Union Plans Need to Look Ahead to ‘Cadillac' Tax Despite Lack of Guidance

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Without concrete guidance on the Affordable Care Act's excise tax on high-cost health plans that takes effect in 2018, collectively bargained plans currently undergoing negotiations are flying blind when trying cushion health benefits against it.

Most employers are anxiously awaiting guidance on the tax, dubbed the “Cadillac” tax, but collectively bargained plans are especially sensitive to the timing of the guidance's rollout because the contracts they are negotiating now could stretch to or past Jan. 1, 2018.

Shaun O'Brien, AFL-CIO assistant policy director for health and retirement, told Bloomberg BNA, “The timing makes it challenging for collectively bargained plans” and “part of the challenge is simply trying to figure out whether or to what extent the excise tax on high cost health plans is going to be a problem or something that you need to address.”

The excise tax is an ACA provision aimed at businesses with generous health benefits. Employers with coverage exceeding $10,200 for individuals and $27,500 for families will be taxed 40 percent starting in 2018, on the theory that the plans boost medical costs.

A notice under tax code Section 4980I on the excise tax on high-cost, employer-provided coverage is listed in the Treasury Department's 2014–2015 Priority Guidance Plan (42 BPR 171, 2/3/15).

Many have speculated initial guidance will ask for more input rather than provide answers needed to ready plans for it.
“While we have the statute, we don't yet have guidance that lays out how it will be applied,” because “the thresholds can be adjusted based on certain factors including the age and gender composition of the workforce,” O'Brien said.

Preparing for Cadillac

Vanessa A. Scott, partner at Sutherland Asbill & Brennan LLP in Washington, said employers who will be locked into a bargaining agreement in 2018 need to think about how they will handle it if they trigger the 40 percent excise tax. 

“Different employers are handling it in different ways. Some employers saw this coming a while ago and started negotiating back in 2013” and put a cap on the amount that the cost of benefits could increase, Scott said.

Others built a provision into their bargaining agreements saying “to the extent that the cost of health benefits triggers the excise tax on high cost health plans then we automatically have the right to reduce the benefits to bring the cost below the threshold,” she said.

“It's very difficult for employers to do right now because we don't have a lot of guidance around the Cadillac plan tax, so we have the threshold and the statute,” but it may not be the threshold that becomes effective in 2018, Scott said.

“So an employer doesn't want to be too specific about what they are going to do as far as putting in dollar amounts for the threshold. They don't want to get themselves into a situation where the threshold has changed and they haven't bargained for what they need,” she said.

At a minimum, Scott said employers should have the tax in the back of their minds when they are negotiating, and they may want to consider putting a clause in the contract that would allow them to reopen negotiations in 2017 once more guidance is out.

Excerpted from a story that ran in Pension & Benefits Daily (02/10/2015).

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