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About your health plan: No Big Changes—for now

First the good news.

After years of shifting health costs to workers, most large firms are taking a breather on benefit redesign, and your health benefits next year will probably look a lot like this year's.

But analysts say brace yourself for some big changes in 2018 if the so-called Obamacare Cadillac tax isn't changed.

Doctor patient health care
Jamie Grill | JGI | Getty Images

"You won't see a big move toward consumer-directed health plans. You won't see a lot in terms of changing deductibles," said Brian Marcotte, president and CEO of the National Business Group on Health. "I think it's the calm before the storm."

Employers expect to keep health-cost increases to 5 percent, according to the latest NBGH survey of the nation's largest employers conducted in June. About three-quarters of the firms surveyed said they're trying to contain costs by offering more high-deductible, consumer-directed plan options.

Yet for now, Marcotte said, employers are not willing to scrap traditional benefit plans.

"They're waiting to see if the Cadillac tax gets repealed," he said. "You have a couple of bills in the House, one that has bipartisan support to repeal the Cadillac tax, and I think they're hoping that something will happen before the election year."

Widespread Cadillac tax opposition

Employers aren't the only ones concerned about the looming Obamacare tax. Union leaders worry that many of their members' benefit plans will also get hit.

"You have this very, very blunt tool … that simply says if your costs go above a certain level there's a 40 percent surcharge," said Shaun O'Brien, AFL-CIO assistant policy director for health and retirement.

The tax triggers an excise tax for every dollar that exceeds a certain benefit threshold. For 2018, it's anything above $10,300 for individual coverage and $27,500 for family coverage. In later years, the threshold will increase at a rate slightly above inflation.

"Although the tax doesn't go into effect until 2018, certainly at the bargaining table, employers are saying we're looking ahead," making it a key issue in union negotiations, O'Brien said.

The tax is imposed on the employer or the insurer that administers the health plan, but benefits analysts said the costs will likely be shifted to workers especially at smaller companies.

"It's going to have a bigger impact on smaller businesses," said Rob Wilson, CEO of Employco, a benefits outsourcing firm. "The clients that I've talked to so far, I don't think any of them will be absorbing that tax."

It's not just the premiums

The Obama administration is taking comments on the proposed rules for the Cadillac tax through October, with final rules expected by early next year. If there are no changes in the policy—and there's no reprieve from Congress—workers could be in for some dramatic changes in their benefit plans over the next two years, benefit consultants say.

The Congressional Budget Office estimates the tax will generate $87 billion in revenues over the next 10 years. About a quarter of the revenues will be paid on the benefits themselves, but the CBO estimates much of the funds will be generated from individuals facing higher taxable income.

That may come as a big surprise for most people, said Tracy Watts, a senior partner at benefits consulting firm Mercer.

"Why would they have higher income? Because they're going to lose out on some of their pretax deductions, because they get included in the excise tax," she said.


The Cadillac tax gets levied on the full dollar amount of benefits, she said.That could include benefits besides insurance premiums, such as flexible spending accounts, which can lower an employee's taxable income. The popular savings accounts allow employees to save for out-of-pocket expenses on a pretax basis.

"That could be the first thing that employers may look to perhaps eliminate, so that they could keep the medical plan itself under the threshold," Watts said. "All of a sudden that increases your taxable wages on your W-2."


Avoiding the tax

Employees can save their bosses and themselves from the Cadillac tax by opting for higher-deductible plans, which will keep them under the threshold. For younger, healthier workers, who don't need much beyond preventive care, those plans can provide savings.

"A lot of people are over-insured for medical," said Watt. "It truly is a financial planning decision and not everybody needs the most expensive plan."

Yet even with a high-deductible option, in some states the excise tax will be hard to avoid. Critics charge that the flat dollar threshold doesn't take into account regional differences in medical costs, which factor into high insurance rates in many areas of the Northeast, and western states like California and Alaska.

"You can have a very moderate plan in a high-cost area that costs more than someone with a rich plan in a low-cost area," said Marcotte.

The threshold also places an undue burden on older workers, who may need more coverage, O'Brien said. For them, avoiding the Cadillac tax could be virtually impossible.

"You've got to figure out what nobody else has been able to figure out, which is how to get health-care costs at or below the rate of inflation in the economy," O'Brien said. "All the experts haven't figured out how to do that, but that's what workers are being told has to happen for their health plans."