San Antonio Express-NewsHearst Newspapers Logo

Experts: New ACA tax will scale back employee health benefits

Upcoming levy on health insurance might prompt employers to cut benefits

By , Staff WriterUpdated
Dwight Lieb, a commercial real estate developer who bought La Fogata with his wife in 1997. He has sold the eatery to Patrick Richardson and his wife Cari Breakie Richardson.
Dwight Lieb, a commercial real estate developer who bought La Fogata with his wife in 1997. He has sold the eatery to Patrick Richardson and his wife Cari Breakie Richardson.Courtesy photo

A new tax imposed by the Affordable Care Act that is poised to take effect in 2018 could prompt some employers to curtail or perhaps eliminate health benefits for their workers, experts predict.

Commonly referred to as the “Cadillac” plan tax, it will be levied on those issuing, providing or administering employer-sponsored health insurance exceeding certain cost thresholds: $10,200 annually for a health plan covering one person or $27,500 annually for family coverage.

The excise tax will be imposed on self-insured employers or insurance companies selling group health plans to workplaces. Insurance carriers almost certainly will pass along that additional cost to their clients.

Advertisement

Article continues below this ad

Traditionally, workplace health plans haven’t been subject to income taxes or payroll taxes, which amounts to an enormous tax break — an estimated $250 billion in 2013, according to a Congressional Budget Office report released in June.

Taxing high-cost workplace health plans will boost federal revenues and help curb health care spending, the federal government has said. It also will help pay for federal subsidies that lower-income customers use to buy health insurance through the government-run marketplace.

But the move has attracted criticism and concern from people who say it will hurt employers’ efforts to provide health insurance to their workers.

“It’s the ultimate of stupidity,” said La Fogata owner Dwight Lieb, who offers health benefits to all 94 of his employees at the San Antonio restaurant. “You get penalized for giving your employees greater benefits. How stupid is that?”

Advertisement

Article continues below this ad

Employers or businesses of any size could be at risk of incurring the tax, according to experts in the insurance and benefits industries. And it won’t just be limited to generous health plans; it also could hit businesses of more than 100 employees that incur several catastrophic claims, said Mike Grossman, president of the Bank of San Antonio Insurance Group.

Small businesses providing health benefits to workforces that are older than average also could be vulnerable, benefit advisers said. The IRS expects it will allow adjustments for people who are old enough to retire and for those working in high-risk professions, however.

The Cadillac tax is “a clear, unintended consequence of the law,” Grossman said. He has been meeting with San Antonio’s congressional leaders to urge them to change or repeal the tax. Several bills seeking to repeal it have been proposed in Congress.

Forecasters said the new tax might dissuade companies from the practice of offering more generous health benefits instead of taxable salary increases.

According to the law, self-insured employers or insurance companies will be taxed 40 percent of any amount spent beyond the defined annual thresholds on an employee’s workplace health plan. Those costs include premiums, employer contributions to a health savings account, employer and worker contributions to a flexible spending account and coverage at some work-based medical clinics, the Henry J. Kaiser Family Foundation reported.

Advertisement

Article continues below this ad

Most employers will try to avoid the tax altogether by reducing workers’ health benefits, said Janna Hamstra, a San Antonio broker who provides benefit advisory services to businesses.

That means larger deductibles, higher co-pays, narrower provider networks and higher out-of-pocket costs for people covered by those health plans. It also means flexible spending accounts and health savings accounts almost certainly will be eliminated, Hamstra said.

“I’ve not heard of a single company who said, ‘Oh, gosh, it’s going to be so hard when we have to pay that 40 percent tax,’” said Hamstra, the owner of Hamstra Benefit Solutions. “It’s ‘What are we going to do? What plans do we have to eliminate? What benefits do we have to eliminate?’ It’s not ‘How are we going to pay the tax?’”

Employers are not going to absorb the costs, Hamstra said. But workers using those health plans will feel the pinch.

“It’s not going to be companies that shoulder that burden,” she said. “It’s going to be the American workforce. We’re going to have less benefits. We’re going to pay more out of pocket, because otherwise the company would get taxed.”

Advertisement

Article continues below this ad

The tax is scheduled to increase according to the rate of inflation. Because health care costs are rising more rapidly, more employers likely will be hit by the Cadillac tax as time goes on, Hamstra said.

Workplaces also could become vulnerable if their health insurance rates continue rising every year, “which the Affordable Care Act has done nothing to mitigate,” said Grossman, legislative chair for the San Antonio Association of Health Underwriters.

“We really need to see some action from our legislators quickly before this tax damages and discourages those employers that continue to grow and build the economy,” local insurance broker Justin Holland, owner of Texas State Financial & Health, said in an email to the San Antonio Express-News. “The middle class worker that depends on these benefits could see them diminish.”

Employers will have to determine every month if any of their workers’ health coverage costs exceed the established limits. If so, the business will be required to alert the IRS and their coverage provider so the tax can be paid.

That ramps up the administrative burden on employers, said Kevin Kuhlman, director of federal public policy for the National Federation of Independent Business, a small-business advocacy group.

Advertisement

Article continues below this ad

“Something that really concerned us is the increased compliance that employers would have to be responsible for,” Kuhlman said.

The IRS has issued general notices about how the tax will work, but it’s still developing regulations. The agency is accepting public comments until Oct. 1 on the most recent guidelines it issued.

Lieb said he doesn’t think the Cadillac tax will take effect in 2018 as scheduled since a new president will be in the White House before then. Others are reluctant to make predictions.

“You certainly can’t bank on it being gone,” Kuhlman said of the tax. “Because like any change to the Affordable Care Act, that is quite a challenge.”

pohare@express-news.net

Express-News archives contributed to this report.

|Updated

Peggy O’Hare reports on the census, demographics and more. She joined the Express-News in April 2013. She is a former reporter at the Houston Chronicle, where she worked for 11 years. She is a graduate of Texas A&M University. Email Peggy at pohare@express-news.net.