“Cadillac” Health Plans and the ACA

The term ‘Cadillac plan’ is an informal term that refers to any extremely comprehensive group health insurance plan offered to employees and retirees. These plans generally pay very close to 90 to 100 percent of health expenses, with very low deductibles, and may come with many other perks and benefits as well.

For many years it was advantageous for businesses to offer these plans, because their high premiums were tax-deductible for the business as a compensation expense, non-taxable to the worker as a health insurance benefit, and provided a great deal of value to the worker.

When Congress passed the Affordable Care Act, however, they decided that this deal was too good to last, and therefore elected to penalize these plans with a 40 percent excise tax on annual premiums in excess of $10,200 for individuals, and $27,500 for family plans.

The tax does not only apply to the plan sponsor’s portion of the group insurance premium: Employers must also add whatever amounts they contribute to health savings accounts, health reimbursement arrangements, some workplace wellness programs, flexible spending arrangements and employee assistance plans, along with other pre-tax health benefits.

The 40 percent tax on Cadillac health plans is scheduled to become effective in 2018, unless Congress sooner amends or repeals the Affordable Care Act. Otherwise, these thresholds will be indexed to the Consumer Price Index in future years. Historically, however, the CPI does not keep up with the actual increases in health care costs, or medical inflation. This means that unless employers roll back their plans, an increasing number of plans are likely to fall within the 40 percent excise tax window each year, as the difference between the CPI and the actual rate of medical inflation increases. All told, the Cadillac Health Plan Tax is expected to affect about 16 percent of employers nationwide, according to the Kaiser Family Foundation, and cost employers roughly $3 billion, according to the Congressional Research Service and reporting by the Columbus Dispatch.

Employers and employees will not be the ones directly paying the tax. The law places responsibility for actually paying the tax on insurers. However, the cost is sure to be passed on to the employers sponsoring these plans. The net effect is likely to be a substantial reduction in the availability of very high-premium health plans with rich benefits.

Critics of the tax have claimed that the tax was only supposed to have applied to a tiny portion of the total number of such plan beneficiaries. But as the law is written, the tax could negatively affect millions of Americans who are currently covered by these high-grade health insurance plans, even including low and moderate income families, self-employed individuals, small businesses, retirees, law enforcement, government workers and retirees.

Businesses and workers in relatively high-cost areas are likely to be more significantly affected by the 40 percent tax than those in moderately-priced areas.

We are beginning to see the leading edge of effects of the Cadillac plan tax on the marketplace as employers are rolling back the availability of these plans to new employees and occasionally cancelling them outright for existing employees.

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