The Cadillac Tax 101–The Basics

Obamacare PPACA Cadillac TaxObamacare (PPACA) introduced several new taxes and the Cadillac tax is probably one of the more controversial of the lot. This tax has great potential to adversely affect all Americans and it is important that we have an understanding of what it is, who it impacts, how it is calculated, and who will ultimately pay the price for it.

What is the Cadillac Tax?

The Cadillac tax (officially the High Cost Plan Excise tax) is a new excise tax that starts in 2018.  It will be used to help pay for the non-group Health Insurance Marketplace subsidies, expansion of Medicaid, and all administrative costs for new federal government bureaucracy. The Cadillac tax is only applied to employer-sponsored health insurance, which enjoys many taxpayer-subsidized perks to both employers and employees . Non-group insurance plans are not subject to the tax. The targeted group of Americans (49% of the population in 2014) is shown (circled) in the figure below.

cadillac tax targeted group

The Cadillac tax is a whopping 40% non-deductible excise tax on employer-sponsored health coverage with a premium price tag greater than $10,200 for individual coverage, and $27,500 for family coverage. How did our government arrive at these specific values for the health insurance premiums? Using the single and family 2010 premium prices from the Blue Cross Blue Shield Standard Option (BCBS-SO) plan offered under the Federal Employee’s Health Benefit Plan (FEHBP), the government estimated the premium prices in 2018 based on a fixed rate of inflation and the Cadillac tax benchmark was born.

Every year after 2018, the “Cadillac” tax benchmarks will increase with inflation (using the lower Consumer Price Index and not the higher rate of health inflation). This means that even though your plan might not trigger the tax in 2018, it is sure to do so as time goes on–unless, of course, your employer reduces your health benefits to keep under the tax every year.  Various groups are busy estimating how many of the present insurance plans will trigger the Cadillac tax based on current expectations for health insurance premium inflation.  I have seen a wide range of numbers being predicted.  In the end, the government expects a certain amount of revenue from this tax and one way or the other, I am sure they will get it.

If your family health insurance premium cost $30,500 in 2018, then a Cadillac tax of $1200 (($30,500 – $27,500) x 0.40) would be owed. The Cadillac tax makes this insurance product $1200 more expensive than it was before the tax. Your family health insurance premium has to be $3000 less to owe no Cadillac tax.

Why Single Out Employer-Sponsored Insurance For the Tax?

There are three reasons why the government has singled out employer-sponsored insurance for taxation:

  1. The employer-sponsored group is the only health insurance group that still has some spare money to be had.  Many of the people in the government and the non-group groups come from lower income households and cannot afford the cost of the health insurance without government subsidies. When our government and their health economists look at where there is easy money to be had, the only place is with the 49% of Americans who get their insurance through their employers.
  2. Our government wants to target some of the tax-advantaged perks of employer-sponsored health insurance that some employees and employers now enjoy. If you remember from my short history of our healthcare system, government policy was geared at making employer-sponsored health insurance the foundation for the American healthcare system. The government handed out increasingly favorable tax treatments to both employers and their employees to where the lost revenue added up to over $250 billion a year. The new Cadillac tax is our government’s backdoor way to recoup some of that lost revenue.
  3. Our government wants to “encourage” employers to offer only high, cost share insurance products (e.g., the HSA-qualified High Deductible Health Plans (HDHP)) and reduce other health benefits to bring down the total health insurance price tag. Without the political muscle to reform the healthcare industry, patients with low, cost share insurance plans are being blamed for the spiraling costs of health care. These new health insurance products represent a REDUCTION in the employee health benefit and have been introduced over the past several years in a gradual process so that employee awareness of the reduction is not too obvious

How is the Cadillac Tax Calculated?

The Cadillac tax calculation has not been a simple matter of adding up all the tax-advantaged dollars associated with employer-sponsored health benefits. This calculation should include the cost of the premium (employer portion and the employee portion) and any tax-free funds put into a savings account.  After almost six years, our government is still trying to figure out if they should exempt some of the tax-free health benefit from the calculation. No formal rules on what is and isn’t included for the Cadillac tax exist yet.

So far, the cost of coverage (defined in Internal Revenue Code Section 4980I) in the Cadillac tax calculation includes but is not limited to:

  • Employer and employee contributions to insurance premiums
  • Employer contributions to HSAs, HRAs (but negotiation is still underway to try to exempt tax-free employee HSA contributions from the Cadillac tax calculation)
  • Employer and employee FSA contributions
  • Employer and employee contributions to retiree insurance premiums

Why exempt tax-free employee contributions to HSAs and not employee FSA contributions since the former is MORE tax-advantaged than the latter?  In my opinion, if our government excludes only tax-free employee contributions to HSAs from the Cadillac tax calculation then it is  encouraging the demise of all types of health insurance except the HDHP!  It should also be noted that the HSA is a taxpayer- subsidized benefit that higher income Americans take advantage of over lower income Americans.

Who Pays the Cadillac Tax?

Officially, the tax is paid by the coverage provider. This is either the insurer (for fully insured plans), the person who administers the plan benefits (for self-insured and government employee plans), or the employer (for HSA-qualified HDHP). In the end, you, the individual American, who gets his health insurance from his employer will be paying the tax in higher premium costs!  Neither the insurer nor the employer is going to absorb the cost of this tax.  If your health insurance does trigger the Cadillac tax, the cost could also be passed down to the employee through lower wages in the future.

The Bottom Line

The Cadillac tax is an excise tax that will be levied in 2018 and beyond on the cost of employer-sponsored health insurance coverage that exceeds government defined benchmarks. The tax is one of several revenue streams proposed in Obamacare (PPACA) to help pay for Health Insurance Marketplace subsidies, expansion of Medicaid, and all new federal government bureaucracy created. It targets the tax-advantaged benefits of employer-sponsored health insurance enjoyed by some employers and employees without eliminating them altogether.

Over the past several years in anticipation of the Cadillac tax, employers have been encouraging employees to sign up for HSA- and HRA-qualified High Deductible Health Plans (HDHP), which sport lower premium price tags but dump more of the cost of sickness onto employees.

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