Delayed, Not Dead: ACA Cadillac Tax

This past December, Congress voted to delay by two years the Affordable Care Act (ACA) excise tax on high-cost health plans (known as the Cadillac tax). Plan sponsors breathed a sigh of relief. Does this mean the Cadillac tax is dead? No. Some experts may argue that it’s on life support, but it isn’t dead. Plan sponsors have a reprieve but can’t dismiss it completely.

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Status, Before Delay

  • The Cadillac tax was originally set to go into effect in 2018.
  • Throughout 2015—and even before—employers and plan sponsors were starting to change their health plans to avoid triggering and paying the tax.
  • ad_ACAU_moreinfo14One area of concern was the threshold that defines what is meant by “high cost” and triggers the tax. This threshold is identified in the law as premium costs above $10,200 for individuals and $27,500 for nonindividual coverage. Concerns included:
    • The thresholds are to be indexed (increased) for inflation, but the inflation rate to be used is general inflation (the Consumer Price Index for All Urban Consumers), not health care inflation. General inflation traditionally rises more slowly than health care inflation, leading to fears that health plans would easily and quickly trigger the tax.
    • Health care costs vary throughout the country. Locales with higher premium costs would hit the thresholds more quickly and easily than areas with lower premiums.
  • Opposition to the tax emerged from many directions.
    • In a rare show of bipartisanship, neither Democrats nor Republicans seem to like the tax. Bills were introduced to eliminate it—two in the U.S. House of Representatives and two in the U.S. Senate. Two were introduced by Democrats, and two by Republicans. Each bill has numerous co-sponsors.
    • Several employer groups and unions have announced they oppose the tax.
    • All of the front-running presidential candidates have called for its repeal.

Delay

In December, President Obama signed the 2016 appropriations bill that included a provision delaying the Cadillac tax until 2020.

Status, Since Delay

  • On February 9, 2016, the president released his 2017 budget, containing Cadillac tax proposals.
    • One proposal addresses the thresholds that trigger the tax. It calls for higher thresholds in states where premium prices are higher, matching it to “gold category” plans on the public exchanges. Specifically, the proposal would modify the threshold so it would be “equal to the greater of the current law threshold or the average premium for a Marketplace gold plan in each State.”
    • Another proposal changes how employers offering health flexible spending accounts (FSAs) would calculate the costs of employer and employee contributions when looking at the total cost of their plan and whether the tax is triggered.
    • Another proposal requires the Government Accountability Office (GAO) to conduct a study of the potential effects of the tax on companies with unusually sick employees.
  • Politicians (including the presidential candidates), employer groups and unions continue to call for the tax’s repeal.
  • If the tax is repealed, a budgetary gap will be created. One major purpose for the tax is to provide funding for various ACA provisions.
  • With uncertainties surrounding the November federal elections, many plan sponsors are likely in “wait and see mode.”

Remaining Questions

  • Will plan sponsors continue to make design changes to their health plans to avoid the Cadillac tax?
  • Will the tax be repealed?

Stay tuned to the International Foundation. We’ll continue to keep you informed about important ACA developments on ACA Central, ACA University and Regulatory Updates.

Julie Stich, CEBS
Julie Stich, CEBS
Director, Research at the International Foundation

Comments (4)

  1. Bonnie Luther

    Can you detail more info regarding how FSA’s will be calculated towards this tax?

    Reply
    1. Julie StichJulie Stich

      Hi Bonnie,
      Thanks for the question. First, we haven’t yet seen “official” guidance on the Cadillac tax. The IRS has released a couple of notices outlining their thoughts. As it stands now, the thought is that both employee salary reductions and employer contributions to health FSAs will be counted toward the cost. In IRS Notice 2015-52 (www.irs.gov/pub/irs-drop/n-15-52.pdf, pages 9-12), the IRS discusses difficulties with carryover amounts and employer contributions that aren’t used. If you’re a member, you’re welcome to contact our information specialists to give you more details. (www.ifebp.org/Resources/personalizedresearchservice/Pages/default.aspx)
      Julie

      Reply
  2. Mary

    Hi Julie, a client has stated that the ACA requires employers to allow employees on a leave of absence the opportunity to make changes to their health plan benefits during the annual enrollment period. I have not seen this requirement documented within the ACA. Have you?

    Reply
    1. Julie StichJulie Stich

      Mary,
      As you know, the interplay between leaves of absence and ACA is complicated. You might find some of the details you need through the resources available in the International Foundation’s ACA Central (www.ifebp.org/acacentral). If you’re a Foundation member, you might like to contact our information specialists who would be happy to look into this for you (www.ifebp.org/Resources/personalizedresearchservice/Pages/default.aspx). Thanks for reaching out.
      Julie

      Reply

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