The Loop

Update on Cadillac Tax

Filed under: Benefits

On January 22, 2018, President Trump signed into law a Continuing Resolution (CR) to fund the federal government through February 8, 2018. This temporary budget legislation also contained provisions that delay the following Patient Protection and Affordable Care Act (PPACA) taxes:

• Health Insurance Premium Tax (HIT) until 2019
• Medical Device Tax until 2020.
• Cadillac Tax until 2022

Cadillac Tax
The Cadillac tax imposes a 40 percent excise tax on high-cost employer-sponsored plans. To date, the Cadillac Tax has never seen the light of day. PPACA, which was passed in 2010, scheduled the tax to take effect in 2018. However, in December 2015, legislation was passed that suspended the start date to 2020. This latest action by Congress delays implementation for another four years.

Note that despite ongoing delays, legislators have merely delayed the tax, not abolished it. This leaves the door open to deploy the tax and use the revenues to help fund the government's share of healthcare expenses in the future.

The purpose of the Cadillac Tax is three-fold. First, it has an overarching goal of reducing the growing cost of providing healthcare by incentivizing individual consumers to be more discerning. In other words, high-end insurance policies are very generous in what they cover without requiring members to shop for the lowest prices. By restricting – or actually penalizing – companies that offer these policies, they are more likely to reduce coverage options.

In turn, consumers will need to shop and compare medical services to save money, which could reverse the trend of growing healthcare expenses. Consumer engagement also is considered necessary for individuals to start making better lifestyle choices to help prevent serious medical conditions down the road.

Second, the Cadillac Tax would reduce the tax-preferred treatment of employer- provided healthcare benefits, perhaps encouraging workers to seek their own individual policies. If more workers purchased health insurance via the exchange marketplace for individuals and small business, it would increase the number of people participating in state and federal insurance pools which could help lower premiums for those policies.

One advantage of owning an individual policy is that it makes the worker-employer relationship more tenuous. Employers would have to work harder in other ways – such as wage hikes – to retain satisfied workers. Entrepreneurial-minded workers would be less reliant on employers for benefits and may be more willing to start their own businesses.

Since small businesses are responsible for more jobs in America and are considered the backbone of the economy, splintering this healthcare tether between companies and employees could promote higher long-term economic growth.

However, it's worth mentioning that when the Cadillac Tax was voted on to be delayed in 2015, it also was changed to a be deductible expense for federal tax purposes.

And finally, the Cadillac Tax is one of the mechanisms designed to help finance the expansion of healthcare coverage under the PPACA. As more of these taxes are delayed, the legislation becomes less tenable and subject to political attack.

Amount of Tax
The Cadillac Tax is calculated as 40 percent of the cost of health coverage that exceeds predetermined threshold amounts. That includes the amount of contributions paid by both the employer and workers, although it does not include cost-sharing amounts such as deductibles, coinsurance and copays. The tax, which would be paid by the insurance plan sponsor, is estimated to cost about two to four percent of insurance premiums.

Should the Cadillac Tax eventually be implemented, the threshold amounts will be indexed for inflation at that time – which means they will likely increase. The current amounts are:

• $10,200 for individual coverage and $27,500 for family coverage
• $11,850 for individuals and $30,950 for family coverage at companies in which the majority of workers are in specified high-risk professions (e.g., law enforcement and construction)

Based on the current threshold amounts, an individual plan that costs the worker and employer a combined total of $12,000 would trigger a Cadillac Tax of $720 per worker.

• $12,000 - $10,200 = $1,800 above the $10,200 threshold
• $1,800 x 40% = $720

A family plan that costs the worker and employer a combined total of $32,000 would trigger a Cadillac Tax of $1,800 per worker.

• $32,000 - $27,500 = $4,500 above the $27,500 threshold
• $4,500 x 40% = $1,800

Should the Cadillac Tax eventually become a reality, plan sponsors could take action in a couple of ways. Many are expected to scale back generous coverage in order to drop below the threshold costs. In fact, since the PPACA was passed many employers have already opted to lower their healthcare benefit costs in anticipation of the tax. However, some plan sponsors may decide to continue offering benefit-rich plans. They could, in turn, increase the cost-sharing responsibility – basically passing on the cost of the tax to workers in the form of higher deductibles, copays and coinsurance.

Affected Plans
Employers have introduced numerous health-related programs over the last two decades in an effort to compete for talent, reduce the cost of healthcare insurance, and encourage workers to become more health conscious. Some features, such as wellness programs and onsite medical clinics, have been introduced to attempt to make up for the fact that employers have transferred a higher percentage of insurance policy costs to their workers.

Therefore, the overall cost of a healthcare plan, as calculated to determine the Cadillac Tax burden, includes more than just premiums, deductibles, copays and coinsurance. Also included are costs associated with the following:

• Insured and self-insured group health plans (including behavioral and prescription drug coverage)
• Wellness programs that are group health plans
• Health Flexible Spending Accounts (FSA) – pre-tax contributions
• Health Savings Accounts (HSA) – pre-tax contributions
• Health Reimbursement Accounts (HRA) – pre-tax contributions
• Archer Medical Savings Accounts (MSA) – pre-tax contributions
• On-site medical clinics providing more than de minimis care
• Executive Physical Programs
• Pre-tax coverage for a specified disease or illness
• Hospital indemnity or other fixed indemnity insurance
• Federal/State/Local government-sponsored plans for workers
• Retiree coverage
• Multi-employer (Taft-Hartley) plans

Excluded from Cadillac Tax
The following policies and programs are not included in the calculation for the total cost subject to this pending excise tax:

• U.S.-issued expatriate plans for most categories of expatriates
• Coverage for accident only, or disability income insurance, or any combination thereof
• Supplemental liability insurance
• Liability insurance (both general and automobile liability)
• Worker's compensation or similar insurance
• Automobile medical payment insurance
• Credit-only insurance
• Other insurance coverage as specified in regulations under which benefits for medical care are secondary or incidental to other insurance benefits
• Long Term Care
• Standalone dental and vision benefits
• Coverage for the military sponsored by federal, state or local governments
• Employee Assistance Programs (EAP)
• Worker After-Tax Contributions to HSAs and MSAs

The Future of the Tax
To date, the Cadillac Tax remains a bit of a mystery. Because initially it was not scheduled to go into effect for many years, the Treasury Department and IRS have not published specific guidelines explaining how the tax will be implemented. This new delay, as well as the regulations that must be developed relating to the new tax legislation, are likely to push back the Cadillac Tax guidelines even further.

In the meantime, there is ongoing resistance from both sides of the aisle in Congress and quite a number of influential constituents who would like to see the Cadillac Tax repealed altogether.

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