One hotly debated aspect of the Affordable Care Act (“ACA”) has been the so-called “Cadillac Tax” on high-cost health benefits, currently slated to take effect in 2022. The Cadillac Tax is a 40% excise tax on the amount of employer-sponsored health care coverage which exceeds $10,200 for individuals and $27,500 for families. (Higher thresholds apply to benefits provided to certain retirees and workers employed in certain high-risk industries.) The thresholds will increase with inflation (as measured by the Consumer Price Index) beginning in 2019, and it is estimated that by 2022 the applicable thresholds will be $11,200 and $30,100 for individual and family coverage, respectively. The effective date of the Cadillac Tax has already been delayed twice, and a recent bill passed by the House of Representatives calls its future into question. However, employers may still want to do some advance planning for the tax now, as described further below.
If the Cadillac Tax ultimately goes into effect, it is anticipated that many employers (particularly public sector employers) will need to restructure their health care benefits to avoid becoming subject to the tax. Unionized workforces, in particular, who have historically included generous health care benefits in their collective bargaining agreements, may need to consider the continued feasibility of those packages in light of the Cadillac Tax, for three reasons:
- No exemption from the tax. The tax must be paid by the insurance carrier in the case of an insured plan, or, in the case of a self-insured plan, the entity responsible for administering the plan (it is currently unsettled as to whether the IRS will interpret this to mean the employer, who is generally the named plan administrator, or the third party administrator (“TPA”) engaged by the employer). However, there is no exemption from the tax for any employers, including public sector employers or other employers that are otherwise tax exempt. It is expected that the insurance provider or TPA would request, as a condition of providing their services, that the employer-sponsor remit to them any amount of the tax (perhaps with an additional tax gross-up to the service provider, since such reimbursement payment would be taxable income to them).
- Collective bargaining schedules. Many collective bargaining agreements which will cover the 2022 plan year are set to be negotiated in the coming months and years. If the tax takes effect in 2022 as currently planned, it would be advisable to make the Cadillac Tax a subject of bargaining. For employers and unions negotiating CBAs covering the 2022 plan year and beyond, the addition of a provision or provisions in the contract causing the renegotiation of health benefits during the pendency of the CBA if the Cadillac Tax takes effect, or otherwise triggering reductions in benefits when or if current benefits offerings exceed the applicable thresholds in the tax, may be worth pursuing. For those employers who have already addressed the Cadillac Tax in prior or existing CBAs, we would suggest that you continue that course until more is known about the tax’s future (see below).
- No guarantee that the tax will be delayed or repealed. Along with creating incentives for employers to reduce health care costs in general, one of the main policy objectives of the Cadillac Tax was to tax generous benefits then-perceived to be offered to only the wealthiest employees. However, in recent years, consensus has emerged that middle-class workers—key constituents for both Democrats and Republicans—would be most affected by the tax. Accordingly, there is broad bipartisan support for its repeal. A current House bill (H.R. 748) repealing the tax, sponsored by Rep. Joe Courtney (D-Conn. 2ndDistrict), passed the House on an overwhelming 419-6 vote on July 17, 2019. A similar Senate bill (S. 684) has been introduced with bipartisan sponsorship, but no further actions have been taken. Given the current volatility in the political environment in Washington, there are no guarantees that even with consensus, bipartisan legislation will become law. Moreover, in its current form, the tax is expected to be a major revenue generator for the Treasury Department, and many economists and policymakers continue to tout the tax’s role in implementing the overall scheme of laws that is the ACA.
Given the current uncertainty with respect to whether the Cadillac Tax will take effect, or instead be repealed or delayed, all employers would be wise to begin thinking about strategies for mitigating the impact to their own benefit programs. These could include shifting more of the total plan cost from employer to employee through coinsurance and deductibles, implementing lower cost plans, or wellness initiatives designed to manage trend.
We are continuing to monitor developments in this area. For questions regarding the above, please contact your Shipman & Goodwin representative.