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NFPs: Get a plan for the Cadillac tax

RFP
Much has been said about the cost to employers of the so-called Cadillac tax under the Affordable Care Act (ACA) — a 40% excise tax that will be imposed on health care expenses that exceed government thresholds beginning in 2018 — yet the not-for-profit (NFP) sector may face a disproportionate share of the expense for several reasons. Employee compensation and benefits costs typically make up a significant portion of NFP operating costs. In addition, the benefits portion of the total rewards package often plays a more prominent role in NFP organizations. Lack of variable pay programs (short- and long-term incentive plans) as well as conservative base-salary philosophies often make the cash side of the equation less competitive for NFPs than for their for-profit counterparts, thus making benefits key to the recruitment and retention of talent.

Attractive health care coverage is a key benefit. The Grant Thornton 2014 Nonprofit Compensation Survey reported that nearly 80% of participating NFPs offered medical benefits to their employees. More than 75% reported that they used PPO plans for the delivery of medical benefits to employees. This use of PPOs is significant because the design and structure of PPOs make organizations that use them more susceptible to hitting the excise tax.

Get a plan
To address whether the Cadillac tax is an issue, an NFP should put together a three-year strategic plan, starting now. Most important is getting a handle on costs of the total rewards package to employees over the next three years, including not just cash and spot bonuses but medical and retirement benefits. How expensive are benefits? How competitive is the health plan relative to premiums and copays, benefits offered and availability of providers? This information is essential to determine if changes should be made and what those changes, and their costs, will be.

NFPs likely will not increase salary and other benefits in response to the excise tax but instead may restructure health care benefits to keep overall costs in check. For example they may choose to move to an HMO, a point-of-service plan or a consumer-driven high-deductible plan, or consider a self-funding structure. Items such as wellness programs that help employees get, or stay, healthy could also play a greater role. Because health care is such a critical component for recruitment and retention at NFPs, NFP organizations are not expected to eliminate health care coverage. But they will need to determine if and how much cost-share increases will be passed on to their employees.

Will NFPs make changes?
Many NFPs may not have to worry about the excise tax until after 2018. The SHRM/EBRI 2014 Health Benefits Survey, conducted by the Society for Human Resource Management and the Employee Benefit Research Institute, found only 13% of responding NFPs expect their organizations to hit the excise tax in 2018. This compares with 15% for all sectors, 28% for the government sector and 19% for public for-profit organizations. Yet larger organizations ― including large NFPs ― are more likely than small ones to hit the excise tax, and consequently may need to make changes.

Interestingly, the SHRM/EBRI study found that 30% of organizations surveyed do not know how they will address the excise tax situation.

Meanwhile, NFPs should be as smart as possible about their costs while trying to make the impact on their employees as painless as possible. A key to reduce the impact on employees is effective and consistent communication. Helping employees understand the total cost of the medical plan and how much the organization is contributing to it on their behalf provides better insight on the total value they are receiving.

Contact
Ken Cameron
+1 404 704 0136
ken.cameron@us.gt.com

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