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Employers and Unions Must Prepare for 'Cadillac Tax'

October 1, 2014

By Louise Pongracz, Susan Blumenfeld, and Kelly Ann Brogan

As many of you know from reviewing employer proposals across the bargaining table, starting in 2018, the Affordable Care Act (ACA) imposes another new tax on high-cost plans, called the “Cadillac Tax.”  The Cadillac Tax is a nondeductible 40% excise tax on the excess (if any) of the cost of an employer-sponsored health plan over a specified threshold. This means that the tax will apply to the health plan costs that exceed certain thresholds. For 2018, these thresholds are estimated to be $10,200 for individual coverage and $27,500 for family coverage.

The tax is based on the cost of the premiums paid rather than the benefits provided or the co-payments/co-insurance rates under the plan. The threshold amounts are set by statute and may be adjusted. The cost means the total cost of the plan, including both the employer’s share and the employee’s share of the premium. However, keep in mind that multiemployer plans are to use the family threshold for determining whether the penalty applies. This higher threshold might alleviate the concerns of employers that contribute to a multiemployer plan.

For purposes of the Cadillac Tax, an employer-sponsored health plan includes medical and prescription coverage, as well as contributions to HSAs, HRAs and FSAs, but excludes stand-alone dental and vision plans. Both insured and self-insured plans are subject to the Cadillac Tax. The statute provides higher thresholds for certain retirees not eligible for Medicare, for plans with a mostly older or female workforce, and for plans in which a majority of participants work in high-risk professions (including, for example, law enforcement, firefighters, first responders, longshoremen and construction, mining and certain other industries).   

Union negotiators in every region and every occupation are seeing employer proposals regarding the Cadillac Tax, ranging from acting immediately to cut benefits so that, by 2018, the cost of the plan will not exceed the Cadillac Tax thresholds, to an automatic benefit reduction if the Cadillac Tax threshold is exceeded. Some employers have demanded that the union indemnify the employer for any Cadillac Tax it may owe, even though the tax is technically applicable only to the plan. If plan is self-insured, the tax is paid by the plan administrator, which is typically the plan sponsor (i.e. the employer). If it is insured, it is paid by the issuer. This is preposterous. Other employers are telling unions that that the employer is required by the ACA to cut the benefits in order to comply with the law. This is just plain untrue. The ACA does not require the employer to cut benefits; the employer might, however, owe a tax if the plan exceeds the specified thresholds.

While there is no need to panic, you should start to plan for the next contract cycle. Keep in mind that even if an employer wants to change its group health plan to avoid the Cadillac Tax, it still has an obligation to negotiate with the union regarding the health benefits it will provide to its employees. It will be a balancing act for employers and for the union; employers likely will want to offer sufficient benefits to meet the “minimum value” threshold under the ACA to avoid paying the employer shared responsibility tax (the “play or pay” penalty), but will also want to stay under the cost threshold that would trigger the Cadillac Tax.

There are many factors to consider. For more information about the Cadillac Tax and other areas of the ACA that have an impact on collective bargaining, feel free to contact the benefits attorneys at Willig, Williams & Davidson.

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