C A P P I N G T H E E M P L O Y E E TA X E X C L U S I O N F O R E M P L O Y E R H E A LT H C O V E R A G E

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1 C A P P I N G T H E E M P L O Y E E TA X E X C L U S I O N F O R E M P L O Y E R H E A LT H C O V E R A G E P R O J E C T I O N O F T H E L O N G - T E R M I M PA C T February 23, 2017

2 T O D A Y S D I S C U S S I O N I M P A C T O F C A P P I N G T H E E M P L O Y E E T A X E X C L U S I O N F O R E M P L O Y E R H E A L T H C O V E R A G E Generally, premiums paid for employer-sponsored health coverage and contributions to account-based plans are excluded from employee income and payroll taxes We evaluated the potential impact to employer plans and employees/families of three proposals to cap the employee exclusion and compared their effects to the 40% Cadillac excise tax. Various scenarios are included in this deck. P R O P O S AL S & C U R R E N T L AW I N D I V I D U AL FAM I LY THE EMPOWERING PATIENTS FIRST ACT $8,000 $20,000 Congressional Budget Office (CBO) OPTION 1 50 th percentile of premiums paid by or through employers Congressional Budget Office (CBO) OPTION 2 75 th percentile of premiums paid by or through employers 40% CADILLAC EXCISE TAX ON HIGH COST PLANS Projected assuming CPI of 2.15% $7,700 $19,080 $9,520 $23,860 $10,750 $28,950 MERCER

3 A B O U T O U R D A T A EMPLOYERS Mercer s National Survey of Employer Sponsored Health Plans is the largest, most comprehensive annual survey in the country. It uses scientific sampling and weighting methodology that recreates the actual mix of employers in the US in terms of their size and geographic location, which means that the results provide an accurate picture of what all US employers are doing and thinking. Most surveys in our industry use what s called a convenience sample meaning, you survey whoever is convenient to survey. Mercer s proprietary database of over 600,000 members enrolled in employer sponsored medical coverage, includes membership from over 200 employers of all sizes and various industries. These employers, both local and national in scope, are actively involved in providing efficient coverage for their employees by offering a choice of plans (PPOs, HMO, CDHPs). EMPLOYEES MERCER

4 I M PA C T F R O M E M P L O Y E R P L A N P E R S P E C T I V E MERCER 2017 MERCER

5 C A P P I N G T H E T A X E X C L U S I O N W I L L A F F E C T M O R E E M P L O Y E R P L A N S T H A N T H E C A D I L L A C T A X Percentage of employers with plans that will be subject to taxation by the specified year if they make no changes to their current plans. Will hit threshold in: % 80% 70% 60% 50% 40% 30% 20% 10% 0% 21% Employers with 50+ employees 42% Cadillac tax threshold 43% 63% CBO 75th percentile 57% 70% Patients' First Act Employers with 500+ employees 31% 57% Cadillac tax threshold 63% 81% CBO 75th percentile 74% 87% Patients' First Act Estimates based on data from Mercer National Survey of Employer-Sponsored Health Plans 2016; premium trended at 6%, excise tax threshold trended at 3% in 2021 and 2% in future years. CBO proposal threshold trended at 2% beginning in 2020, and Patients First Act proposal threshold trended at 2% beginning in MERCER

6 E M P L O Y E R P L A N S I N H I G H - C O S T R E G I O N S M U C H M O R E L I K E L Y T O H I T C A D I L L A C T A X T H R E S H O L D Percentage of employers (50+ employees) with plans that will be subject to excise tax by the specified year if they make no changes to their current plans. Regional cost variation would be a factor in all proposals based on premium. 60% Will hit threshold in: 50% 40% 53% 49% 46% % 34% 20% 25% 21% 28% 10% 0% 10% Northeast West Midwest South Estimates based on data from Mercer National Survey of Employer-Sponsored Health Plans 2016; premium trended at 6%, tax threshold trended at 3% in 2021 and 2% in future years MERCER CO-BRAND COMPANY LOGO HERE

7 F A C T O R S T H A T A F F E C T P L A N C O S T N O T J U S T P L A N D E S I G N D E M O G R A P H I C S M A T T E R Characteristics of employers with plans that w will reach versus won t reach threshold in 2020: the Cadillac tax Older employees More female employees Higher rate of dependent coverage election More likely to offer coverage to parttime employees Plan values only slightly richer Average age: 42 Average age: 39 54% female 44% female 48% avg rate 40% avg rate 38% offer 27% offer AV: 87% AV: 84% Like the Cadillac tax, capping the exclusion is more likely to penalize older workers, women, people with families, and employers who provide health benefits to part-time employees And there is relatively little difference between the plan designs of those employers that will reach the threshold and those who won t. Estimates based on data from Mercer National Survey of Employer-Sponsored Health Plans 2016; premium trended at 6%, tax threshold trended at 3% in 2021 and 2% in future years MERCER

8 D I S T R I B U T I O N O F A C T U A R I A L P L A N V A L U E S A M O N G E M P L O Y E R S A T R I S K F O R T R I G G E R I N G C A D I L L A C T A X B Y ( H I G H - C O S T P L A N S ) V S T H O S E N O T A T R I S K ( L O W - C O S T P L A N S ) Distribution of actuarial values of plans offered by large employers that will exceed tax threshold by 2024 ( high cost plans) Distribution of actuarial values of plans offered by large employers that will not exceed tax threshold by 2024 ( low-cost plans) AV below 70% 1% AV of 70%-79% 11% 33% AV of 90%+ AV below 70% 1% AV of 70%-79% 15% AV of 90%+ 17% 55% AV of 80%-89% More than half (57%) of employers with 500+ employees are estimated to have plans that will exceed excise tax v threshold by 2024 (based on their 2016 medical plan premiums for their highest-cost or only plan, trended forward at 6%) 67% AV of 80%-89% Source: Mercer National Survey of Employer Sponsored Health Plans 2016 MERCER

9 I M PA C T O N I N D I V I D U A L S E N R O L L E D I N E M P L O Y E R P L A N S MERCER 2017 MERCER This is for informational purposes only - not intended to be used as legal advice.

10 E M P O W E R I N G P A T I E N T S F I R S T A C T M A J O R I T Y O F H O U S E H O L D S E X C E E D C A P B Y Percent of households exceeding cap is expected to increase significantly over time: 38% 31% I N C L U D E S F S A, H R A, H S A E X C L U D E S F S A, H R A, H S A 51% 46% 42% 44% 39% 35% 56% 48% 63% 56% 67% 61% 73% 68% 77% 73% 82% 79% 85% 82% Proposed caps of $8,000 individual/$20,000 family indexed at CPI% (CPI assumed to be 2%) Medical plan trend (assumed to be 5.5%) has historically outpaced CPI and is anticipated to continue Based on a Mercer proprietary database of 600,000 members salary and benefits. Salary information used as proxy for household income. MERCER

11 E M P O W E R I N G P A T I E N T S F I R S T A C T L O W I N C O M E F A M I L I E S H I T H A R D E S T Cap will result in increased income tax liability for middle-income Americans 25% 20% 23% Percentage increase in effective rate Effective tax rate for married filing jointly 15% 10% 5% 5% 0% Income bracket: $20-30k $60-70k $ k $ k $ k $ k Single Head of household Married, filing jointly Effective tax rate with cap Effective tax rate without cap The bars represent the percentage increase in income tax liability in Payroll taxes not included Proposed caps indexed at CPI% (CPI assumed to be 2%); medical plan trend assumed to be 5.5% Projects the impact of including account contributions FSAs, HRAs and HSAs in value of coverage Based on a Mercer proprietary database of 600,000 members salary and benefits. Salary information used as proxy for household income. 10 MERCER 2017

12 E M P O W E R I N G P A T I E N T S F I R S T ACT T A X A C C E L E R A T E S O V E R T I M E Projected average per employee increase in income and payroll tax (for those impacted): I N C L U D E S F S A, H R A, H S A E X C L U D E S F S A, H R A, H S A $1,776 $1,651 E M P L O Y E E $821 $728 $424 $189 $401 $ E M P L O Y E R Proposed caps index at CPI% (CPI assumed to be 2%) Medical plan trend (assumed to be 5.5%) has historically outpaced CPI and is anticipated to continue For employees, tax increase related to increases in income and payroll taxes. For employers, tax increase is related to increase in payroll taxes. These dollar amounts reflect an employed population and have not been normalized to the US population but we expect the trend to be similar Based on a Mercer proprietary database of 600,000 members salary and benefits. Salary information used as proxy for household income MERCER

13 E M P O W E R I N G P A T I E N T S F I R S T A C T R E S U L T S D I F F E R B Y P L A N T Y P E A N D F A M I L Y S T A T U S Employees % Exceeding enrolled Cap in CDHPs are less likely to exceed 2020 the proposed caps as these plans 2030 generally cost less than PPOs and HMOs Plan Type Includes Accounts Excludes Accounts Includes Accounts Excludes Accounts PPO Coverage of dependents, in particular full 47% family coverage (spouse 47% and children) 93% increases the likelihood 93% the caps are exceeded HMO 30% 30% 84% 84% CDHP 29% 16% 78% 73% ALL 38% 31% 85% 82% % Exceeding Cap Family Status Includes Accounts Excludes Accounts Includes Accounts Excludes Accounts Single (no dependents) 33% 26% 89% 87% Head of Household (children no spouse) Married Filing Jointly (spouse with or without children) 9% 7% 51% 47% 51% 43% 89% 86% ALL 38% 31% 85% 82% Based on a Mercer proprietary database of 600,000 members salary and benefits. Salary information used as proxy for household income. *Accounts = FSAs, HRAs, HSAs MERCER

14 D A T A, A S S U M P T I O N S A N D M E T H O D O L O G Y A S S U M P T I O N S These simulated results are based on a Mercer proprietary database of over 600,000 members enrolled in employer sponsored medical coverage. The database includes membership from over 200 employers of all sizes and various industries. These employers, both local and national in scope, are actively involved in providing efficient coverage for their employees by offering a choice of plans (PPOs, HMO, CDHPs).Taxable income developed assuming: Base salary of the employee assumed to be the only source of income for their household Only employees pre-tax contributions associated with medical plan enrollment were assumed to reduce their gross income to taxable income. Other potential adjustments to taxable income, such as 401(k) contributions, were ignored for purposes of this analysis 2016 standard Federal Income Tax Brackets and standard deductions assumed Tax filing status is assumed to align with their dependents covered under the medical plan: Dependents No Dependents Children Only Spouse with or without Children Single Head of Household Married Filing Jointly Tax Filing Status Medical plan trend: 5.5% Consumer price index (CPI) trend: 2.0% Salary increase: 2.0% Standard deduction and Federal income tax bracket trend: 1.5% Social Security Threshold Trend: 1.5%; Other indexes used to calculate FICA taxes were unchanged The proposed caps are assumed to be effective in 2020; see table on slide 1 for cap assumptions State and local taxes were excluded from these simulated results MERCER

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16 F A C T O R S T H A T A F F E C T P L A N C O S T N O T J U S T P L A N D E S I G N D E M O G R A P H I C S M A T T E R Current demographics / plan design Will be subject to tax Won t be subject to tax Will be subject to tax Won t be subject to tax Average age % female 54% 44% 51% 42% % electing dependent coverage 48% 40% 45% 39% % offering coverage to PTEs (among employers that have PTEs) EE monthly contribution for employee-only coverage in a PPO 38% 27% 32% 27% $204 $133 $178 $129 PPO average actuarial value 87% 84% 86% 84% Average HMO enrollment 27% 21% 33% 15% *Average in-network individual deductible Estimates based on data from Mercer National Survey of Employer-Sponsored Health Plans 2016; premium trended at 6%, tax threshold trended at 3% in 2021 and 2% in future years MERCER

17 C A P O N E M P L O Y E E T A X E X C L U S I O N P R O J E C T E D L O N G - T E R M I M P A C T O F T H E C B O O P T I O N S Percent of households exceeding cap is expected to increase significantly over time: 50 TH P E R C E N T I L E 75 TH P E R C E N T I L E 52% 48% 43% 16% 19% 23% 58% 26% 64% 31% 69% 36% 74% 39% 78% 44% 83% 86% 88% 60% 54% 49% Proposed caps indexed at CPI% (CPI assumed to be 2%) - 50 th Percentile: $7,700 individual / $19,080 family - 75 th Percentile: $9,520 individual / $23,860 family Medical plan trend (assumed to be 5.5%) has historically outpaced CPI and is anticipated to continue Projections include account contributions FSAs, HRAs and HSAs Based on a Mercer proprietary database of 600,000 members salary and benefits. Salary information used as proxy for household income. MERCER

18 C A P O N E M P L O Y E E T A X E X C L U S I O N P R O J E C T E D L O N G - T E R M I M P A C T O F T H E C B O O P T I O N S Projected average per employee increase in tax (for those impacted): $1, TH P E R C E N T I L E 75 TH P E R C E N T I L E $1,507 E M P L O Y E E $870 $703 $202 $155 $455 $350 E M P L O Y E R Proposed caps indexed at CPI% (CPI assumed to be 2%) - 50 th Percentile: $7,700 individual / $19,080 family; 75 th Percentile: $9,520 individual / $23,860 family But medical plan trend (assumed to be 5.5%) has historically outpaced CPI and is anticipated to continue Projections include account contributions FSAs, HRAs and HSAs For employees, tax increase related to increases in income and payroll taxes. For employers, tax increase is related to increase in payroll taxes. These dollar amounts reflect an employed population and have not been normalized to the US population but we expect the trend to be similar Based on a Mercer proprietary database of 600,000 members salary and benefits. Salary information used as proxy for household income MERCER

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