Is Repeal of the Cadillac Tax Inevitable?

Many provisions of the Affordable Care Act (ACA) are still being debated, especially as our country decides what direction to go next and government agencies shift in the ways they’re creating and applying regulations to enforce the law. One provision of the ACA, often referred to as the “Cadillac Tax,” that is currently under discussion, places a 40% excise tax on “high-cost” employer-sponsored health plans.

While designed to target the richest health plans, the tax appears to affect up to a fourth of employer-sponsored health plans in the country. These “high-cost” plans are any employer-sponsored health plan with a value of health benefits above $10,200 per individual or $27,500 per family. While the thresholds are increased if the majority of covered employees are engaged in specified high-risk professions such as law enforcement and construction and to accommodate certain group demographics including age and gender, the Cadillac tax applies to a large number of employer-sponsored health plans and, unsurprisingly, those businesses objected to the tax.

What is the Purpose of the Cadillac Tax?

The purported purpose of the tax is three-fold: (i) reduce tax-preferred treatment of employer-provided health care, (ii) reduce excess health care spending by employees and employers, and (iii) provide financing for the expansion of health coverage under the ACA.

Who Pays the Tax?

The 40 percent tax applies to the cost of health coverage that exceeds the threshold amounts. The cost of coverage includes the total contributions paid by both employers and employees, but not cost-sharing amounts such as deductibles, coinsurance, and copays. For insured plans, employers calculate the tax and insurers must pay the tax. For self-funded plans, employers calculate the tax and the plan administrator pays the tax. While the tax was originally non-deductible, changes to the tax in December 2015 make it tax deductible for employers who pay the tax. In addition to fully insured and self-funded plans, contributions to Health FSAs, HRAs, and HSAs as well as wellness programs and fixed indemnity insurance are included in determination whether the value of health benefits exceeds the threshold amount.

Impact of Repeal on Employer-Sponsored Health Plans

Recently, President Trump signed a stopgap funding measure that delays the tax, which was supposed to take effect originally in 2018 and delaying it from its current start date of 2020 until 2022. Further efforts by businesses have resulted in a bi-partisan look at the possibility of fully removing the Cadillac tax from the ACA. On March 6, Senator Martin Heinrich of New Mexico proposed the Middle Class Health Benefits Tax Repeal Act of 2019 and has already garnered significant cross-party support for the bill. A similar piece of legislation, also featuring bi-partisan support, has appeared in the House of Representatives.

Many businesses were looking at the best way to structure employee benefits in light of this high excise tax. Often, the cost of health insurance has less to do with the generousness of benefits offered and more to do with the location and age of the population covered. Because the Cadillac tax, as implemented, would cover such a wide range of plans, not just the super-generous plans initially envisioned, businesses who could not afford the additional costs begin to shift their plans to avoid potential issues.

Even benefit plans that do not currently reach the threshold have seen rising costs, causing concern for the businesses and insurers who offer these plans that they will become subject to the excise tax. Further, businesses often use generous benefit packages as a recruitment tool, helping them attract and retain the top talent needed to succeed in a competitive market. Placing a large tax on these types of plans disincentives businesses from offering their team quality healthcare. Recent appeal proposals have given companies hope that instead of just delaying the tax, it can be repealed altogether.

Understanding both regulations and tax law and how they apply to the benefit plans you offer your employees is important. Reach out to the experienced team of benefit attorneys at Hall Benefits Law to discuss your unique situation and goals. Call our office today at 678-439-6236 or visit the Hall Benefits Law website.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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