“Cadillac Tax” Will Hit 38 Percent of Employers in 2018
The “Cadillac tax” is the excise tax on high-value health plans, which goes into effect in 2018. If the value of health benefits exceeds $10,200 for an individual or $27,000 for a family, the excise will be taxed at 40 percent.
A new report from the American Health Policy Institute breaks down the effect on employers. As well as concluding that the Cadillac tax will hit 38 percent of employers in 2018, it estimates that the average employer-based policy will be subject to the tax by 2031.
There is no doubt the Cadillac tax will put an administrative burden on employers, and reduce the attractiveness of employer-based benefits. On the other hand, as the AHPI report notes, the Cadillac tax will cause employers to increase workers’ wages in exchange for reducing health benefits. Indeed, the Congressional Budget Office anticipates that 75 percent of the revenue due to the Cadillac tax will be from income and payroll taxes due to wage increases, and only 25 percent due to the Cadillac tax itself.
Notwithstanding the tax hike, shifting workers’ income from benefits to money improves their welfare, because they are free to spend their money on whatever they like. Also, the current exclusion of employer-based benefits from taxable income is a “tax expenditure” of over $785 billion over the next five years.
That is not a subsidy, as some assert, because it only reduces people’s taxes. It doesn’t get paid out to people who do not pay taxes. However, it does create a hole in the Treasury.
Is it fair to give employees an unlimited tax break if they get health benefits from an employer, but not if they choose their own health insurance? And while a plurality of citizens probably accept that a certain value of health spending should be tax free, should it be unlimited?
Most conservatives reject this, and include some type of Cadillac tax in their reform plans. NCPA’s plan taxes employer based benefits in exchange for a universal, refundable tax credit that treats everyone the same.
The Cadillac tax is sorely needed.
My gosh, spending $27,000 a year for a family is higher than many mortgage payments – with no equity accruing each year.
Only an ability to draw on “unlimiyed” medical benefits.
Employers need to consider different financing mechanisms to provide family premiums way below the Cadillac tax.
And, they can do so whether 20% of the people incur 80% of he claims, 10% incur 90% of the claims, etc.
For self funded employers, they normally assume all the risk up to the attachment point or specific “deductible” per person. This deductible can be as high as $100,000 per person. Imagine a financing mechanism in which the higher claimants remain the employers’ risk, but the lower claimants’ risk is transferred to National Prosperity Life and Health.
The cool thing is that it matters not who falls into the 20% or who falls into the 80%. The 80% are accruing benefits much faster that claims are paid, thus lowering the employers’ risk, premiums, and reserve fund needed.
To learn more, go to nationalprosperity.com.
Don Levit,CLU,ChFC
“taxes employer based benefits in exchange for a universal, refundable tax credit that treats everyone the same.”
In the tones of Sam Cooke, what a wonderful world this would be
That is not a subsidy, as some assert, because it only reduces people’s taxes. It doesn’t get paid out to people who do not pay taxes.
I don’t understand the logic behind this distinction. Is it the fact that the transfer is in the form of a tax reduction and not a separate payment that disqualifies it from being a subsidy, or is it the fact that it’s not universal?
Is the earned income tax credit a subsidy? That would seem to negate the first condition. Does a payment have to be given to everyone and not a specific group in order to be called a subsidy? Wouldn’t that negate the second?
How is this exercise in semantics meaningful?
Sorry, the first paragraph should have been quoted.
In a presidential debate a few years ago, I recall Newt Gingrich’s claim that his proposal to forgive illegal immigrants “was not amnesty” because “it did not confer citizenship.” That always struck me as a non sequitur, and this feels similar.
If you have a tax liability that is reduced by a preference (e.g. exemption from taxation of employer-based benefits) but you still pay taxes, I argue that is not a subsidy.
If you get a tax credit that eliminates your tax liability and you end up with positive income from the tax credit, that is a subsidy.
I think the taxpayers have more authority to govern how you spend the latter than they do the former.
Note to Don:
In my insurance career I did run across some plans that charged $27,000 a year for family coverage.
They were plans for university faculty, state agencies, small school districts, or unions in shrinking industries.
Without exception, the average age in these plans was 55 or 60. More than 20% of the participants were having large claims.
The Cadillac tax is really a tax on older risk pools. For that reason I do not think it will survive an actual implementation.
That is a helpful comment. I have already noted the high premiums of private non-profits when I discussed the Kaiser Family Foundation/HRET survey of employer-based plans and you have helped my understanding.
In the short-term, the Cadillac tax could be amended to me more like a cap on the individual’s tax exemption.
There is no “High Cost Health Plan” tax on public exchange coverage. Should it be implemented, as written, expect to see greater employer efforts designed to encourage older (and less than healthy) Americans to opt out of employer sponsored coverage – coupled with new regulations and other actions specifically focused on countering such actions.
Further, and importantly, when it comes to the $27,000 amount for non-single coverage, the solution to avoiding that (for at least the next ten years and perhaps longer for most employers) is simple – go to two tiers of coverage, single and non-single, put in a full replacement HDHP-HSAs option with a jumbo deductible, and then, after 2018, drop spouses from eligibility (not spousal waiver nor spousal surcharge provisions). This will force the spouse to enroll where she/he works, or, if they do not have access to employer sponsored coverage, to enroll in public exchange coverage (where underwriting limits the impact on price among older Americans) and where lower income Americans (< 400% of FPL) get taxpayer financial support.
I would note that the longer the Republicans wait to remove this tax (or curtail it, or adjust it, whatever), the harder it will be to accomplish a return to the PPACA ex-ante status quo- without subjecting themselves to criticism that they are significantly adding to the federal deficit.
That is because when health reform was enacted, only the first two or three years of Cadillac tax revenue was included in CBO estimates. In 2017, once President Obama leaves office, if they can get a law through to remove it, there will be a full ten years of tax priced into the new legislation – and, by some estimates, over the ten year budget window period, we are talking about $500B – $1T in new revenues.
The cynical among us might simply note that no one seems concerned about the deficit (few if any Americans can tell you what the federal deficit was in each of the last three years), and almost no one can tell you the projected deficit for the current federal fiscal year. So, no one will understand the cause should the deficit jump from say $400B to $550B one year in the future – because the high cost health plan tax was curtailed.
Note that, because many employers have already started to respond to the Cadillac Tax by changing eligibility and point of purchase cost sharing provisions, the savings in terms of the moderation of federal tax expenditures are already underway.
Thank you, but hope Republicans do not want to return to the pre-ACA status quo. I will be proposing an alternative to the Cadillac tax in 2015.
Jack, we are already seeing many employers raise the amount they charge to keep spouses and children in the company plan.
But you are wrong on one count –due to the awful “kid glitch” in the ACA, the spouse and children CANNOT go to the exchanges in most cases. So long as the premium for the individual worker is ‘affordable’, it does not matter that family coverage is getting harder to find and keep.
Small point — your second email implies that the Cadillac tax was supposed to raise
$50-$100 billion a year after 2017.
Even in Jon Gruber’s fanciest lies I do not think that was true.
All things being equal, the more kids the employee has (if he is under 400 percent of FPL household income), the more likely he is to tolerate being sent to an Obamacare exchange. He might pay more, but dependents will be subsidized.
It raises revenues in three ways
The tax itself,
Reduced tax preferences as spending in employer plans is up, but much less than it would be, and peri rubber projections,
As employers spend less. On medical they spend more on taxable wages.
Spouses enroll in public exchange once made in eligible for employer. Plans (no employer penalty) where qualify for subsidy.
Kids enroll because with NO employer support where non-single coverage elected, difference in ee contribution to add a child is greater than unsubsidized. Plan in public exchange.
Total disruption in ten more years according to professors Emmanuel and grub er … Just might. Happen without legislative change…
That’s per gruber predictions
Spouse no longer eligible means no employer penalty and may qualify for taxpayer subsidy if enroll in public exchange
Sorry for typos
Jack, I am not following you on spouses and the ACA.
Consider the following from Health Affairs:
Under the ACA, an individual worker and family members who can enroll in “affordable” job-based health insurance cannot get financial help to lower the costs of Marketplace coverage. Based on the way eligibility for premium tax credits is determined under current Internal Revenue Service (IRS) regulations, employer-sponsored insurance, for both the employee and his or her family members, is deemed affordable if the cost of self-only coverage–that is, a plan that covers only the individual worker–is less than 9.50 percent of household income. This measure is adjusted annually and will increase to 9.56 percent of household income in 2015. Defining eligibility in this way ignores the cost of a family plan, which is frequently much more expensive than self-only coverage.
In 2013 the average worker contribution for self-only, employer-sponsored coverage was $999 annually, while the average contribution for family coverage was $4,565, although there is considerable variation in both single and family plans. Therefore, the employer-sponsored coverage would be considered affordable for a family of four with a household income of $33,000 (just over 140 percent of the federal poverty level), even though buying a plan for the entire family would cost 13.8 percent of their household income, well above the current 9.5 percent threshold.
This is the glitch that I was referring to.
Sorry about my typing here.
All of us who are lawfully present in the United States can go to the public exchange and enroll for coverage – even if we are eligible for Medicare, employer-sponsored coverage (as an employee, spouse, child of a parent eligible for coverage, retiree, etc.)
However, if an employer only offers employee only coverage and employee and child(ren) coverage, if they exclude the spouse from eligibility for coverage, the spouse is free to go to the public exchange and enroll in coverage AND receive a taxpayer subsidy – assuming the household income is low enough to qualify (but not too low so that it falls below 100% of the Federal Poverty Level for that family size and geographic location).
Health reform, in terms of “affordability” of employer-sponsored coverage (which disqualifies individuals from receiving taxpayer subsidies for public exchange coverage), only looks at the employee contribution for the single tier (employee only) of coverage.
So, in 2015, for a family of four, with a household income of $33,000, the single tier employee contribution cannot exceed $263 ($33,000 * .0956 / 12). The employer is free to charge anything they want for non-single coverage (even an amount in excess of 100% of the premium) without affecting “affordability”.
Sorry about my typing here.
All of us who are lawfully present in the United States can go to the public exchange and enroll for coverage – even if we are eligible for Medicare, employer-sponsored coverage (as an employee, spouse, child of a parent eligible for coverage, retiree, etc.)
However, if an employer only offers employee only coverage and employee and child(ren) coverage, if they exclude the spouse from eligibility for coverage, the spouse is free to go to the public exchange and enroll in coverage AND receive a taxpayer subsidy – assuming the household income is low enough to qualify (but not too low so that it falls below 100% of the Federal Poverty Level for that family size and geographic location).
Health reform, in terms of “affordability” of employer-sponsored coverage (which disqualifies individuals from receiving taxpayer subsidies for public exchange coverage), only looks at the employee contribution for the single tier (employee only) of coverage.
So, in 2015, for a family of four, with a household income of $33,000, the single tier employee contribution cannot exceed $263 ($33,000 * .0956 / 12). The employer is free to charge anything they want for non-single coverage (even an amount in excess of 100% of the premium) without affecting “affordability”.
Thanks Jack.
What I run into a lot are situations where the employer covers the employee and pays almost all the premium.
But if the employee wants spousal and family coverage, they must pay an extra $900 a month.
These spouses seem to be out of luck.