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Employers May Reduce Health Benefits to Avoid ‘Cadillac Tax’ in Senate Bill

According to a new survey by Mercer, a global consulting firm, 63% of the employers surveyed would cut health benefits to avoid paying the “Cadillac tax” found in the U.S. Senate’s health care reform bill. Twenty-three percent of employers said they would keep their current plan but pass along the new cost to their employees, and only 2% of employers would keep their plan and take the cost hit themselves. Additionally, 7% of employers said they would terminate their current plan, and 5% would use some other measure to respond to the excise tax.

The Senate’s Patient Protection and Affordable Care Act (H.R. 3590), which is currently being debated on the Senate floor, would create a tax on employer-sponsored high-end “Cadillac” insurance plans. The tax would be 40% of the “excess benefit” of plans that exceed the thresholds of $8,500 for individual coverage and $23,000 for family coverage. Mercer estimates that the health coverage offered by one in five employers would exceed the thresholds and would therefore be subject to the “Cadillac” tax.

Out of the employers surveyed that said they would reduce health benefits if the tax goes into effect, 75% would raise deductibles and copayments, 40% would offer an alternative low-cost plan to their employees, and 32% would replace their current plan with a low-cost one. Additionally, 19% of employers would terminate employer contributions to flexible health spending, health reimbursement accounts, and health spending accounts, and 19% would introduce high-performance provider programs, medical homes, and health management incentives.

Although proponents of the excise tax argue that employers that cut benefits will raise employee wages, only 16% of the employers surveyed said they would convert their cost savings into higher employee income.

Mercer conducted the survey in early November, polling 465 employer health plan sponsors on how they might respond to this type of tax on their health coverage. Mercer surveyed around the same amount of small employers (fewer than 500 employees), mid-sized employers (500-4,999 employees), and large employers (5,000 or more employees).

Keep up with the latest legal changes affecting employer benefits and trends in employee benefits with the Benefits Complete Compliance and with changes in federal employment laws in the Federal Employment Law Insider.