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Deal Struck on Taxing of Cadillac Health Plans

January 14, 2010
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Related Topics: Financial Impact, Benefit Design and Communication, Labor Relations, Latest News
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Labor leaders struck a deal Thursday, January 14, with Democrats that would help unionized workers and retirees avoid an excise tax on high-cost health care plans, clearing a major political hurdle for the passage of health care reform.

Employer groups have also opposed the tax and said that the deal would benefit unionized workers at the expense of nonunion employees.

The bill would exempt the so-called “Cadillac” plans attained through collective bargaining; Taft-Hartley multiemployer plans; and all employees who are part of a state-employer health plan from being taxed until January 2018.

The agreement would raise the threshold at which benefits would face a 40 percent tax to $24,000 for family plans from the $23,000 passed in the Senate health reform bill, said AFL-CIO president Richard Trumka during a conference call with reporters Thursday. The threshold for individual plans, formerly at $8,000, would be raised by a similar amount.

Beginning in 2015, dental and vision benefits would be excluded from a plan’s taxable value.

“I think we’ve made some changes for middle-class America that I think will be very, very beneficial,” said Trumka, who was joined by leaders of major labor unions to announce the deal. “We don’t look at this as the end of that fight for real reform, but another step along the way to real reform.”

The plan would also raise the tax threshold for older Americans and for women, who tend to have higher health care costs than men do. That provision would be applicable to all plans.

The deal maintains a raised threshold for employees in high-risk professions, such as police and firefighters. And it would maintain the higher taxable threshold for plans in states where health care costs are higher. The threshold for plans in those states would be 120 percent of the maximum, an amount that would be phased downward beginning in 2014.

The deal would also allow health plans of unions, multiemployer plans and retiree plans run by voluntary employee beneficiary associations to purchase insurance on the health insurance exchanges beginning in 2017.

Employers say the deal raises concerns of fairness for nonunion workers.

“It will give a huge advantage to unionized plans over nonunionized employers,” said James Gelfand, senior manager for health policy at the U.S. Chamber of Commerce.

While employers have opposed the tax on the grounds it would hurt employees, the tentative deal would ultimately reduce the amount of money the excise tax would raise to help pay for the nearly $1 trillion health care bill.

The tax as originally detailed would have raised $150 billion toward paying for health care. Labor leaders said the changes would reduce revenue by $60 billion.

“One of the concerns we all have right now is how much revenue is lost,” says Martin Reiser, chairman of the National Coalition on Benefits, an organization composed of 200 employers and employer groups—including Xerox, UPS and Target—and such organizations as the American Benefits Council, the National Association of Manufacturers and America’s Health Insurance Plans. “I think these changes are all positive. But what are they going to do to make up that lost revenue?”

Legislators are expected to send the new details to the Congressional Budget Office to determine the impact on the bill’s total cost. President Barack Obama has vowed to sign a bill that does not increase the federal deficit.

New revenue could be raised by increasing a 5.4 percent tax on high-income earners and extending the tax to investment income, sources say.

Labor leaders were able to increase the rate at which the threshold would grow with inflation, but concerns remain among employers that more people will face taxes on benefits if health care prices continue to widely outpace inflation.

The new deal would raise the taxable threshold to the Consumer Price Index plus one. Labor leaders said that if health care inflation grew faster than expected from 2010 to 2013, the taxable threshold also would grow.

Generally, the politics of reconciling the health reform bills passed separately by the House and Senate favor the Senate, since its 60-vote, filibuster-proof majority must remain intact for any plan to pass.

As a result, observers say many of the elements in the House bill are likely to die, including a government-run insurance plan known as the public option and an employer mandate to provide insurance or face up to an 8 percent tax on payroll. In its place would be a so-called “free rider” penalty against employers with employees who receive federal subsidies to pay for health care.

—Jeremy Smerd 

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