CFO JOURNAL After Years of Prep, CFOs Wonder if Cadillac Tax Will Ever Take Effect Levy on high-cost health coverage, scheduled to go into effect in 2022, could initially affect more than one-fifth of U.S. companies Duke Energy at a plant in Wilmington, N.C. The utility’s finance chief said the company has some high-cost health plans that would trigger the Cadillac tax, but he doesn’t expect it to have a material effect on earnings. PHOTO: KEN BLEVINS/ASSOCIATED PRESS By Mark Maurer Nov. 25, 2019 5:30 am ET The uncertainty of a tax on pricey health coverage hangs over finance chiefs as they aim to cut costs and prepare for the levy despite its possible repeal. The federal government in 2022 is scheduled to begin collecting the 40% tax on U.S. employer benefit plans whose values exceed government-set thresholds. The so-called Cadillac tax, which is a part of the 2010 Affordable Care Act, has been delayed twice, feeding doubts that it will ever come to fruition. As the law stands, employer-sponsored plans that cost more than $11,200 a year for individuals and $30,150 for families would trigger the tax in 2022. Employers would be taxed on anything above those thresholds. Newsletter Sign-up The average individual health plan costs $7,188, and the average family plan costs $20,576, according to the Henry J. Kaiser Family Foundation, a health-care nonprofit. About one-fifth of all U.S. employers offer at least one health plan whose contributions would exceed the thresholds in the first year of the tax’s implementation. The tax was developed to help fund the provisions of the Affordable Care Act and battle rising health-care costs. It is projected to record gross collections of $96 billion between 2022 and 2029, according to a May report from the Congressional Budget Office, But some aspects of the plan remain unresolved. Some executives say they don’t have enough information from the U.S. Treasury Department and Internal Revenue Service to know whether their efforts to reduce plan costs will be enough to dodge the tax. The Treasury requested feedback from companies in 2015 and 2016, but hasn’t released guidance since. It is also unclear whether benefits such as retiree medical coverage, dental and vision plans and on-site medical clinics will be subject to the tax. If they are, it could bring the total cost of company health plans closer to “busting through the tax threshold,” according to J.D. Piro, a senior vice president at Aon PLC, a professional-services firm. Representatives from the Treasury and the IRS didn’t return messages seeking comment. The uncertainty leaves finance chiefs in a bind. If they don’t devise strategies to avoid the threshold, they face a bigger tax burden. On the other hand, all the resources sunk into planning for the tax—additional fees for tax consultants, for instance, and hours devoted to financial modeling on the potential impact—could be for naught. Lawmakers, who most recently delayed collection of the tax as part of a deal to end the partial government shutdown in early 2018, are now considering its repeal. The House of Representatives voted 419-6 in July to repeal the tax, and a companion bill in the Senate, introduced in March, is awaiting action. The Cadillac tax faces increasing opposition from a bipartisan group of lawmakers and major U.S. companies such as AT&T Inc., CBS Corp. , Exxon Mobil Corp. , Pfizer Inc., and Procter & Gamble Co. “The goal for companies is to stay competitive and manage costs,” said Trevis Parson, chief actuary for consulting firm Willis Towers Watson’s North America health and benefits division. Finance chiefs, meanwhile, are trying to adjust health-care benefits for employees in an effort to remain below the cost thresholds that trigger the tax. Duke Energy Corp. cut its active medical expenditures over five years by encouraging healthier habits through employee wellness programs and incentives that encourage employees to get regular checkups. Steve Young, finance chief for the Charlotte, N.C.-based electric utility, said the company has some high-cost health plans that would trigger the Cadillac tax but doesn’t expect it to have a material effect on its earnings. “The emphasis on employee health has been fruitful for us, more fruitful than I initially expected it to be when we undertook some of these programs,” Mr. Young said. “That’s kind of our first line of defense.” He declined to disclose figures on cost reductions. Other companies have sought to reduce benefits or increase participant out-of-pocket contributions in an effort to cut coverage costs. They have tried removing higher-cost hospital systems from beneficiaries’ networks, establishing programs that focus on managing high-cost claims, and offering access to state-of-the-art health facilities and programs. Wellness programs often take years to generate results in offsetting rising health costs, thus making the Cadillac tax’s delays beneficial in some ways. “All I want to make sure is that, if it happens, we’re ready,” said Bob Kolodgy, chief financial officer of the Blue Cross Blue Shield Association, a federation of 36 locally operated, mostly nonprofit companies. He said the association’s preparations have involved making sure the leaders of the Blue Cross companies are informed about the tax’s impact. Blue Cross Blue Shield Association is part of a coalition of companies, labor groups and patient advocacy organizations pushing for the tax’s repeal. Should this element of the Affordable Care Act stand, all health-care plans, even ones offering minimum coverage, would eventually hit the thresholds because of the way the tax is structured, said Tracy Watts, national leader of U.S. health policy at Mercer LLC, a New York-based consulting firm. That would leave companies with two options: offer coverage that meets minimum-value requirements mandated by the Affordable Care Act and pay the tax, or drop the plan and pay the penalty for the mandate, she said. The penalty for failing to offer minimum coverage is $2,500 per employee and increases annually. The latter of the two options could result in an unprecedented number of companies forgoing employee health care, Ms. Watts said.