The Cadillac Tax

A reader requested background on the Affordable Care Act’s high-cost employer-sponsored plan excise tax which is colloquially known as the Cadillac tax.

Premiums paid for employer-sponsored health plan coverage are excluded from income and payroll taxation. During the 2008 Presidential campaign, then Sen. Obama strongly criticized Sen. McCain for suggesting that Congress eliminate this exclusion as part of his health care reform plan. (A commentator in Fortune magazine recently suggested that the Republicans revisit Sen. McCain’s plan as an alternative to the ACA.)

As Prof. Jonathan Gruber, one of the ACA’s architects, explained in the Washington Post in 2009, “The [“Cadillac tax”] assessment proposed in the Senate is not a new tax; it is the elimination of an existing tax break that is provided to exactly these firms [that offer health benefits to their employees.” So instead of ending or carving back this tax exclusion, the ACA creates an enormous administrative burden on employers, including OPM, by requiring them to account for the cost of coverage, e.g., employer and employee contributions, health care flexible spending account contributions, employer-sponsored medical clinics, etc. for each employee and retiree and arrange to pay a 40% excise tax on the cost in excess of a $10,200 threshold for self only coverage and $27,500 threshold for other than self only coverage. The thresholds are subject to certain initial adjustments and to small CPI-U (now chained CPI-U) adjustments for years after implementation.

The Cadillac tax originally was scheduled to apply to tax years beginning after December 31, 2017.  In 2015, the IRS began to issue compliance guidance which makes it clear that compliance with this law will require an army of consultants. However,

The Consolidated Appropriations Act, 2016 (Pub. L. 114-113), signed into law on Dec. 18, 2015, delayed the effective date of the excise tax on high cost employer-sponsored health coverage from taxable years beginning after Dec 31, 2017, to taxable years beginning after Dec. 31, 2019.

With any luck, Congress in the consolidated or omnibus appropriations law that Congress must pass for the current federal fiscal year will further delay this tax perhaps to 2026 and extend the expiring suspensions of the ACA’s medical device and health insurer tax at least for another year.

If implemented, the Cadillac tax would have a dramatic impact on the FEHBP for a goofy reason.  The other than self-only threshold for the Cadillac tax is 2.7 times its self-only threshold.  The FEHB other than self only premiums typically do not exceed 2.4 times the self-only premiums on average. Consequently, FEHB premiums for self-only coverage currently have a Cadillac tax problem particularly when you take into account additional benefits like the FSA.  Other than self and family premiums currently don’t. But OPM or its contractor would have to do the calculation. (OPM would send a tax bill to each affected plan for its share of the assessment.)

There you go, dear reader. With all things ACA, there are unintended adverse consequences because the law is unnecessarily complex.