After years of lobbying by countless interest groups, Congress has finally killed the dreaded Cadillac tax.
Officially known as the High Cost Plan Tax (HCPT), this unpopular provision of the Affordable Care Act was originally scheduled to go into effect in 2018. The implementation date was pushed back multiple times (most recently to 2022) as lawmakers kept kicking the can down the road, but the failure to permanently repeal the tax created confusion for employers of all sizes.
As Forbes explains, the tax was included as part of the Affordable Care Act, in part, to discourage companies from offering comprehensive (and expensive) “Cadillac” plans to their employees and reduce “employee incentive to overuse services encouraged by these high-cost plans.” These expensive plans cost the federal government money because they are tax deductible to the business and tax free to the employees.
Put another way, when employers offer less costly plans to their employees, the government receives additional tax revenue as those funds are either retained by the company as profit, which is taxable, or given to the employees as taxable income. On the other hand, when companies offer very expensive health plans, the government receives less tax revenue since those benefits are not taxed.
To make up for the lost revenue, the High Cost Plan Tax, described in section 9001 of the Affordable Care Act, would tax benefits above a pre-determined threshold at a rate of 40%.
The problem with the Cadillac tax as it was written in the ACA is that it was based on “the aggregate cost of the applicable employer-sponsored coverage of the employee,” not the actuarial value, of the health insurance. So an older group with bronze-level coverage could end up subject to the tax while a younger group with platinum coverage might not. Also, the tax was not based solely on the cost of health insurance but rather on the cost of most benefits an employer offers or allows employees to purchase on a tax-free basis, including dental insurance, vision insurance, and supplemental coverage. It would even include the amount employees deposit into HSAs and FSAs on a pre-tax basis. For that reason, critics argued that the Cadillac tax could end up harming the very tax-advantaged accounts that encourage people to become better health care consumers.
While the High Cost Plan Tax was ultimately a tax on insurance companies and providers of health insurance, it could have increased costs for consumers. As we pointed out in a 2015 blog post, “everyone expects carriers to pass on the extra cost to their fully-insured clients in the form of increased premiums.”
And a lot of employers would have been impacted by the HCPT. As the Kaiser Family Foundation details in a 2019 analysis:
- “When the HCPT takes effect in 2022, an estimated 21% of employers offering health benefits will have at least one plan whose premium and account contributions would exceed the HCPT threshold.”
- “When potential FSA contributions are included, the percentage climbs to 31%.”
- “The percentage of employers with a plan reaching the threshold is projected to grow fairly rapidly over time, to 28% in 2025 and 37% in 2030 without including potential FSA contributions, and to 38% in 2025 and 46% in 2030 when they are included.”
We could go on and on about the potential negative impact of the Cadillac tax and the amount of stress it has caused large employers that tend to plan their benefit strategies years in advance, but thankfully we don’t have to. The Cadillac tax has been repealed, so we can move on and worry about something else.
Before we go, though, we’d like to thank everyone who contacted their elected officials over the years to voice their opinion on this harmful provision of the ACA. Sometimes it takes a while, but it really does make a difference, so please continue to let lawmakers know how you and your clients feel about our existing laws and some of the changes they are considering.