Finance chiefs at companies ranging from Cisco Systems Inc. to Westmoreland Coal Co. are scrutinizing employee health benefits as they face the Affordable Care Act’s looming “Cadillac tax” on generous health plans.
They aren’t the only ones.
Across the country, cities and states are also scrambling to figure out how many millions the tax will cost them.
The ferment underscores how all employers stand to be pinched if they can’t reduce employee health-care costs below government-set thresholds.
Starting in 2018, both public and private employers will have to pay a tax of 40% on the amount by which the cost of their health-care plans exceed $10,200 for individuals and $27,500 for families. Those sums include premiums paid by both employers and employees.
The Congressional Budget Office predicts the nation’s employers will have to fork over $3 billion for the Cadillac tax in 2018. But, with health-care costs likely to grow faster than inflation, it expects the burden on employers to rise, doubling to $6 billion in 2019.
Without changes in its health plans, Boston’s tab for the tax would come in at around $6 million in 2018. The city of Washington’s total payments could be at or below $10 million through 2021, according to Jeffrey DeWitt, its chief financial officer.
In San Antonio, the Cadillac tax will cost $71 million between 2018 and 2024 unless the city makes changes, according to City Manager Sheryl Sculley.
Employers are keeping a close eye on one another. For them, “generally it’s not a good idea to have your head up too high; you want to do what other people are doing,” said Mark Pauly, a professor of business economics and public policy at the University of Pennsylvania’s Wharton School. “There’s safety in numbers,” he added.
Here’s an early look at the strategies and prospects emerging as companies and the public sector prepare for the tax:
Cutting back on health coverage, slowly
More than a quarter of U.S. companies are likely to face the Cadillac tax on at least one of their health plans if they don’t make sweeping benefits changes, and 42% will be hit by the tax a decade later, according to a report last week from the Kaiser Family Foundation, a nonprofit health-policy think tank.
Many of them will be able to avoid that fate, but only if they reduce or eliminate spending on insurance premiums and stop offering popular benefits, such as flexible spending accounts, which allow employees to use pretax dollars to pay for their health-care expenses.
Most employers are expected to shift employees to high-deductible plans that require them to pay more out of pocket for doctor’s visits and prescriptions.
“Small changes sooner, rather than later,” is the key to not jarring workers, according to Jane Jensen, senior consulting actuary for benefits consultant Towers Watson.
In Boston, more than 10% of the municipal budget goes to health insurance, said David Sweeney, the city’s CFO. Boston recently negotiated labor contracts with its 40 public-sector unions that avoid the tax and allow for renegotiation down the road if the city’s health plans eventually trigger it.
The city expects the new contracts to save $45 million over five years. Its initial Cadillac-tax tab in 2018, with the contracts untouched, would have been $6 million a year, assuming “extremely conservative annual cost growth of just 6%,” Mr. Sweeney said.
A minority of employers plan to pay the tax.
A survey of 562 human-resources and benefits executives early this year suggested a mere 2.5% of companies are resigned to paying the tax. Some corporate CFOs say privately, however, that they might elect to do so if having high-end health plans gives them an advantage in competing for talent.
For the most part, companies are likely to keep quiet about their own plans until they can figure out what their rivals will do. “Companies have an incentive to keep information private from their competitors,” said Katherine Baicker, a professor of health economics at Harvard University.
Mr. DeWitt, the CFO of Washington, said keeping generous benefits “is important in our ability to retain government employees.” Just one of its public-employee health plans “comes close” to triggering the tax, he added. Given the District of Columbia’s $2 billion in reserves, its annual budget of many times that and a healthy economy, he says he is comfortable paying a tax bill of $10 million or less.
The union representing thousands of film, television and digital-media writers is seeking an exemption from the Cadillac tax for all unions.
In a letter to the Treasury Department and Internal Revenue Service Thursday, the Writers Guild of America East argued that health plans in collective bargaining agreements have historically been exempted from other benefit-plan regulations.
Major private-sector employers, including railway operator CSX Corp., phone giant Verizon Communications Inc. and the Detroit auto makers, have about 400,000 workers whose contracts are up for negotiation this year.
Pittsburgh-based Allegheny Technologies Inc. locked out more than 2,000 union workers at a dozen plants in six states last month, after contract talks between the steelmaker and its employees broke down. A sticking point was Allegheny’s push for the right to reopen contract talks if it projects its health plans will force the company to pay the tax.
An Allegheny spokesman declined to comment, referring questions to a company website on the talks. According to the site, the company wants employees to pay more for health care, “but still far less than what employees at other companies pay,” and its most recent proposal offered $4,500 in lump-sum payments through 2018 if workers ratified the contract.
City officials in San Antonio say they hope the Texas Supreme Court will hear its case to declare labor contracts for its police and firefighters unconstitutional. The city is challenging a decade-long extension that allows those contracts to remain as-is after they expired last year, making it harder to trim health-care costs. The contracts are constitutional, the president of the firefighters union said, because the extension isn’t permanent.
The tax could have financial ripple effects.
General Mills Inc., Boeing Co., and Altria Group Inc. have said in regulatory filings that the tax would increase their obligations to retirees.
A Boeing spokesman said the tax “on certain high-value plans could add costs for our employees and retirees, and raises the possibility” the company will have to make cuts to its benefits packages.
States and municipalities, meanwhile, need to keep an eye on what the tax might mean to their credit ratings.
California, Illinois, Louisiana, Michigan and New Jersey each have state or local debt worries that the Cadillac tax could exacerbate. “It’s something we need to start planning for now,” said John Kennedy, Louisiana’s treasurer. Governments “have fixed costs that are mandated.” After paying the tax, “the less we have to spend on everything else, including debt service,” he said.