The "Cadillac tax" isn't dead but it will stay suspended a while longer.
On Jan. 22, Congress passed and President Donald Trump signed into law a two-year delay on the Affordable Care Act's 40 percent excise tax on high-value health care plans. The provision was part of the measure to restore funding to the federal government through Feb. 8, ending a partial government shutdown.
Both political parties supported the provision to postpone the so-called Cadillac tax from taking effect until 2022, instead of in 2020—as did the Society for Human Resource Management (SHRM).
In December 2015, Congress passed and President Barack Obama signed an initial two-year delay of the Cadillac tax, changing the effective date from 2018 to 2020.
"The IRS has not yet issued regulations on this tax," commented Sharon Cohen, JD, and Richard Stover, consultants with Conduent HR Services,
in an alert. "With another delay, it's unlikely the IRS will issue regulations soon. But unless and until the tax is revoked, employers should keep an eye on their plan designs with this tax in mind."
"There continues to be wide bipartisan support for repealing the Cadillac tax," noted
an online post by ADB Insurance & Financial Services. "However, there is no consensus approach to replacing the lost revenue from full repeal. While it remains unlikely that the tax will ever fully take effect, the long planning process required to prepare for its effect will continue to make employers nervous each time the effective date closes in."
SHRM Advocates Full Repeal of Tax
"SHRM has long advocated for full repeal of the excise tax and applauds the new two-year delay," said Chatrane Birbal, senior advisor of government relations at SHRM. The postponement will provide much needed relief to employers and employees and "is an acknowledgement by Congress of the importance of employer-sponsored health insurance, which provides benefits to over 178 million Americans and their families."
Looking ahead, SHRM will continue to support and encourage Congress to fully repeal the excise tax, Birbal said. "Repealing this tax has strong bipartisan, bicameral support," she noted. Proposals to fully repeal the tax have been sponsored by Senators Dean Heller, R-Nev., and Martin Heinrich, D-N.M., and by Representatives Mike Kelly, R-Pa., and Joe Courtney, D-Conn.
While the excise tax is only intended to target high-value plans, "modest plans will also be impacted," wrote Johnny C. Taylor, Jr., SHRM-SCP, president and CEO of SHRM,
in a Jan. 19 letter to Senate Majority Leader Mitch McConnell (R-Ky.) and Minority Leader Charles Schumer (D-N.Y.).
Taylor wrote, "This means millions of Americans and their families could face higher co-pays and deductibles, causing some to decline employer-provided health care," if the tax were to take effect.
[SHRM members-only toolkit:
Complying with and Leveraging the Affordable Care Act]
What Happens in 2022
With the new delay, the excise tax will be imposed beginning in 2022 on the cost of health plan coverage that is more than these pre-determined annual limits:
- $10,200 for individual coverage ($11,850 for qualified retirees and those in high-risk professions).
- $27,500 for family coverage ($30,950 for qualified retirees and those in high-risk professions).
These limits are indexed to the Consumer Price Index and may be increased for inflation. While the tax was originally not deductible as a business expense, the December 2015 changes make it tax deductible for employers who pay it.
The provider of health coverage must pay the excise tax:
- For self-funded plans, the employer plan sponsor is responsible for payment.
- For fully insured plans, the insurance carriers are responsible for paying the tax, which would likely be passed on to covered individuals in the form of higher premiums.
A Welcome Delay
Several employer groups also cheered the postponement but, like SHRM, look forward to achieving full repeal of the levy.
"We applaud efforts to delay the Cadillac tax that is driving up health care costs for millions of Americans," said James A. Klein, president of the American Benefits Council in Washington, D.C., a trade association for large plan sponsors. "We will continue our efforts to fully repeal this onerous tax that forces employers to reluctantly cut benefits and increase out-of-pocket costs for employees in an attempt to avoid it. We appreciate Congress including this two-year delay as a down payment for full repeal."
"Employer plans are driving innovations that improve the health of employees and their families and that provide more affordable, higher quality health care for all," said Steve Wojcik, vice president of public policy at the National Business Group on Health in Washington, D.C., an employers group. "There is widespread, bipartisan support to repeal this tax, which if it takes effect, would drive up costs for employers and employees alike."
The Cadillac tax still has supporters, however. James C. Capretta, a resident fellow at the American Enterprise Institute in Washington, D.C., and former associate director at the White House's Office of Management and Budget under President George W. Bush, recently called it "an imperfect answer to a long-standing and fundamental problem." He argued in a January 2018 commentary, "The unlimited exclusion of employer-paid premiums from taxation encourages overly generous job-based insurance. All premiums paid by employers are excluded from taxation, no matter the expense. This leads employers to offer expansive insurance coverage, which then leads to more consumer demand for services and higher prices."
Other ACA Taxes and Health Programs
The stopgap funding bill also amends the Affordable Care Act and affects health programs by:
- Delaying the medical device tax—a 2.3 percent tax on the sale of certain devices—until 2020. This tax had previously been suspended for 2016 and 2017.
- Suspending for one year the health insurer tax (HIT). The tax is in effect for 2018 but suspended for 2019. The tax had previously been suspended for 2017.
- Extending the Children's Health Insurance Program (CHIP) for six additional years.
"The health insurer tax was not suspended for 2018 because insurance rates for 2018 already include the tax, and to suspend the tax now would be a windfall for insurers unless they were required to refund the tax to policyholders," Cohen and Stover noted.
This six-year commitment to CHIP "could have an impact on employers, especially those with low-wage work forces," they explained. For example, "the extension could reduce the risk of exposure to the ACA shared responsibility assessment for employers of low-wage workers in states where CHIP coverage is provided to pregnant women." However, CHIP's "administrative burden on employers and group health plans, including notification and changes of elections, will continue for the next six years."
Related SHRM Article:
'Cadillac Tax' Will Hit Majority of Employer Plans,
SHRM Online Employment Law, October 2017
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