Bellybuttons and Cadillacs don’t usually bring taxes to mind, but the Affordable Care Act is just a magnet for creative nicknames. The law won’t tax your navel or classic car to fund itself, but the Cadillac tax has been particularly important for corporations — some even blaming it along with the employer mandate for massive benefit cuts and layoffs.
What is the Cadillac Tax?
It sounds crazy at first, because all the Affordable Care Act wants is to give people better access to higher quality healthcare, right? Not in this case, because if you own a large national enterprise and offer great health benefits to workers, it’s sort of frowned upon by the ACA.
Robust coverage, low out-of-pocket costs, and excellent benefits characterize these employer-sponsored insurance policies. Premiums are paid mostly by employers in so-called Cadillac health plans.
The “Cadillac” tax is a provision of the health law imposed on companies that offer this generous level of benefits. The targeted plans feature small deductibles or none at all, and a modest level of cost sharing.
Starting in 2018, an excise tax of 40 percent will be assessed on the overall coverage cost for policies that exceed an annual maximum of $10,200 for individuals and $27,500 for couples and families.
Why give employers who offer great health benefits a hard time? Supporters of the Cadillac tax claim these types of plans allow policyholders to feel too comfortable, i.e. visiting the doctor or hospital more than they should, simply because it’s covered and they don’t have to pay the full cost.
If this is the case, national healthcare costs increase overall because these insured individuals are receiving unnecessary tests and other pricey services. Yet the policies in question may be subject to new tax because they’re expensive due to who they cover — older and/or sicker people — can also be a contributor to cost.
Those who oppose the tax say it’s a way of narrowing health benefits unfairly.
Let’s dig deeper into the tax and why it made the cut for the Affordable Care Act.
The Purpose of the Cadillac Tax
The health reform law is emphatic that everyone needs health insurance. The most commonly recognized ACA rule stressing the importance of coverage is the individual mandate, which was upheld by the Supreme Court in June 2012 after being challenged.
Though many Americans receive coverage through an employer, the uninsured population was pushing 50 million when the law was signed in 2010. It has since dropped gradually, especially now that coverage is available to anyone regardless of their health status.
By opening the individual market to everyone, the ACA was expected to lower uncompensated care, therefore reducing overall expenses and the national deficit. A win-win situation: people get healthcare, the government gets out of debt.
According to the Obama administration, the law would save over $200 billion over a decade and more than $1 trillion in the following decade. Medical costs should also be reduced by the law, as it increases the availability of preventive services, and rewards providers for providing good quality at a low cost.
The Cadillac tax was included in the slew of taxes established to offset costs and help slow the growth rate of medical costs — notably premium rate hikes — and pay for other reforms.
Over $900 billion in coverage reforms were to be passed onto taxpaying individuals and employers. In 2013, the Congressional Budget Office estimated the excise tax on costly medical coverage would raise about $80 billion between 2013 and 2023 (though it’s not in effect until 2018).
Who Decided to Call Them “Cadillac Plans”?
Since the 1970s, the phrase “Cadillac plan” had been used to describe the American luxury car of health insurance policies. The phrase was re-popularized in the 1990s during national health reform debates, interchangeable with “gold-plated health plans” for plans with high premiums and the most generous array of benefits.
Interestingly, the health law created “gold” and “platinum” plans on the individual market, and Cadillac plans are taxed to fund the exchanges that sell them.
Cadillac plans may also have larger provider networks and more covered services, including costly ones like in vitro fertilization, which can cost tens of thousands of dollars.
Beyond coverage, it may be the individuals in the group plan who cause the Cadillac plans to cost more, for having medical conditions, working a high-risk job, or being older.
Rules for High-Cost Health Plans
Under the ACA, both fully-insured and self-funded group health insurance plans will be assessed a 40 percent excise tax on individual coverage exceeding $10,200 per year and family coverage exceeding $27,500. This excise tax begins in 2018, pushed back from it’s original start date in 2013.
The excise tax also applies to:
- Employee premium rates
- COBRA rates for self-insured employers
- Contributions to Flexible Spending Accounts, Health Reimbursement Accounts, and Health Savings Accounts
How it Works
Fully-insured group plans pay a fixed premium to the issuer or insurer, and the insurer takes on the group’s risk.
Self-insured employer plans take on the risk of the group as an employer, therefore the employer is the health plan administrator and insurer.
Whoever issues the plan — insurer or employer — will be required to pay the excise tax. For instance, if the plan’s overall value went over the annual limit by $1,500, the employer or issuer would pay an excise tax of 40 percent, or $600.
The ACA allows adjustments to the thresholds for plans with a higher number of workers who are an advanced age or women.
Why Employers Are Concerned
No one likes hearing that they’re about to pay additional taxes. Perhaps some employers are going a little overboard by making their own estimates on Obamacare costs, but the law will cost some individuals and some employers more.
Especially if they weren’t supporters of the health law, employers weren’t thrilled to discover they’re helping fund the law. Keep in mind, most every taxpayer is helping in some way.
Employers have been searching for ways to avoid the tax ever since this provision went public. Although it’s not in effect until 2018, companies began to scale back coverage starting in 2012.
Some have considered modifying premiums and cost sharing to pass costs onto their workers. In combination with the employer mandate, Obamacare has been blamed for many lost hours, jobs and benefits.