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.