The Cadillac Tax: The End of Employer-Sponsored Healthcare?
Signed into law on March 23, 2010, The Patient Protection and Affordable Care Act, more commonly referred to as the Affordable Care Act (ACA) or Obamacare, represents a major overhaul of the United States healthcare system. Leading up to the 2008 presidential election, then Senator Barack Obama promised to make significant changes to the healthcare system, such as decreasing the amount of citizens that were uninsured, as well as reducing healthcare costs across the board. The ACA is the byproduct of this promise.
Currently, employer sponsored healthcare plans in the United States are part of an employee’s compensation package, but are not taxed as wages. However, under the ACA, an excise tax will be imposed on high-cost health plans, set to go into effect in 2018. This excise tax has more commonly become known as the “Cadillac Tax.” In essence, this is a tax on expensive healthcare plans, typically offered by employers, which arguably contain an excessive amount of healthcare coverage. In effect, this is a mechanism put in place by the government to deter these high-cost plans from being offered by employers as a form of tax-free compensation to their employees. Once the tax goes into effect, if the aggregate cost of an employer-sponsored healthcare plan exceeds $10,200 for individuals or 27,500 for families, there is a 40% excise tax applied to the excess amount of coverage over the limits. This amount is either paid by the insurer if the plan is issued by a health insurer or by the employer if the employer “self-insures.” In either scenario, the employer will bear the cost, due to either an increase in the price of the plan (if issued through the insurer) or by the employer being taxed directly (if the employer self-insures). Importantly, the Cadillac Tax is not a deductible business expense.
Unfortunately for employers, the aggregate cost of employee healthcare benefits is broadly defined. Included in these prescribed limits are not only employer-paid premiums, but also flexible-spending account medical reimbursements, tax-free employee premium contributions, health insurance arrangements, employer contributions to a health savings account, supplementary health insurance coverage (not including dental and vision coverage), as well as on-site medical clinics offering more than a de minimis amount of employee medical care. Therefore, in reality, what is considered to be a Cadillac Plan may not be that extravagant.
While the Cadillac Tax will very likely not have a huge impact on employer-sponsored health plans in 2018, the years following are where the tax will be most applicable. In 2019, these aforementioned limits are indexed to the Consumer Price Index (CPI) plus one percentage point. In the years after 2019, these limits are simply indexed to the CPI. While the CPI is generally a good indicator of rising costs, current healthcare costs are rising at a much faster rate than most other prices. Therefore, down the line, what is now considered an average healthcare plan (one that does not offer what can be described as unnecessary healthcare benefits and coverage) will likely be subject to the Cadillac Tax.
If Congress does not repeal this provision and these average plans are subject to the tax, is it possible that employers will simply leave the healthcare world altogether? Is it possible that such an outcome was the ACA’s drafter’s intention? If so, it would seem that this would push many more people into the statewide healthcare exchanges setup throughout the country, administered by the states or federal government.