Understanding the Cadillac Tax

Under Section 9001 of the Affordable Care Act (ACA), high-cost employer-sponsored health plans must pay a 40 percent excise tax. Informally known as the Cadillac tax, it is set for implementation in 2018 and will affect plans offering benefits that exceed an annual limit of $10,200 for individual coverage and $27,500 for family coverage. The 40 percent excise tax would be applied on the dollar amounts that exceed those thresholds.

Proponents of the tax argue that it will reduce health care expenditures. Generous Cadillac plans encourage greater usage of health care services, driving up costs. Cadillac plans are also untaxed—they traffic around $250 billion each year in tax subsidies.[1] By tapping into these plans, the Cadillac tax will raise funds to pay for the expansion of health insurance coverage under the ACA; the tax is currently slated to garner $87 billion over the course of 10 years.[2]

The tax faces a wide and disparate range of opponents, however, who argue the tax will affect more plans than originally suggested. The tax is indexed to inflation, but because health care costs are rising faster than general inflation rates, the tax will influence more plans in future years According to a Kaiser Family Foundation analysis, the tax is now predicted to apply to more than a quarter of plans by 2018, and 42 percent a decade later.[3] As 2018 looms and employers do the math, they are scrambling to either reduce benefits and avoid the tax or have it repealed altogether. Parties as diverse as employers, health insurers and labor unions—whose members traditionally negotiate substantial health care benefits—are banding together to lobby against the Cadillac tax’s implementation. The Alliance to Fight the Forty—a coalition of pharmaceutical companies, insurance plans, various businesses, employer groups and unions—launched this past July and is the foremost of these forces.

Specific regulations for the Cadillac tax have not yet been released. The Internal Revenue Service is currently seeking feedback from stakeholders as it determines how the tax will be administered and who will be liable to pay the tax. According to the statute, under a fully insured plan, the tax is assessed on the insurance company. With a self-insured plan, the tax is assessed on the entity that administers the plan benefits, which may be the plan sponsor or employer.

While the Cadillac tax faces many vocal opponents and few outright supporters, replacing the tax will be difficult, not the least because it brings in $87 billion in revenue. The tax is contentious politically: Many Democrats favor rescinding it but generally support the Affordable Care Act. Labor unions have historically swung left, but oppose the tax. Republicans have opposed the ACA in general and there are many who support repealing the tax, but some would like to see it replaced with another provision that places limits on the tax exclusion for employer-sponsored insurance. As such, short of outright repeal, the tax may be delayed or altered.

As 2018 draws closer and pressure builds, lawmakers are considering their options.

[1] http://www.healthaffairs.org/healthpolicybriefs/brief.php?brief_id=99

[2] http://www.modernhealthcare.com/article/20150309/NEWS/150309909

https://www.cbo.gov/sites/default/files/cbofiles/attachments/49973-Updated_Budget_Projections.pdf

[3] http://kff.org/health-reform/issue-brief/how-many-employers-could-be-affected-by-the-cadillac-plan-tax/

 

by Zoya Haroon