While the recent IRS request for comment on implementing the 2018 excise tax on high-cost coverage gave us insight into what the IRS is thinking, it isn’t the formal guidance that we desperately need. This makes it tough on employers heading to the bargaining table this year. A recent article in The Wall Street Journal highlights the challenges facing the big three automakers as they prepare to negotiate this summer with the UAW, which historically has been very protective of its members’ health benefits. In other words, benefits are rich and costs are high. The law imposes a 40% excise tax on the annual cost of health plan premiums above $10,200 for individual coverage and $27,500 for family coverage. While it’s not clear whether UAW workers are enrolled in plans with costs that currently exceed the threshold, the employers and the UAW are concerned that, if costs continue to rise at their current rate, by 2018 the plans could face significant penalties. If they do, who pays?
Of course, the other option is to find ways to reduce plan cost and avoid triggering the tax. Typically, this would mean higher out-of-pocket cost for plan members, which unions have resisted. The big three automakers aren’t alone in facing this dilemma. Mercer survey data shows that, across all industries, large employers with at least 65% of their employees in unions have higher average costs — $13,659 per employee, compared to $11,421 among large employers with no employees in unions. What’s driving the higher cost? Only 8% of their employees are enrolled in a low-cost consumer-directed health plan, compared to 23% nationally. When a PPO is offered, the median individual deductible is $300, compared to $500 nationally, and 18% of sponsors don’t require any deductible, compared to just 8% nationally. In fact, virtually all cost-sharing provisions are lower among heavily unionized employers. And while these employers provide similarly robust health management programs, they are less likely to provide financial incentives to participate in the programs or to improve health habits. For example, only 13% provide an incentive for non-tobacco use, compared to 30% of employers with no employees in unions.
Where union plans are even more generous, however, is with premium contribution levels. Nearly a fifth of the unionized employers require no contribution at all for employee-only PPO coverage, compared to just 4% of the non-union employers, and the average contribution is just 15% of premium, compared to 24%. And when the unionized employers do offer a high-deductible health plan with an HSA, only 57% require any employee contribution, compared to 92% of the non-union employers. Low employee contributions don’t increase the risk of triggering the tax, since the threshold is based on total plan cost, but they do increase cost of the employer. Union employers looking for ways to avoid the tax could focus on plan design changes — like raising deductibles — to lower the total premium cost and yet still maintain union-friendly contributions that are below market.
Union plans also have cost drivers beyond their control — perhaps most significantly, their employees tend to be older. Adjustments for employee demographics is one of the many areas where we await guidance. That’s where these early challenges facing unionized employers could benefit the masses. This is a rare time where we find employers and unions on the same side of the table in Washington — pushing the government for guidance.
Do you know when your plans will hit the threshold? Our excise tax calculator will help you estimate exposure for the medical plan cost component — you just need to enter your number of employees and annual cost by medical plan tier.