Quick Summary on the Cadillac Tax

The tax was originally set to begin in 2013, but has been delayed as of December 18, 2015[1] until 2020.  This could be the best news we’ve received about the ACA since inception.  The Cadillac tax seems to promote employers offering plans that will be low in cost and therefore “better” for employees.  I always get real tickled when the government starts to think they know what’s best for everyone.  My mother references a quote from her late predecessor when her clients become overwhelmed by the rising health insurance, “good insurance isn’t cheap and cheap insurance isn’t good.” The way she says it usually brings a giggle or two from her audience.  The problem with the saying is that it’s no longer applicable to our current industry.  We need to replace the saying with “good insurance isn’t cheap and cheap insurance isn’t cheap either.”Our Federal government needs to do American business owners a favor by lighting the TNT fuse and backing away from this tax completely by repealing it.

The Cadillac Tax is a 40% excise tax on the “excess benefit” of high-cost employer sponsored health coverage on full-time eligible employees.  The design of this tax is intended to encourage businesses to choose lower cost health plans; however, it’s obvious the secondary design is to raise revenues to fund other ACA provisions the individual tax credit.

The excess benefit is the sum of an employee’s monthly excess amounts for the taxable period.  Excess amounts are the aggregate cost of an employee’s coverage for the month that exceeds 1/12 of the annual limitation for the calendar year.  Most employees will fall under the annual aggregate limit of $10,200 for individual coverage and $27,500 for coverage elections other than individual (spousal, child(ren), and whole family elections).  Any amounts over this limit are subject to the 40% tax.

  • There is also a high risk profession category including qualified retirees which sets higher annual limits at $11,850 for individual coverage and $30,950 for coverage elections other than individual (spousal, child(ren), and whole family elections)
    • Those professions include:
      • Law Enforcement
      • Fire Protection Services
      • Paramedics, First Responders, EMT
      • Individuals in construction, mining, agriculture, forestry, and fishing
      • Long shore Work
      • Retirees in those professions with 20 or more years of service

So you might be wondering, who is responsible for paying the tax?  Well, that would fall under the “coverage provider.”  There are a few different types of coverage providers; however, health insurance issuers, employers, and third party administrators are all possible payers depending on the type of coverage.

  • The coverage provider for most employers that purchase fully insured coverage would be their carrier. The employer or Plan Administrator would only be responsible for reporting the excess benefit to their respective coverage providers and the IRS each month/year.
    • Anyone who understands basic economics knows exactly what happens when an additional tax or cost is placed upon a business. They will most assuredly pass these costs to consumers; therefore, driving prices ever higher in a market that already is becoming the second largest employer expense right behind Wages.

There are too many variables that could change with this tax between now and 2020.  The IRS is now scheduled to release final guidance on the tax requirements sometime before 2020. My priority as a broker consultant to business owners is to have the best possible solution available for them when the time comes. I will continue to bring developments to light as I study and learn more.

Sincerely,

Blake Butler

[1] 2016 Federal Budget Bill signed into law by President Obama