The battle to end the Cadillac tax
The Affordable Care Act’s high-cost plan tax, popularly known as the Cadillac tax, received bipartisan scrutiny in Congress nearly immediately after the law went into effect in 2010. Although the implementation of the law has been delayed from 2020 to 2022, repealing the penalty could cost the United States roughly $2 billion in lost revenue.
In an effort to repeal the Cadillac tax once and for all, a coalition of more than 50 businesses, patient advocates, employer organizations, unions, local government, healthcare companies, consumer groups and other stakeholders have joined together “to ensure that the employer-sponsored healthcare coverage that protects more ant 178 million Americans remains an effective and affordable option.”
Called The Alliance to Fight the 40, the coalition members range from The Council of Insurance Agents and Brokers, Employers Health Purchasing Corporation, the Independent Insurance Agents & Brokers of America and the National Association of Health Underwriters. Its ultimate goal is to lobby Congress to repeal the 40% tax increase on health benefits while preventing new taxes on workers who depend on their jobs for coverage.
The reason so many businesses and organizations are signing on with the coalition is because there are so many problems with how the tax is structured, says Heather Meade, principal at Washington Council Ernst & Young, which is the lobbying arm of the coalition.
“Once employers started to do the analysis of what they could do to avoid the tax, it started to become clear that there was no way around it,” Meade says. “High-deductible health plans are going to be hit with this tax and the plans with the sickest employees are going to be the first ones subject to the tax as well.”
Originally, the 40% excise tax was targeted at employer plans that exceeded $10,200 in premiums per year for individuals and $27,500 for families. Since the tax was delayed to 2022, those figures have increased.
These thresholds have extended to an estimated $11,100 for self-only coverage and $29,750 for family coverage. While the name may imply the 40% tax applies to a few individuals with luxury health coverage, it actually extends much farther, according to the Alliance.
Employer and employee premium contributions will count against the threshold, as will most employer and pretax employee contributions to health saving accounts, Archer medical savings accounts, flexible spending accounts and health reimbursement accounts.
Meade adds that the tax is not tied to healthcare inflation, but to a chained consumer price index — a way to index spending and taxes including social security benefits to the rate of inflation or the rise in prices overtime.
“Employers started to see that there were huge, multi-million dollar taxes that they would have to pay on top of their already rising healthcare costs for things that they cannot avoid,” she says.
These unavoidable costs include the location of the business, whether or not the employer hires more women than men, the age of the employee population and whether or not part-time employees are offered healthcare.
If these benefit offerings cause the employer to exceed the premium limit, it could encourage the employer to reduce these benefits or discourage them to hire certain demographics in order to avoid paying the tax.
Because the Cadillac tax is indexed to the chained CPI, which is lower than healthcare inflation, every year an increasing number of health plans will be subject to the tax. At least 82% of employers expect their plans will be affected by the tax within the first five years of implementation, according to a study by Willis Towers Watson.
Meade says if the Cadillac tax was enforced today, she has clients who would already have to pay the tax whose health plans are at 60% actuarial value, rating those plans at a bronze level.
“If an employer was to offer a health plan that was lower than that, they would have to pay the employer mandate penalty on top of the Cadillac tax,” Meade says. “There is nowhere lower the employer can actually go yet the tax would still affect them.”
Although the Cadillac tax is still set for 2022, the Alliance has made some small victories since its formation in 2015; beginning with the original two year delay to the Cadillac tax to 2020 and then delaying it even further to 2022.
“In less than six months of the alliance’s formation, they achieved the first two-year delay,” Meade says.
“They did that just by educating members about the tax because there was a lot of confusion just around the name of the tax — thinking it was only for overly rich or overly expensive plans.”
More recently, the alliance has taken steps to voice their opinions on newer pieces of legislation that could affect employer-sponsored healthcare cost both positively and negatively such as the Middle Class Health Benefits Tax Repeal Act of 2017. This piece of legislation amends the Internal Revenue Code to repeal the excise tax on employer-sponsored health coverage for which there is an excess benefit.