As an early holiday gift to many employers, today Congress passed important legislation regarding the so-called "Cadillac tax" that was originally scheduled to go into effect in 2018. Under the legislation, the effective date of the Cadillac tax, which is a 40 percent excise tax intended to apply to "high cost" employer-sponsored health coverage, has been pushed back to the year 2020. The two-year delay was passed as part of an omnibus spending bill for 2016 that President Obama is expected to sign into law next week.
The Cadillac tax is one of the last major provisions of the Affordable Care Act ("ACA") scheduled to take effect. Although, as its name implies, the tax was intended to apply to generous benefit plans, many estimates have indicated that it will actually affect a broad array of employers. One estimate by the Kaiser Family Foundation indicated that one in four employers could have been subject to the tax in 2018. The Cadillac tax will apply to the amount of an employer's covered benefits that exceeds certain statutory dollar thresholds, to be adjusted annually based on the Consumer Price Index ("CPI"). Assuming that medical inflation rates will continue to exceed general inflation reflected by the CPI, experts estimate that the number of employers that will be affected by the tax will increase each year that it is in effect (i.e., as the cost of sponsoring even moderate health plan coverage increases more rapidly than the CPI). As a result, the Cadillac tax has had the potentially unintended consequence of encouraging many employers to consider cutting back their existing health benefits, in order to avoid or minimize the potential future effects of the tax.
The tax has been the subject of much opposition, from both plan sponsors and labor unions, and we anticipate that there will still be continued efforts to repeal it altogether for 2020 and later years. However, the extended effective date will be welcomed by many employers who were concerned about its future affect on their health plan structures and awaiting additional guidance from the IRS on how to begin preparing for implementation of the tax.
Also of interest to employers, the new legislation will make the Cadillac tax deductible for employers. In addition, it will require the U.S. Comptroller General to work with the National Association of Insurance Commissioners on a study involving appropriate benchmarks for certain Cadillac tax adjustments applicable to employers with a workforce that has unusual age and gender characteristics.
The information provided is for educational purposes only. This information is from sources we believe to be reliable, but we cannot guarantee or represent that it is accurate or complete. The opinions are those of the writer, and the opinions and information presented are subject to change without notice.