PPACA Continues to Evolve: Automatic Enrollment Gone, Is Cadillac Tax Next?

Margaret Thatcher is reputed to have said, “I am extraordinarily patient, provided I get my own way in the end.”  Perhaps that is the right model for employers to consider when it comes to changes to the Patient Protection and Affordable Care Act (PPACA).

Automatic Enrollment Eliminated

Another plank in the PPACA, automatic enrollment, has been eliminated by Congress and the President in the Bipartisan Budget Act of 2015 (BBA). This provision was inserted into the statute to meet the stated goals of PPACA to expand coverage. While this repeal may be encouraging to those who seek further changes to PPACA, due to some unique circumstances it could instead be a harbinger of false hope for additional changes.  More on that in a moment.

Original Thinking Behind the Tax

Regulatory agencies realized that administering the automatic enrollment mandate involved a lot of inherent difficulties.

Under much behavioral economic theory, inertia, properly harnessed, can get people to do the right thing — in this case, by defaulting new employees into enrolling in their employers’ group medical plan.

Rather than forcing people to make an active choice to enroll, the active choice would be to dis-enroll. That way, inertia would work in favor of more people taking coverage under their employer plans and meeting the goal of PPACA.  That was the thinking behind the PPACA provision that required all employers with more than 200 full-time employees to include an automatic enrollment feature in their group medical plans.

That requirement was supposed to be effective for the 2012 plan year. Observant readers might note that we are already in 2015 and yet no employer was actually ever required to implement that mandate.  That is because, on the way to that goal, the regulatory agencies realized that administering that mandate involved a lot of inherent difficulties, such as:

  • What would it mean in practice?
  • What would the default enrollment option be if an employer offered more than one plan option? If the default was to the expensive option, employees might drop the plan as being unaffordable; if it was to the least expensive plan it might not offer the protection that employees would expect.
  • What if the employee has dependents? Would it be fair to force employees to cover them automatically (particularly if they are covered under another parent’s plan) or to exclude them if they needed coverage?

These were just a few of the knotty questions that the regulators would have to answer. So, the implementation was delayed and, now, abandoned.

Call This Chapter “Follow the Money”

And the automatic enrollment mandate would have reduced tax revenues.

Was it just the administrative complexity that conspired to do in the auto-enrollment provision? Probably not. Perhaps a major reason for the change is that this provision, if actually implemented, would have caused a reduction in tax revenues. Conversely, its repeal has the effect of raising revenue (likely needed for passage of the BBA).

Here’s how it works: As fewer people are defaulted into a plan choice and concomitant reduction in taxable wages is avoided (i.e. the employee share of the premium would be a deduction for tax purposes for the employee), more tax revenue is raised.

While we would like to think that avoiding unnecessary administrative complexity drove the change, our legislators’ decision is likely more prosaic: eliminating this mandate would raise money in the Congressional scoring system. (I’ll leave the substance of the economic theory to others to argue.)

Does it All Come Down to Politics?

There are bills in both houses of Congress — sponsored by Democrats and Republicans — to repeal the “Cadillac” tax.

Despite the Administration’s stand that all of PPACA is sacrosanct — and any changes imperil the statute’s integrity — we see that the supporters are willing to make changes if needed for political purposes (in this case, the passage of a budget).

To opponents of the PPACA, this is good news; for supporters not so good. Of particular interest might be the potential effect as it relates to the so-called “Cadillac” tax. (This is the tax taking effect in 2018 on 40% of the cost of any group medical plan sponsored by an employer that exceeds $10,200 for individual coverage and $27,500 for family coverage.)

Setting Our Sights on the Cadillac Tax

Willis is a founding member of the Alliance to Fight the 40, which is working to affect a repeal (or major change) to the Cadillac tax due to its large effect on employer plans. Employers are already making major changes to their plans in anticipation of the tax.

Employers are already making major changes to their plans in anticipation of the tax.

There are bills in both houses of Congress — sponsored by Democrats and Republicans — to repeal the tax. In fact, there is no real opposition in Congress. In fact the Senate just voted to repeal the Cadillac tax on a by an overwhelming and bipartisan majority (90 – 10).  It is generally agreed that the vote is largely symbolic (the bill will generate a veto and that veto is expected to be sustained), but now most of the Congress is on record that they are against the tax. The industry feels this is a step toward an eventual repeal.

Despite that action, however, unlike the automatic enrollment repeal, it is still considered that repeal of the Cadillac tax (under the arcane determinations of the Congressional Budget Office) would cost the federal government tax revenues rather than raise them. That makes repeal more difficult.

Keep Calm and Carry On

Given the bipartisan nature of the effort and the fact that other parts of PPACA have in fact been changed, perhaps the Cadillac tax will be repealed or changed as well. Remember Lady Thatcher: We need to be patient but continue to work toward that goal.

About Jay Kirschbaum

Jay spent 22 years as a tax attorney specializing in employee benefits before joining Willis in 2001. He is current…
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