In a rare display of bipartisan cooperation, Congress recently passed major spending and tax bills, that, among other things, amended the Affordable Care Act’s (“ACA”) so-called Cadillac Tax by delaying its implementation for two years. The Cadillac Tax was set to begin in 2018, and would have imposed a 40% non-deductible excise tax on that portion of a group health plan’s premiums that exceeded $12,200.00 for single coverage, and $27,500.00 for family coverage. Instead, this new bill delays the Cadillac Tax until 2020.
One concern over the Cadillac Tax that has alarmed employers and unions alike is the perception that healthcare costs will not stay in check, as they are rising far faster than CPI inflation. This point is critical since the Cadillac Tax’s ceiling is increased annually by an inflation index. As a result, many argue that the vast majority of health plans will eventually exceed the Cadillac Tax ceiling given projected increases in healthcare costs.
The obvious question, therefore, is whether the Cadillac Tax will be implemented in the future or be repealed. While both political parties are seemingly working to scrap it, the excise tax from the Cadillac Tax was designed to be a major source of revenue to cover the ACA’s ongoing costs, including its tax credits. Moreover, the bill signed by the President last Friday, provides for tax deductions of the employer’s/sponsor’s payment of the excise tax. No study, however, has been done concerning what the impact will be with respect to revenue shortfalls caused by eliminating the Cadillac Tax or allowing a deduction for excise taxes paid. (As you may recall, the ACA, when first enacted, was purported to be a “revenue neutral” enactment, which now seems very unlikely.)
Another question raised by this legislation is whether the current trend towards limiting healthcare costs will continue. Employers may not continue to implement cost control structures to avoid triggering the excise tax if the perception is that the Cadillac Tax may be repealed. Accordingly, while the road ahead is uncertain, it does seem clear that the next President will be left with a major issue in deciding how to pay for the costs of the ACA and how to control increases in healthcare costs in general with respect to an aging baby-boomer population.
We note that this tax bill also included a freeze on the ACA’s medical device tax for 2016 and 2017 and further provides that the U.S. Controller General and the National Association of Insurance Commissioners should study whether the ACA uses a suitable benchmark to calculate the Cadillac Tax’s ceiling and whether it accurately takes into account both age and gender factors.
In the final analysis, therefore, even with this delay, many companies will likely need to implement further measures to avoid the Cadillac Tax in 2020 if it is not repealed, although the ability to deduct this excise tax may help, to some degree, in mitigating this tax’s overall impact.