Cadillac Tax Delay Would Save OEBB as Much as $21.3 Million

Repealing the unpopular excise tax on generous health plans leaves a budget hole for the Affordable Care Act, but it’s unclear how many employers would have paid the tax because insurance brokers have devised solutions that avoid higher taxes while retaining benefits for employees. One such end-run uses health reimbursement accounts tied to higher-deductible health plans.

Congress appears poised to delay the so-called Cadillac Tax for two years as a part of a large, year-end tax deal until 2020, a move that could save the Oregon Educators Benefit Board as much as $21.3 million in taxes it would have been expected to pay on its most generous health plans.

OEBB’s sister health plan, the Public Employee Benefit Board, restructured its health plans to avoid the 40 percent federal excise tax, but consultants from Towers Watson told the OEBB board earlier this month that similar changes could only reduce OEBB’s federal excise tax liability for the first two years from $21.3 million to $14 million.

If OEBB kept medical inflation to 3.4 percent -- as ordered by the Legislature -- OEBB still wouldn’t be able to completely eliminate the tax liability, but that level of inflation would limit the first two years of the tax to $1.7 million.

The two-year delay will buy OEBB time to consider other creative solutions to avoid the tax other than simply eliminating its richer plans, which are favored by older, less healthy workers.

“There are many OEBB plans that will not exceed the threshold,” Steve Carlson, a Towers Watson consultant, told the board. “People have tended to migrate to the lower premium plans, and that would help.”

The state’s largest teachers union, like other labor groups, had been lobbying Oregon’s Congressional delegation to repeal the tax.

"OEA members and leaders have been working very hard to advocate for a delay, and ultimately a repeal of the excise tax due to the negative impact on working families’ access to quality affordable health care,” said Jared Mason-Gere, a lobbyist for the Oregon Education Association.

The Congressional tax deal also suspends the tax on medical devices and gives a one-year reprieve to a special health insurance policy assessment. All three taxes were put into the Affordable Care Act to pay for the Medicaid expansion for the poor and health insurance subsidies for middle-class people who do not receive health coverage through their employers.

In the House vote, Republican Rep. Greg Walden of Hood River and the two Democrats from Portland, Rep. Earl Blumenauer and Rep. Suzanne Bonamici, supported the tax deal, while Rep. Kurt Schrader, D-Canby and Rep. Peter DeFazio, D-Springfield, were opposed.

Nothing was proposed to replace the revenues from the tax breaks, meaning that the $35 billion shortfall will likely be made up with government borrowing.

U.S. Sen. Ron Wyden of Oregon, the ranking Democrat on the Senate Finance Committee, declined to comment when his office was reached about the merits of the Cadillac Tax or repealing it without replacing the revenue source.

Both Wyden and Sen. Jeff Merkley voted against the overall tax deal, two of only six Senate Democrats to do so.

A report from the Robert Wood Johnson Foundation released in October made the case that a viable alternative, as well as an arguably more fair and more effective replacement for the “Cadillac Tax,” would be simply to cap the income level where a health insurance benefit could be awarded tax free to an employee.

Instead of taxing the benefits above $10,200 at an onerous 40 percent -- which would effectively end generous employer-sponsored health plans -- the benefit to wealthier workers would simply be taxed like any other income.

Portland insurance broker Rick Skayhan at Leonard Adams Insurance said this policy would work where the Cadillac Tax doesn’t -- employers would likely continue to help their employees with health insurance, but the federal government would see increased revenue from that now-taxable benefit.

He said the tax penalty of the Cadillac Tax was so blunt that few employers -- big public employee plans like OEBB aside -- would ever pay the tax.

Bethany Bacci, an employee benefits attorney at Stoel Rives, told the Oregon Senate Health Committee last month that, indeed, federal budget accountants calculated that most of the benefit from the excise tax would actually come from increased payroll taxes as employers scaled back health benefits and compensated with higher (taxable) wages.

But Skayhan said he had been helping employers avoid paying more taxes altogether by scrapping their generous health plans in favor of a moderate health plan combined with a health reimbursement account -- which an employee could tap into to avoid paying the new higher deductible.

The employee would see the same benefit as the old plan, but these accounts, since they remain with the employer, and not given to the employee upfront like a health savings account, would not count towards the Cadillac Tax. And if an employee didn’t use the benefit, the employer could keep the money that previously would have been paid to an insurer through higher health premiums.

“There’s no surcharge because you’ve changed the design,” Skayhan said. “The employee is held harmless.”

Chris can be reached at [email protected].  

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