The Looming Cadillac Tax

As part of the ACA, the federal government will impose an excise tax on high-value, employer-provided health-insurance coverage, commonly referred to as “Cadillac” plans. While the tax was originally scheduled to go into effect in 2013, the Obama administration delayed the “Cadillac tax” until 2018. States and municipal governments across the country are now looking for ways to avoid passing the substantial cost of this tax on to their taxpayers.

The Cadillac tax imposes a whopping 40 percent excise tax on the value of employer plans in excess of $10,200 for an individual plan and $27,500 for a family plan. For example, an individual plan with a value of $15,000 will be taxed $1,920.

For health coverage provided through collective-bargaining agreements, the $27,500 threshold applies to both individual and family plans. Retirees under age 65 have a $11,850 threshold for individual coverage and $30,950 for family coverage.

Many state- and municipal-government employee health plans will be subject to this tax in the near term while other plans will trigger the excise tax in the long term. That is because the allowable health-plan value is based on the inflation rate (Consumer Price Index, or CPI), not the healthcare inflation rate. Since healthcare costs have consistently increased faster than inflation, more and more plans are likely to be hit with this tax over time.

States and municipal governments have long been able to offer generous fringe benefits, such as lavish health insurance coverage and generous retirement benefits. For example, according to The Pew Charitable Trusts, 24 states offered health-insurance plans that had at least one plan with $0 deductible in 2013 and individual employees paid an average of only 12 percent of their total premiums with the remainder paid by taxpayers.

Many governments are already struggling to address their current budget obligations and are either unwilling and unable to absorb this additional cost. The Cadillac tax is intended to upend generous employer-sponsored health plans which benefit from the open-ended tax exclusion that allows employers to provide unlimited health benefits on a pre-tax basis.

Instead of passing the cost of the Cadillac tax on to their employees in the form of lower wages or higher costs (beyond the normal health insurance premium increases), many private-sector employers are already offering less generous plan options to avoid the Cadillac tax entirely. They are increasingly shifting to the use of private health insurance exchanges where employees shop for coverage among a variety of options with a defined contribution amount from the employer and to higher-deductible plans, often with a Health Savings Account (HSA) option. This is a lower-cost option that can, in many cases, allow state- and municipal-government employees to continue to receive high-quality health insurance coverage without triggering the Cadillac tax.

HSAs put consumers in charge of first-dollar coverage, encourage them to become more prudent health care consumers, and them more freedom and flexibility in meeting their own health care needs. Unused funds are owned by the consumer and can grow tax-free year after year, unlike most other employer-sponsored “use it or lose it” health savings plans.

State and municipal governments should be taking steps now to avoid the Cadillac tax. Every dollar a state spends on the Cadillac tax is money that cannot be directed toward actual healthcare services, to citizens’ top priorities, or ─ ideally ─ back to taxpayers’ own wallets, many of whom could use some relief paying for their own healthcare coverage.

Naomi Lopez Bauman is the Goldwater Institute’s Healthcare Policy Director.