At Work

Tax free versus the 40% Cadillac tax on health plans

Why should employers, insurers and plan sponsors pay a 40% tax on higher cost health plans to the detriment of employees, taxpayers and shareholders?

It would be far more logical and fair, although politically less palatable, to simply limit the tax-free value of employer contributions toward worker coverage.



4 replies »

  1. Also, expect to see employers structure coverage so those with greatest cost have incentives to use public exchange coverage – where there is no Cadillac tax (not medicare eligible retirees, opt out incentives, etc.). Also, look for employers to find ways to cover medicare-eligible retirees with low cost, retiree pay all medicare supplements – to lower their average costs.


  2. Dick, you were there in Miami, I believe, at the ABC meeting where I was almost hooted out of the place for making such a recommendation – noting tax preferred dollar limits on qualified plans as precedent.

    Goes to show that people resist change until it is forced upon them. I believe the reason why we have the Cadillac tax and not a cap is because congress wanted to have TPAs and insurers pay the tax so they got no blame. Same reason why they delayed it to 2018. That said, it won’t be the end of employer-sponsored plans until after 2025 -2030, and not then either (we get a new president in 2017) and she/he needs to buy votes, too.


  3. The Cadillac Tax is about behavior modification. It intends to force employers to lower the quality of plan until there is no lower plan to offer. At that point (TAX FREE) company plans will cease to exist and the Tax Exclusion will have been essentially repealed since it will go unused. The wonks know this but don’t say it (other than Gruber and Emanuel).

    The wonks assume that employers will recompensate their workers with TAXABLE wages. The CBO scoring estimates that the vast majority (70-80%) of $ coming to the Treasury is not from the 40% surcharge but from these new mystery wages. There are no studies that prove this wage growth argument. There are studies showing that mandating employers to provide benefits reduces wages but there are no studies proving the opposite. The wonks have simply taken previous studies and are applying them in reverse.

    Finally, there’s the “cost control” argument. As the employers lower the quality of plans, the employee will pay more out of pocket. It is assumed that since the employee now has to pay more, they will use the system less. So while there may be “systemic cost control,” this actually means that the individual will pay more. Cost control sounds great, until you realize that YOU are the cost control.

    If the Cadillac Tax was truly about containing the costs of over-utilization of the system by the Gold Plated plans, the thresholds would be linked to healthcare inflation, not CPI. That’s the gimmick. Because of the link to CPI, this tax exposes itself as a “roundabout way” (Zeke Emanuel) of wiping out the Tax Exclusion for Employer Sponsored Plans.

    The cost control argument is a side show. The Cadillac Tax is about the Tax Exclusion, plain and simple.


  4. I still do not understand the logic of this tax. If the goal of Obamacare was to ensure health insurance for all then why are we taxing the Cadillac plans? I see this tax as only doing one thing and that is cheapening of the coverage to comply with the rule so that the 40% tax is not paid. From what I am seeing with my benefits is that most family plans that exist before Obamacare were not considered Cadillac plans but due the out of control increases in premiums and other healthcare costs it seem like other than high deducts plans, all other plans are going to be considered Cadillac plans and will be taxed.

    I also do not understand why 40%. If I was given the exact same money for premiums to go and buy my own insurance, it would be taxed at a rate depending on income 15-30% or not at all if your income is low enough. The Cadillac tax is so punitive.

    What I see in the future is that it will be cheaper for large companies to pay the penalty to the government and give each employee a few thousand dollars for medical and tell them to go buy their own insurance on the exchanges.


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