An excise tax provision in Obamacare, which is meant to contain health spending and generate revenue -- approximately $80 billion between 2018 and 2023, according to the Congressional Budget Office -- will likely affect the health benefit packages that employers offer.
The “Cadillac Tax”, set to take effect in 2018, is a 40% tax on the total cost of each employee’s health benefits above certain thresholds -- $10,200 for self-only coverage and $27,500 for family coverage, both set to increase annually based on the general rate of inflation. Those figures include both employer and employee contributions to a plan. As the name implies, the tax is aimed at “rich” plans, but could also hit companies with historically high claims, those covering an older workforce, and those in areas with higher healthcare costs (e.g., rural areas).
The Kaiser Family Foundation recently concluded that, nationwide, 26% of employers who offer health benefits would be subject to the Cadillac tax in 2018, 30% in 2023, and a whopping 42% in 2028 if benefit costs rise at expected rates. Raising employees’ shares will not mitigate the tax effect, so employers will likely be looking for ways to trim their plans. If the Cadillac tax is implemented as designed, expect benefits like health savings accounts, flexible spending accounts, on-site medical clinics, and wellness programs to quickly become a thing of the past.
There are signs that the Cadillac tax is in trouble, however. Sen. Bernie Sanders and a slew of Republicans are speaking out against the tax. Washington rarely agrees on anything, so agreement across the aisle is a pretty good sign that changes will come. The question is whether to repeal or replace it. Sanders and 11 of his Democratic Senate colleagues want to shift the Cadillac tax cost from employers to wealthy individuals. Sanders argues that a surtax on the wealthiest U.S. taxpayers would raise $460 billion over 10 years, more than five times the amount raised by the Cadillac tax. Republicans, by and large, simply want to repeal the Cadillac tax. Either way, the tax is in trouble.
That being said, do not expect repeal or revision to come anytime soon. The Cadillac tax will likely be an election talking point, but a vote on the issue won’t come quickly. Congress has far more pressing issues on its agenda, including avoiding a government shutdown this week (and who knows how many times before 2018). Plus, Congress seems to have a penchant for waiting until the eleventh hour to make big policy changes. If a vote on the Cadillac tax is to come, I’d expect it sometime late 2017. My best advice, as with all Obamacare provisions, is to prepare as if it will be implemented fully, but be open to the possibility it won’t happen at all.