Cadillac Plans Ride in Under the Affordable Care Act

Posted on Monday, March 11, 2019

While the Affordable Care Act (ACA) required minor changes to most middle-of-the-road employer health plans, there is one type of plan that is likely to be heavily affected by the law, and may, in fact, be driven to near extinction as a group health care plan type: the so-called "Cadillac plans."

These are benefits-rich comprehensive health care plans that typically come with very low deductibles and low or no cost-sharing or coinsurance, and often pay between 90% and 100% of health expenses. They may be bundled with a variety of other perks as well.

Why Are Cadillac Plans in Jeopardy?

The authors of the Affordable Care Act wrote into the law a 40% excise tax on any employer-paid annual premiums that exceed $10,200 for individual plans, and $27,500 for family plans. Whatever the purpose of that excise tax, it could have the effect of causing employers to abandon them.

The tax includes any amounts employers pay on an employee's behalf to health savings accounts, health reimbursement arrangements, FSAs, EAPs, certain wellness programs, and any other health benefits that the employer pays pretax.

Unless Congress acts, the tax will become effective on January 1, 2018. The thresholds will be adjusted each year in accordance with the Consumer Price Index (CPI).

Why Do Companies Offer "Cadillac Plans?"

Cadillac plans essentially allow employers to differentiate themselves in the employment marketplace and attract workers by offering an exceptionally rich health insurance policy. Prior to the ACA, health insurance premiums were a tax deduction to the employer, and tax-free income for the worker. There is no income tax due on money employers pay in group health insurance premiums. This arrangement encouraged some employers to offer more in health insurance benefits and restrict what they offered in cash compensation, which is taxable to the employee.

How Will the Cadillac Plan Tax Affect U.S. Employers?

The tax on Cadillac health care plans is expected to impact about one in eight employers nationwide according to information provided by the Kaiser Family Foundation. And data from the Congressional Research Service shows the cost to employers of this tax will be roughly $3 billion.

Opponents of the Cadillac tax argue that the CPI is not an appropriate yardstick, because medical inflation costs have risen far faster than the general inflation rate

Opponents also argue that the excise tax will hurt millions of Americans who currently enjoy coverage under these plans, including self-employed individuals, entrepreneurs, small businesspeople, retirees, law enforcement and government workers. Many of these workers will be low and moderate income-earners, who will now have to find a way to cover more of their medical cost risk out of pocket with a more conventional plan.

Insurers, rather than employers, will make the direct tax payments to the IRS. However, insurers must naturally pass these costs onto their customers, in the form of increased premiums. As a result, analysts expect a sharp reduction in the availability of these very high-quality health insurance policies in the workplace.

What Should You Do?

Chances are, if your company offers Cadillac plans you're well aware of the pending tax. Your health insurance carrier may have some ideas for how you can continue to provide generous coverage to your workforce and for yourself, without running afoul of the law or incurring an onerous tax. Schedule some time to talk it over with your agent long before the tax kicks in.

Posted in Tax Topics For Individuals

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.