The Cadillac Tax, set to take effect in 2022 under delays signed into law in December 2015 and January 2018, calls for a 40% excise tax on the amount of the aggregate monthly premium of each primary insured individual that exceeds the year’s applicable dollar limit, which will be adjusted annually to the Consumer Price Index plus 1%. Given that pace of healthcare growth, beyond that of general inflation, this means that the tax is destined to outgrow itself in short order and many employers will be impacted by the cost of the tax and the enormous compliance burden that the tax creates. An estimated 47% of employers will be subject to the tax by 2022, which could force many to consider dropping employer-sponsored insurance altogether.
Congress should repeal the current Cadillac Tax before it is set to take effect.
The Cadillac Tax, set to go into effect in 2022 under delay, will impose a 40% excise tax on health plans that exceed certain cost thresholds beginning in 2020. Specifically, the law calls for a 40% excise tax on the amount of the aggregate monthly premium of each primary insured individual that exceeds the year’s applicable dollar limit, which will be adjusted annually to the Consumer Price Index plus 1%. The current threshold for when the tax applies is set to $10,800 for individual coverage and $29,100 for “other than self-only” coverage. Because of the wide-ranging benefits that can be counted towards the tax, including HSAs, HRAs, FSAs, and other cost-containment measures, many employers will find their plans exceeding these thresholds already when the tax takes effect. Mercer estimated that a third of employers would be impacted by 2018 and 47% by 2022. While designed to incent employers from offering the most-benefit rich plans, in reality the tax will impact a majority of plans, including those that aren’t benefit-rich and were not the intended targets of this provision.
All employers could be subjected to this tax, with various factors determining the likelihood of a plan’s costs exceeding the threshold. These include family size, state benefit mandates, high-cost geography, age, health status, the size of the employer, and other factors. In addition to paying the tax, employers will also be forced to handle onerous compliance requirements on a monthly basis to record and pay the tax to insurers. In turn, insurers will be required to treat the tax as revenue and will be taxed on that amount, which will increase the size of the tax for everyone. Individuals and families who are already struggling to afford existing plan premiums and higher deductibles will also be hit by the tax, further increasing their costs, with cost-shifting will only adding to growing affordability issues.
- The tax is not properly indexed for inflation; it uses the Consumer Price Index (CPI), which puts it out-of-line with the much higher rate of medical inflation. This virtually guarantees that the thresholds will become out-of-date within years of the tax taking effect.
- The tax was intended to target only a small segment of insurance plans, those that were considered the most benefit rich, and therefore discourage their use through the tax. It was initially projected that only 3% of plans would be impacted, but within the first few years an estimated half of all plans will be subject to the tax.
- Current proposed guidance on the tax calculates numerous other health plan components as part of the overall cost of the plan, further pushing up the value of the plan towards the tax threshold. These elements include cost-saving measures like Health Savings Accounts (HSAs), Health Reimbursement Accounts (HRAs), Flexible Spending Accounts (FSAs), and on-site clinics.
- The proposed guidance will significantly reduce the likelihood that employers who offer HSA compatible plans will be able to make employer contributions to these accounts because it will likely subject them to the tax thereby reducing their overall effectiveness. Furthermore, the tax that the insurer collects from the employer we anticipate, may be expected to be treated as revenue to the insurer and subject to further taxation. This is a tax on a tax and means that they must collect even more than the 40% in order to remain whole thus driving up costs even further for employers and their employees.
- Employers will face significant compliance burdens with the tax, with regular monthly reporting to insurers and collection of the tax. The tax liability will be different from person to person, depending on various factors including dependents, age, and HSA contributions.
- Insurers will collect the tax from employers and pay this annually. The tax that the insurer receives is treated as revenue to the insurer and is therefore also taxes, leading effectively to a tax on a tax and further increasing the cost of the tax on everyone.
- This tax will impact every employer that has at least two individuals enrolled in coverage.
- The tax will impact middle-class families who are already dealing with higher premiums and deductibles. Further cost-shifting will only exacerbate the affordability issue.