Obamacare's Cadillac Tax Officially on the Chopping Block

Last September, we brought to your attention the fact that Obamacare’s most lucrative funding piece, the Cadillac tax, was in trouble.  Today, it seems all but done for.  The Democratic Party released its platform Friday, calling for an end to this planned excise tax on high-cost healthcare plans.  Republicans have complained about the tax for years.  With such bipartisan support for repeal, the Cadillac tax seems to be in its last days.  The question is, now what?

To review, the goal of the Cadillac Tax was to fund the Affordable Care Act by penalizing employers for offering high-cost employer sponsored health insurance plans to employees, effectively pressuring them to offer less-generous health insurance plans. The Cadillac tax was to be a 40% tax on the cost of employer-sponsored health coverage exceeding certain thresholds: $10,800 for individual coverage, and $27,500 for family coverage.  (The cost of wellness programs, on-site clinics, and other plan features aimed at reducing overall medical expenses were also to be included.)  In evaluating the thresholds, both employer and worker contributions were to be included, and the tax was to apply to every dollar above those thresholds. The 40% tax would not be tax deductible by the employer.  Obamacare was passed in 2010, but the Cadillac tax was deferred until 2018. Later, Congress rolled it back two more years, to 2020.

If it goes away completely, which now seems likely, we must start to wonder how Obamacare will be funded.  The Cadillac tax was a critical piece -- a projected $80 billion by 2023 piece -- of planned funding.  Where will that money come from?  The official Democratic platform is to repeal the excise tax and “find revenue” to offset it.  But from where?

One possible answer is to increase the numerous other – but so far less aggressive – Obamacare taxes.  These include:

• 2.3% tax on medical device manufacturers
• 3.8% Net Investment Income Tax
• $2,000 per employee ($3,000 if employee uses tax credits to buy insurance on the exchange) Employer Mandate on businesses with over 50 full-time equivalent employees to provide health insurance to full-time employees.
• Medical deduction threshold tax increase
• Individual Mandate (a tax for not purchasing insurance)
• Excise tax on charitable hospitals which fail to comply with the requirements of Obamacare
• Medicare Part A Tax increase of 0.9% on earned income over $200k (single), $250k (married, filing jointly)
• An annual $63 fee levied by Obamacare on all plans (decreased each year until 2017 when pre-existing conditions are eliminated) to help pay for insurance companies covering the costs of high-risk pools
• Medicine Cabinet Tax (over the counter medicines no longer qualify as medical expenses for flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs), and Archer Medical Saving accounts (MSAs).
• Additional tax on HSA/MSA distributions.
• Penalties for non-qualified medical expenses of 10% to 20% for HSAs and 15% to 20% for MSAs

This is just a partial list.  The full list of Obamacare tax provisions can be found here.

Even with all these other taxes, the hole left from the Cadillac tax is a big one.  If Obamacare is to stand, a tremendous amount of money needs to be generated, and it’s possible one (or more) of the taxes listed above will be increased.  Employers may very well still share a heavy burden of providing for the rising cost of health care.  So while you may be expressing a bit of relief that the hefty Cadillac tax will very likely be repealed, the bottom line is that you still need to prepare financially for what is ahead.

It’s a difficult task to plan in the midst of uncertainty, but employers need to educate themselves and prepare as best as possible.  Your most effective strategy continues to be the monitoring of changing healthcare law and seeking the guidance from benefits brokers to come up with creative solutions that will make it easier to provide coverage for your employees.  It’s all any of us can do, really.