The formal launch of the “Cadillac tax”, officially known as the Affordable Care Act’s high-cost plan tax (HCPT), has once again been pushed back; this time from 2020 to 2022. In January 2018, Congress voted to delay implementation of the tax as part of a measure to restore funding and end a partial government shutdown. For now, employers, insurance companies and consumers will not have to face the consequences of the highly unpopular tax plan.
What is the Cadillac Tax
Initially passed by Congress in December 2015, the HCPT imposes a 40 percent excise tax on employer plans that cost more than $10,200 in premiums per year for individuals and $27,500 for families. Upon signing the act, President Obama immediately imposed a two-year delay on the start of the act from 2018 to 2020. Since then, the Cadillac tax has become a topic of immense debate and contention. Many people favor outright repeal while others prefer keeping it in a modified form.
The purpose of the bill is three-fold:
- Curb the growing cost of healthcare
- Roll back the favorable tax treatment of employer-provided insurance
- Generate revenue to fund the Affordable Care Act (ACA)
The entity providing the health coverage is responsible for paying the excise tax. In the majority of cases, that means the insurance carrier, not the employer, must pay the tax. The exception is for companies that self-fund their healthcare plans; in those situations, the employer pays the tax. In the original version of the act, the excise tax did not qualify as a deductible business expense. However, Congress reversed course in December 2015, making it tax deductible for employers.
Employer and employee premium contributions will count against the threshold. In addition, most employer and pretax employee contributions to consumer directed health plans – such as Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs) – will also figure into the equation. Guidelines for determining the taxable/nontaxable status of a particular coverage is subject to interpretation by the Internal Revenue Service (IRS).
Pros and Cons of the Cadillac Tax
Supporters of the tax contend it will generate much-needed revenue streams to support the cost of paying for ACA. Many also believe the tax-exempt status of employer-paid healthcare premiums encourages overly-generous insurance that leads to more consumer demand for healthcare services and higher prices. While some supporters prefer to keep the Cadillac tax as-is, others favor a modified version. One proposal retains the 40 percent excise tax while removing the tax deduction for employers.
Surprisingly, those who favor repealing the tax include factions on both sides of the political divide. This unlikely coalition of businesses, labor unions, and politicians from both political parties is strongly in favor of repealing the Cadillac tax because they believe it will drive up healthcare costs for employers and employees.
Middle Class Beware
If the tax passes, it will lead to insurance companies paying the excise tax (except in self-insured companies), which could cause increased premiums. To avoid the tax and higher premiums, some employers will likely offer less expensive health plans, and increase co-payments and deductibles for employees; while it may result in higher wages, it could also increase income and payroll taxes. The increase in out-of-pocket medical costs would also likely discourage most low-income families from seeking medical care. As a result, the Congressional Budget Office predicts that 80 percent of the revenue generated by the Cadillac tax health plan will come from higher income and payroll taxes and not from the excise tax itself.
Opponents of the Cadillac tax health plan also believe the excise tax will have biggest impact on middle-class families; of particular concern are those who rely on FSAs and HSAs to make healthcare more affordable. If the tax is not repealed, opponents are urging Congress to at least exempt FSA and HSA from the formula for determining threshold contributions. Otherwise, middle class workers and families may take a big hit in their out-of-pocket healthcare expenses.
Some have gone so far as to call the Cadillac tax an aggressive tax subsidy that unfairly favors the rich. According to a study by health policy experts at the City University of New York School of Public Health and Harvard Medical School, taxing employment-based health benefits will disproportionately harm families with incomes between $38,550 and $100,000. This, in turn, could lead to even more gaps in healthcare coverage between wealthy and lower-income Americans.
What Happens in 2022
Based on the latest vote in January, the excise tax will be imposed beginning in 2022. At that time, health plans that cost more than the following pre-determined limits will be subject to the tax:
- $10,200 for individual coverage
- $11,850 for individual qualified retirees and those in high-risk professions
- $27,500 for family coverage
- $30,950 for family coverage for qualified retirees and those in high-risk professions
(These limits are indexed to the Consumer Price Index and may be increased for inflation.)
Although the extension pushes the Cadillac Tax start date out until 2022, organizations such as the American Benefits Council in Washington, D.C., (a trade association for large plan sponsors) and the Employers Council on Flexible Compensation (ECFC) are continuing to lobby against the Cadillac tax.
At the same time, mymoneymyhealth.org has launched a campaign to protect employee contributions to their FSAs and HSAs from the Cadillac tax. If the tax isn’t repealed, the organization argues that Congress should at least exempt individual contributions to their accounts to make healthcare more affordable.
With both sides pushing hard for their point of view, it’s hard to predict which outcome will prevail: repealing the tax, enacting a modified version, or keeping the current version of the bill. In the meantime, concerned healthcare consumers should make their voices heard by writing their elected representatives in Washington, D.C.
DataPath, Inc. is a leading provider of technology solutions for healthcare benefits administration. DataPath is an active member in ECFC.