketplace to secure our business by pricing their vehicles competitively and increasing the quality of the products they offer.

That has never been the case with healthcare. With medical insurance, once a person has selected their health insurance provider from the limited number offered by their employer, the typical consumer is no longer engaged in the ‘product and purchase of healthcare’ and usually doesn’t know the cost of services until after the fact.

If we experience more of a financial burden for our healthcare, then the hope is that we too will ‘shop’ for our healthcare and force the providers of such care to compete for our business. This will compel doctors, hospitals and other providers to offer better prices, better products and better customer service, thus reducing the cost of health care and increasing its quality.

Free market economics has proven itself over and over again for hundreds of years. The concept is proven and will drive down prices, increase innovation and increase quality.

For example, in an effort to increase their customer satisfaction scores and to compete more effectively, many hospitals have hired chief experience officers (CXOs) from the hotel industry to help develop better customer experiences.

The High-Risk Professions Threshold

High-risk professions are identified in U.S. Code 49801 as law-enforcement officers, defined in section 1204 of the Omnibus Crime and Control and Safe Streets Act of 1968, as well as employees in fire-protection activities as that term is defined in section 203(y) of the Fair Labor Standards Act of 1938 and individuals who provide out-of-hospital emergency medical care, including emergency medical technicians, paramedics and first responders.

For these professions, the threshold at which their insurance is defined as ‘high cost’ is definitively higher than that of other occupations, providing a significant benefit to employers in high risk professions.

Problems with the Cadillac Tax for High-Risk Professions

However, though the law provides an increased threshold for high-risk professions, there are several aspects of the law’s current implementation that will present additional challenges and costs to you as the employer.

First, each employer will have the responsibility to determine who qualifies for a high-risk profession’s increased threshold and then report that information to the health insurance carrier. This will not be a simple task.

Second, the Cadillac Tax only allows a higher threshold of insurance premiums for these professions as long as the insured is currently employed in the profession or has retired with 20 or more years of service. The IRS has not yet addressed medically retired individuals or those who otherwise retired before reaching 20 years of service.

Third, the wording of the law reads

Section 49801(b)(3)(iv) provides that an additional amount is added to the dollar limits for an individual who participates in a plan sponsored by an employer, the majority of whose employees covered by the plan are engaged in a high risk profession or employed to repair or install electrical or telecommunication lines.

The problem is who the employer is defined as. If your city is deemed the employer, does your city have more than 50% of its employees employed in a high-risk profession, such as law enforcement, fire suppression or EMS? In the vast majority of cases, the answer would be no.

How Much Will This Cost Me?

High-cost healthcare benefits are currently defined as healthcare plans that cost more than $10,200 for individuals and $27,500 for family coverage. For those in high-risk professions, the thresholds are $11,850 and $30,950 respectively.

Thus, to the extent that your employees’ benefits exceed the threshold, insurance companies will likely increase premiums to cover the 40% Cadillac Tax on that differential (see Cigna 2015).

Of course, the big question is whether you and your employees will qualify for the High Risk Profession Threshold.

The Path Ahead

The IRS is asking for assistance in crafting the rules that will be needed to implement the Cadillac Tax.

Some groups will pressure Washington to exempt firefighters and police officers from the excise tax altogether. Other groups will work with the IRS to craft language that better defines the High Risk Profession Threshold and who the employer is so more firefighters will qualify for the higher threshold.

The IAFC has already provided comments to the IRS (PDF) on the need to address a variety of issues, including the definition of “high risk professional.”

This article isn’t designed to provide all of the details about the Cadillac tax. For that, you must connect your HR and Finance teams as well as legal consultants with those familiar with the Affordable Care Act. Reviewing IRS notices 2015-16 and 2015-52 will provide a good basis for understanding the intent and direction of the IRS regarding the implementation of the Cadillac Tax.

For more information about the Affordable Care Act and its potential impact on America’s fire and emergency service, check out IAFC.org/ACA.

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