By Kimberly S. Johnson And Maxwell Murphy
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 discussed 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 it.
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 Congressional Budget Office 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 companies 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.
Emily Chasan contributed to this article.
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