Impact of the ACA’s Cadillac Tax

May 1, 2019

While many aspects of the Affordable Care Act (“ACA”) have been controversial, few have sparked as much continued debate as the Cadillac Tax, the 40% excise tax on what the federal government deems as high-cost health plans. The tax is universally opposed by business and labor leaders as punitive with unintended consequences. The tax has bene delayed twice by Congress and multiple bi-partisan bills have been proposed over the years eliminate it all together. Yet since the tax is intended to raise needed revenue to pay for other aspects of the ACA, an outright elimination has been tough to design. And absent replacing revenue, the elimination of the tax adds to the federal deficit which both parties have said they want to avoid. Hence, the dilemma the Congress now faces: what to do about the unpopular Cadillac tax.

The Background / Data from the Employee Benefits Research Institute (“EBRI”)

When the ACA passed in 2010, the Cadillac tax, a nondeductible 40% excise tax imposed on the portion of health coverage costs that exceeds $10,200 for single coverage and $27,500 for family coverage, was scheduled to take effect in 2018.  It has since been delayed twice and is currently scheduled to take effect in 2022.  At that point, the portion of health coverage costs that exceeds $11,200 for single coverage and $30,150 for family coverage will be subject to the tax. The Cadillac tax is controversial. It is the first time that the historically unlimited tax exclusion for employment-based health benefits has been impacted.  Although it has its enthusiasts, there has been bipartisan support for repealing it. In May 2018, the Congressional Budget Office (CBO) estimated that the tax would generate $168 billion in tax revenue from 2022 to 2028.  The Joint Tax Committee (JCT) and CBO assume that when employers reduce the comprehensiveness of health benefits to avoid the tax that they will in turn increase worker taxable wages such that total compensation is unchanged.  Shifting the composition of compensation toward a higher proportion of taxable wages will translate into additional tax revenue.  Repealing the tax would mean needing to find $168 billion in new tax revenue.

As of now, the new tax will hit employers, plan sponsors and presumably workers come 2022 which is only 3 years away. Absent a change to the law, a delay or it’s outright elimination employers and plan sponsors will need to begin planning by early 2020 to make the necessary preparations for the law’s impact. This will be especially hard for labor plans and those that are collectively bargained where the level of benefits may not so easily be changed. It is therefore wise for employers and plan sponsors to continue to encourage their members of Congress and Senate to address the issues with the Cadillac tax sooner than later. While opposition to the tax seems to be bipartisan, nothing has measurably changed. It is possible that the tax could continue to be delayed. To take a stand on the issue, one can locate their member of the House and Senate here. We will continue to provide updates on this important topic.

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Employee Benefits