Monday, December 14, 2015

Are Affordable Benefits a Thing of the Past?

Company sponsored healthcare is costing the federal government an estimated $250 billion per year in tax subsidies from premiums alone, and the Affordable Care Act is out to change that in a big way.

By imposing a so-called “Cadillac Tax” on high value health insurance plans, beginning in 2018, the Affordable Care Act expects to bring in approximately $87 billion over the next ten years.

Any plan that costs more than $10,200 for single coverage or $27,500 for family coverage will be subject to a 40% tax on any value above the set threshold, which will be adjusted annually for inflation. The Obama Administration claims that this tax is only meant to affect those with platinum-level healthcare, however there is some economic trickery at play here: Medical care prices have historically risen significantly faster than all other prices, so by linking the inflation adjustments of the Cadillac Tax threshold to the Consumer Price Index (CPI), the administration has ensured that the threshold will increase at a much slower rate than the cost of healthcare.

Over time, employers will be unable to continue to provide a standard level of care that is below the Cadillac tax threshold, which will eventually hang average plans over the edge. According to the American Health Policy Institute, the cost of the average family health care plan is expected to hit the Cadillac tax threshold by 2031.

While there is still a lot to be figured out in terms of the implementation of the tax, we do know a few things for sure: The cost of healthcare will continue to rise, the pressure on benefit spending will continue to increase, and companies need to be prepared.

Staying Competitive

Studies overwhelmingly report that healthcare is the number one consideration for a prospective employee evaluating a job’s compensation and benefits package – something that is unlikely to change with the entrance of the Cadillac tax. Cutting back on healthcare will not be an option for companies committed to attracting and retaining top talent.

In light of these healthcare sanctions, business and financial strategists are being compelled to evaluate alternative approaches to employee benefits that are more affordable and sustainable in the long-term. Some companies are incorporating free and inexpensive benefits such as flex hours, nap rooms, and casual dress days, but these fringe benefits are insignificant recruiting tools compared to a robust healthcare plan.

 When one door closes…

Business and financial strategists are being compelled to find sustainable cost efficiencies to support the huge impending healthcare expenditures, and many are finding solutions within the very context of their existing corporate tax outlay.

Employers in all fifty states are already required to foot the bill for Unemployment Insurance for their workforce as part of payroll tax obligations. Unlike health insurance however, the premiums for Unemployment Insurance virtually never increase from use, and most companies are unknowingly already paying the maximum rates. By creatively incorporating the benefits of Unemployment Insurance, companies are saving millions.

How it’s Being Done

Severance is being replaced.

Until lately, the Supplemental Unemployment Benefits Plan (SUB Plan) has been the best kept secret of the IRS. Like healthcare, the IRS recognizes separation payments made under a SUB Plan as “benefits” rather than “wages” making these payments exempt from payroll taxes for both the employer and employee. Additionally, SUB Payments make use of the aforementioned Unemployment Insurance and are made in conjunction with State Unemployment Benefits. Employees maintain 100% of their pre-displacement income, while the company funded portion is reduced dollar-for-dollar by the State benefit collected by displaced employee.  

“Many of our clients see it as an opportunity to offset their healthcare plans by making use of government program that works in their favor rather than against them,” says Elizabeth Corley, a senior executive at Transition Services Inc., a major provider of SUB-Plan administration. “Over the past year the popularity (of SUB Plans) has really taken off. It’s a no-brainer when you see the savings available to the company.”

In Conclusion

Keeping a competitive recruiting and financial edge amidst the changing economic and political landscape will require innovation and flexibility. Corporate America is fast embracing the “what got you here won’t get you there” mentality and we’re likely to continue to see antiquated programs, like severance, being replaced with leaner, more efficient programs to counteract the Cadillac tax. If the Affordable Care Act is indeed here to stay, it’s our job as business leaders and thinkers to invent and implement sustainable solutions going forward.