As one of the last pieces of the Affordable Care Act (“ACA”) to be implemented, the so-called Cadillac Tax has taken the spotlight. Scheduled to become effective in 2018, the Cadillac Tax imposes a 40 percent excise tax on a health plan’s excess benefits over specified thresholds—$10,200 for individual coverage and $27,500 for family coverage, with adjustments for certain high-risk professions, retirees, and workforces with particular age and gender characteristics.

The Cadillac Tax was passed to generate revenue and decelerate rising health care costs by encouraging employers with lavish health plans to restructure their benefits. The theory was that by pressuring employers with extravagant health plans to reduce their health benefits, their employees would spend less on health care and reduce the country’s overall health care spending. When passed, proponents argued that the tax would affect only a small number of benefit-rich health plans.

In reality, the Cadillac Tax will likely affect a much larger universe of employers. According to a November 2014 study conducted by the American Health Policy Institute, in 2018, the tax will directly affect approximately 17 percent of all American employers, including 38 percent of large employers. A September 2014 Towers Watson study revealed that approximately 50 percent of employers with 5,000 or more employees will trigger the Cadillac Tax in 2018, which will rise to 82 percent by 2023. The significant increase in affected employers over time is due, in large part, to rapidly accelerating health care costs. Cadillac Tax thresholds are indexed for inflation based on increases in the Consumer Price Index, which lags far behind health care inflation.

In addition, estimates of tax liability are significant. For example, one employer surveyed in the American Health Policy Institute study estimated that it would be on the hook for $378 million in Cadillac Tax liability from 2018 to 2023.

The Cadillac Tax’s Effects on the Hospitality Industry

There has historically been a strong union presence in the hospitality industry, particularly hoteliers. The result is a significant number of collectively bargained plans among hospitality employers. Many experts believe that such plans will be among those hardest hit by the Cadillac Tax since they typically impose lower cost sharing and offer more generous health benefits than other employer-sponsored plans.

According to a Health Affairs report, the difference between collectively bargained plans and employer-sponsored plans is substantial. The report found that employee contributions for single coverage in collectively bargained plans average $21 for single coverage and $69 for family coverage per month. Meanwhile, the average employer-sponsored plan costs $83 for single coverage and $380 for family coverage per month. Collectively bargained plans will therefore be especially susceptible to Cadillac Tax liability. And while certain unionized high-risk occupations (such as law enforcement, mining, and construction) will have some flexibility in terms of the dollar threshold, this is likely to have a negligible effect on hospitality employers.

Action Items

Although the Cadillac Tax is still more than two years away from taking effect, unionized hospitality employers need to consider the implications of the Cadillac Tax in negotiations for collectively bargained plans under contracts extending past January 1, 2018. Ideally, employers should look to add a provision that allows them to make any necessary changes to the health plan to eliminate Cadillac Tax liability. Another alternative that may be more amenable to unions is to include a reopener provision that would reopen contract talks on health benefits at some point before 2018.

Hospitality employers should also consider offering their input on key Cadillac Tax issues to potentially guide regulatory implementation in their favor. The Department of the Treasury and Internal Revenue Service (collectively, “Treasury”) have thus far issued two notices proposing various approaches to implementing the Cadillac Tax:

• The first notice, Notice 2015-16, addressed some of the core issues, such as what types of coverage are taken into account when calculating liability, how to calculate the cost of coverage, and what adjustments to the annual dollar thresholds will be permitted.

• The second notice, Notice 2015-52, was published in July 2015 and supplements the first notice by addressing such issues as who is liable for the Cadillac Tax (given that several entities may be involved in administering benefits for a particular workforce), how the tax will be allocated, and how the tax will be paid.

Comments on Notice 2015-52 are due by October 1, 2015, and the Treasury is continuing to entertain comments on the first notice as well. After considering public comments, the Treasury will issue proposed regulations, after which employers will have another opportunity to comment.

Unfortunately, the Treasury will not have unfettered authority in drafting regulations. Some of the core Cadillac Tax issues are statutorily defined, including the annual dollar thresholds and the link between these thresholds and increases in the Consumer Price Index. A legislative fix seems unlikely given the significant revenues that the Cadillac Tax is expected to generate for the government. And it is unclear how far the Treasury will extend its regulatory authority to resolve those issues in favor of employers.

Nonetheless, there are proactive ways to address the statutorily prescribed provisions, such as the provision of transition relief that would allow employers more time to determine the impact of the tax and restructure their benefits accordingly.