Conclusions reached by a recent Congressional Research Service (“CRS”) report state that, although the Cadillac tax is imposed on insurers or employers, ultimately, the burden will be borne by employees.
The Cadillac tax refers to an excise tax recently added to the Internal Revenue Code (“IRC”)1 by The Patient Protection and Affordable Care Act (“PPACA”)2 and set to begin in 2018. The tax, formally called the “Excise Tax on High Cost Employer-Sponsored Health Coverage,” is triggered by the cost of an employer’s health coverage being greater than a statutory indexed cost. At present, not many plans bump up against the indexed cost. However, it may not take long for a majority of the plans to go beyond that ceiling.
How will the Cadillac tax be imposed?
The tax is set to be imposed on single plans that cost more than $10,200 or more than $27,500 for all other plans (e.g., family plans). In the years after 2018, the baseline is indexed for inflation. Strangely though, the increase in the dollar amount of the limit for that year is calculated not by using the rate of increase in the cost of healthcare, but by using the ordinary consumer price index (“CPI”). Historically, the CPI rises rather slowly, while the cost of healthcare continues to rise at a rapid pace. The result is that even plans that find themselves under the threshold in the first year (2018) may find their plan costs exceeding the limit in the future. Unless the CPI and healthcare costs rise at a proportional rate, the cost gap will compound. The 40% Cadillac tax is applied to the amount of overage.
This tendency of healthcare costs to outgrow the index is noted by the CRS report, stating that the baseline is “indexed for inflation and, because health costs tend to grow faster than inflation, the share of premiums covered by the tax and the revenue collected is expected to grow over time.”
The Future of the Cadillac tax
Due to the rapidly increasing costs of healthcare, as opposed to the gradual growth of the CPI, it seems likely that virtually all group health plans will be subject to the Cadillac tax within a few years. As more employers see their healthcare plans subject to the Cadillac tax, it is conceivable that these employers will opt to eliminate healthcare plans entirely and pay the $2,000 per employee penalty instead.
The CRS report comes to a similar conclusion, stating that rather than dropping healthcare plans entirely, employers will substitute taxable wages for insurance coverage in excess of the threshold, and employees will be subject to income and payroll taxes on those wages. In other cases, employers will retain the Cadillac insurance plans and pass the tax on to workers in the form of lower wages. The report states that revenue projections assume the former situation will be more common.
It is important for employers to familiarize themselves with the intricacies of the Cadillac tax and, more importantly, follow plan costs closely to ensure that their organizations and employees address this matter proactively. Based on the CRS’s findings, employees have the ultimate cause for concern.
1 I.R.C. § 4980I
2 Patient Protection and Affordable Care Act, Pub. Law No. 111–148, 124 Stat. 119 (2010) (codified as amended at 42 U.S.C. § 18001 (Supp. 2010))