The Cadillac Tax is Politically Unpopular – So is Repeal a “Done” Deal?

Willis is a member of the Alliance to Fight the 40 – the reference is to the 40% excise tax on so-called “Cadillac” plans that is part of the Patient Protection and Affordable Care Act (PPACA). The Alliance used that title because, as most employers realize, the tag of “Cadillac” is a misnomer. The tax will be levied on all plans that exceed a cost of $10,200 for individual coverage and $27,500 for family coverage (with some flexibility for some specific industries and union plans).

That sounds like a rich level of benefits for many plans, but in reality many plans will hit that level in 2018 – the first year of the tax – if they do nothing to adjust their benefits, and all employer plans will meet or exceed those levels eventually because of the way the tax is structured and indexed. The plan levels are indexed at the consumer price index (CPI) levels – plus 1% the first year – but medical inflation has historically been about double underlying CPI.  So, with time, all employer plans, not just Cadillac plans, will be subject to the excise tax.

The plan levels are indexed at the consumer price index (CPI) levels – plus 1% the first year – but medical inflation has historically been about double underlying CPI.

That is not the only provision that makes the tax somewhat opaque. It actually is assessed on the insurance carriers (although there might be some leeway there in the regulatory interpretation). The insurers, of course, will pass that additional cost on to the plans so the employers will still bear the cost.

Until recently, there was very little written or spoken regarding this tax.  After all, there were ongoing costs and compliance issues practically every year, and this does not hit until 2018. However, a 40% excise tax is meaningful, so employers will do whatever they can to adjust their plans to avoid it.  And many employers have been making those adjustments (raising deductibles and co-insurance or co-pays, limiting benefits and narrowing networks) to get ahead of the tax and avoid the impact. That general response has recently changed.  The Alliance and other opponents of the excise tax have been quite active in making their case for repeal known, and that activity has generated a slew of editorial commentary, pro and con.

Status of the Repeal

The repeal is gaining some political headway. There are bills in both houses of Congress sponsored by both Democrats and Republicans. There are enough co-sponsors on the two bills in the House to get one passed. The Senate has been a little slower, but there is momentum there as well.

The work of the Alliance has been pretty effective as measured by those who oppose the repeal – there are numerous editorials and blogs written about how important the Cadillac tax is to PPACA generally.

Employers will not just accept the higher costs.

The reality is that, the tax was not really a part of the legislative process. It was a last-minute way to raise tax money to help “pay for” the PPACA generally. Now that people realize that employers will not just accept the higher costs and are making changes to upset that “pay for,” we are hopeful that the legislation repealing the tax will gain more headway.

That said, it is not a done deal. Employers who have employees who will be negatively affected should take note and let their members of Congress know where they stand on the issue.

About Jay Kirschbaum

Jay spent 22 years as a tax attorney specializing in employee benefits before joining Willis in 2001. He is current…
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