While the next phase of the Affordable Care Act is still a few years off, it’s causing anxiety already. The “Cadillac tax” is an excise tax on high end health plans offered by employers set to take effect in 2018. It’s a 40 percent charge on health plans that exceed $10,200 for individual coverage or $27,500 for family coverage. That’s a 360 degree turn-around in tax policy as employers have been allowed to write off the costs of group health insurance for decades. Unions are the first to feel the effects of employer anxiety about the tax, saying employers are asking to cut benefits in negotiations anticipating costs of the upcoming tax.
While the Cadillac tax is supposed to be a charge on high-end plans, experts say this first-ever tax on health care benefits will eventually hit a majority of employers. And the tax hits more than just health insurance because it also applies to flexible spending and health savings accounts, supplemental insurance plans, and potentially employer-provided on-site clinics.
The National Education Association is demanding the tax be repealed, claiming it will disproportionately affect more vulnerable workers, including women, older workers, and workers in high-cost areas, causing unfair hardship to American workers. The NEA argues that it’s unfair that teachers (and others) could be penalized based on factors outside their control because plan costs vary significantly by geographic location, not necessarily by the richness of the plan. Even though the tax will be charged to employers, the real costs will likely be passed on to workers through budget reductions, reduced health benefits, or higher up-front health premiums.
In Politico’s article “Next Big Obamacare Battle: ‘Cadillac Tax,’” author Brian Faler explains that economists have always claimed that the tax break employers have gotten for so long for providing coverage pushes up the costs of health care while benefitting the wealthy. Economists advocate for the Cadillac tax as a cap on benefits saying it will slow health care costs. Some also say it’s a matter of fairness because rich insurance plans veil real costs encouraging overuse of services, driving up costs for everyone and giving major financial breaks to those working for employers offering coverage.
Why Repeal is Necessary
Tax Policy Center head Len Burman thinks capping the tax benefit for employer-sponsored health insurance is a good thing, while admitting it will eventually hit all health plans. It’s designed to generate billions over a decade and cover the cost of subsidies in the exchanges.
Tax lobbyists like Rick Grafmeyer say the Cadillac tax will hurt employers who have been trying to help employees better understand and manage health care costs with HSAs and FSAs. Legislators including New Hampshire Representative Frank Guinta and Connecticut Representative Joe Courtney are working to get the excise tax repealed, along with the AFL-CIO, the National Education association, and the director of health care policy at the U.S. Chamber of Commerce Katie Mahoney.
Tax lawyer Robert Wood, writing for Forbes, says employers are already starting to avoid the Cadillac tax by changing coverage, and very few employers say they plan to actually pay it. That means bad news for employees who have employer group health plans because they’ll likely see reduced benefits, higher costs and deductibles, and for small businesses under 50 employees, total loss of employer-sponsored healthcare benefits altogether.
Wood makes another point. “Why would employers offer generous health insurance that triggers a 40 percent excise tax that they must pay and cannot deduct?” The short answer is that most won’t, leaving taxpayers holding the bag for the billions that the Cadillac tax was supposed to generate to fund healthcare reform.