Understanding the Cadillac Tax and Its Repeal

The Cadillac Tax was a provision in the Affordable Care Act (ACA) that imposed a 40% excise tax on high-cost employer-sponsored health plans. It was set to take effect in 2018.

The tax was designed to discourage employers from offering expensive health plans, which the ACA saw as a way to reduce healthcare costs. The tax would have applied to plans with a value above $10,200 for individuals and $27,500 for families.

The Cadillac Tax was intended to generate revenue for the government, but its implementation was delayed several times due to bipartisan opposition.

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The Cadillac Tax is a 40% tax on high-cost employer-sponsored health plans. It's a permanent, annual tax that will start in 2022.

The tax was originally set to take effect in 2020, but Congress passed a two-year delay in 2018, changing the effective date to 2022. This delay was part of a short-term federal spending bill.

Employers who pay the tax will be able to deduct it for federal tax purposes, thanks to a December 2015 change. This is a significant consideration for businesses that offer high-cost health plans to their employees.

Here's how the tax works: it's based on the cost of the plan, compared to a threshold amount. For example, if a plan costs $12,000 for self-only coverage, and the threshold is $10,200, the employer would pay a tax of $720 per covered employee. This is calculated by taking the amount above the threshold ($1,800) and multiplying it by 40%.

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The Cadillac tax has a long and complicated history. It was originally supposed to take effect in 2018, but it's been delayed multiple times.

The tax was established by the PPACA and was supposed to generate $87 billion in revenue between 2016 and 2025, according to the CBO. The tax was delayed two years by the Consolidated Appropriations Act, 2016, pushing its implementation ahead to 2020.

The tax's implementation was delayed again through the Continuing Appropriations Act of 2018, and it's currently scheduled to take effect in 2022. The tax's parameters are adjusted for inflation, but health insurance premiums tend to grow faster than inflation, which could push more plans beyond the specified dollar thresholds.

Some have attributed delays in the Cadillac tax's implementation to its unpopularity. The tax has been criticized because it would hit some health insurance plans harder than others, such as more expensive plans provided by labor unions.

The Cadillac tax was designed to be a 40% excise tax on the portion of employer-sponsored health insurance premiums above a specified dollar level.

The tax would have been based on total annual premiums, including both the employee's and employer's contributions. The initial threshold for single individuals in 2022 was $11,200, and for family coverage it was $30,100.

These amounts would have increased with inflation over time, so the tax would have had a built-in escalator. This means that the threshold for the tax would have gone up each year to account for rising costs.

The Congressional Budget Office had estimated that most health plans would have been well under the projected 2022 thresholds for the Cadillac tax. Average total premiums in 2022 for employer-sponsored health coverage were about $7,991 for a single employee, and $22,463 for family coverage.

The Cadillac tax was designed to make very high-end health plans less attractive for employers, and thus less common. This was in an effort to reduce overutilization of healthcare services.

The tax exclusion for employer-sponsored health coverage is the largest expenditure in the current U.S. tax code, and economists noted that the Cadillac tax would effectively have capped the amount of the tax exclusion, resulting in lower healthcare costs.

The tax would have helped to make coverage and health care more affordable for people who have to buy their own coverage, by penalizing employers that offered very generous plans to their employees.

The Cadillac tax was designed to make very high-end health plans less attractive for employers, and thus less common. This was a concern because people with these plans might overutilize healthcare, as the insurance plan was paying for all or nearly all of the cost.

The tax exclusion for employer-sponsored health coverage is the largest expenditure in the current U.S. tax code. Economists noted that the Cadillac tax would effectively cap the amount of the tax exclusion, resulting in lower healthcare costs.

Employers that offered very generous plans were generally cash-flush and offered them to highly compensated employees. This made some policymakers feel that the Cadillac tax would help make the overall healthcare system more equitable by charging employers for these expensive plans.

The tax was intended to make coverage and healthcare more affordable for people who buy their own coverage, not just those with employer-sponsored plans.

The Cadillac tax would have likely led to employers increasing cost-sharing on their health plans, resulting in higher deductibles, copays, and out-of-pocket maximums. This would have tackled the problem the tax was designed to solve, but also had the potential to cause people to cut back on necessary healthcare.

The tax exclusion for employer-sponsored health coverage is the largest expenditure in the U.S. tax code, and economists noted that the Cadillac tax would have capped the amount of the tax exclusion, eventually resulting in lower healthcare costs. This could have made the overall healthcare system more equitable.

Employers in areas with higher-than-average healthcare costs, such as Wyoming and Alaska, would have been disproportionately subject to the excise tax, despite providing relatively average benefits. This is because the tax would have been based on premiums alone, without considering other factors.

The tax would have effectively penalized employers based in areas with high healthcare costs, rather than addressing the underlying issue of overutilization. This would have been unfair to employers who offer average benefits but are forced to pay more due to their location.

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Employers began offering health insurance to their employees in the late 19th century, with the cost paid through payroll deductions.

This practice was officially exempted from income taxation by the Internal Revenue Service in 1954.

The ESI exclusion now supports our system of employer-sponsored health insurance, and is often referred to as the "glue" that holds insurance markets together.

Eliminating the exclusion could discourage employers from providing health insurance, leaving employees who are sick without access to health insurance.

The ESI exclusion comes with trade-offs, including a tax expenditure of $2.79 trillion from 2019-2028, which is the biggest tax expenditure in our tax code.

Employee benefits would have been affected by the Cadillac tax, but it was repealed before implementation. Employers would have tried to avoid paying the tax by structuring their health plans to keep total annual premiums below the threshold.

Increasing cost-sharing on plans, such as higher deductibles and copays, would have been a likely outcome. This would have tackled the problem the Cadillac tax aimed to solve, but also led to people cutting back on necessary healthcare.

Higher out-of-pocket costs can result in chronic conditions that aren't well-controlled, increasing healthcare costs in the long run. The result can be healthcare costs that are higher than they would have been if the care hadn't been avoided due to costs.

Some employers might have had a health plan with higher-than-average premiums due to factors other than benefit design. This could have included claims history, industry, or geographic location, which can still play a role in premiums in the large group market.

The Employer-Sponsored Insurance Exclusion is a crucial aspect of the US tax code that has a significant impact on the way health insurance is provided to employees. In 1943, the War Labor Board ruled that "fringe benefits" like health insurance were not subject to wage and price controls.

This led to employers offering insurance benefits to draw employees, and by 1954, the Internal Revenue Service had officially exempted Employer-Sponsored Insurance (ESI) from income taxation. Now, an employee's compensation in terms of wages is taxable, but compensation in the form of health insurance is excluded from gross income.

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As a result, employees have an incentive to demand compensation via health insurance, and employers have an incentive to help reduce their employee's taxable income. The ESI exclusion is so important that economist Jonathan Gruber calls it the "glue" that holds insurance markets together.

Eliminating the exclusion could discourage employers from providing health insurance to employees, compromising the exclusion as a "pooling mechanism" that encourages both healthy and sick employees to take part in a health insurance market. This could leave employees who are sick without access to health insurance.

The ESI exclusion also comes with trade-offs, including a tax expenditure that will lower federal revenue by $2.79 trillion from 2019-2028. This makes the exclusion a regressive tax expenditure, where the benefits increase with income, making it a regressive tax.

The opposition to the Cadillac tax was not universal, but rather had strong support from economists, including the President's Council of Economic Advisors.

Employers, unions, consumers, and politicians on both sides of the aisle were largely opposed to it. The House of Representatives voted 419-6 in favor of legislation that included repeal of the Cadillac tax in July 2019.

Policy analysts and economists explained extensively why the tax should have been allowed to take effect, noting that it would incentivize value rather than increased spending in health care.

Congress is poised to debate another delay to the Cadillac tax, which is a provision of the Affordable Care Act (ACA) that imposes a tax on high-cost health insurance plans.

The Cadillac tax is not a transparent way to rein in health insurance subsidies, and instead of capping the exclusion for employer-sponsored insurance, lawmakers chose to levy the tax on coverage providers.

This approach will likely result in individuals paying the tax through increased income and payroll taxes, as most employers shift from high-cost health insurance plans and compensate employees with increased wages.

Bracket creep is a concern, as inflation can push taxpayers into higher income tax brackets or reduce the value of credits, deductions, and exemptions, resulting in an increase in income taxes without an increase in real income.

Despite concerns about transparency and stability, the Cadillac tax begins to correct the distortions caused by the exclusion for ESI and raise some revenue in a progressive way.

The tax is also a more incremental approach to limiting the ESI exclusion than getting rid of the exclusion entirely, which could significantly impact health insurance consumers, particularly those who currently receive health insurance through their employers.

The opposition to the Cadillac tax was not universal, as economists generally supported it, including the President's Council of Economic Advisors.

Employers, unions, consumers, and politicians on both sides of the aisle were largely opposed to it. In July 2019, the House of Representatives voted 419-6 in favor of legislation that included repeal of the Cadillac tax.

Policy analysts and economists explained extensively why the tax should have been allowed to take effect, noting that it would incentivize value rather than increased spending in health care.

The average annual premiums for employer-sponsored health insurance in 2018 was $6,896 for individuals and $19,616 for families.

These premiums are below the thresholds of $10,200 for individuals and $27,500 for families originally established by the PPACA in 2018.

The Tax Policy Center's projections of $11,200 for individuals and $30,150 for families in 2022, when the law is next scheduled to take effect, are also higher than current premiums.

Faster growth in the cost of health insurance plans could consume adjustments to the Cadillac tax for inflation.

Congress is poised to debate another delay to the Cadillac tax.

The Cadillac tax is not a transparent way to rein in health insurance subsidies, and lawmakers chose to levy the tax on coverage providers instead of establishing an actual cap on the exclusion for employer-sponsored insurance.

Bracket creep, which occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, deductions, and exemptions, could increase the number of taxpayers subject to the tax over time.

Despite its flaws, the Cadillac tax begins to correct the distortions caused by the exclusion for ESI, as well as raise some revenue in a progressive way.

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The Cadillac tax is a 40 percent excise tax on high-cost employer-sponsored health coverage. It's a permanent, annual tax that will begin in 2022.

The tax is levied on the value of health insurance benefits that exceed certain dollar thresholds. For self-only coverage, the threshold is $10,200, and for family coverage, it's $27,500. These amounts will be indexed before the tax takes effect in 2022.

Here's a breakdown of how the tax works:

As you can see, the tax increases as the plan's cost increases. For example, a $12,000 individual plan would pay an excise tax of $720 per covered employee, while a $32,000 family plan would pay an excise tax of $1,800 per covered employee.

The Cadillac tax is a 40% tax on high-cost employer-sponsored health coverage that exceeds certain value thresholds. These thresholds are $10,200 for self-only coverage and $27,500 for family coverage in 2022.

To calculate the tax, you subtract the threshold amount from the plan cost, and then multiply the result by 40%. For example, if a self-only plan costs $12,000, you would subtract $10,200 from $12,000, resulting in $1,800. Then, you would multiply $1,800 by 40% to get a tax of $720 per covered employee.

The tax is levied on "excess benefits", or the value of health insurance benefits surpassing the threshold amounts. This means that employers who provide high-cost health insurance plans may be subject to the tax.

Here's a breakdown of how the tax would increase as the plan's cost increases:

The tax would encourage employers to reduce the value of health benefits provided to employees to avoid the tax, and instead provide more compensation in the form of wages that would be taxed by the payroll and income taxes.

The Senate has passed the TRIA extension, which is a significant development for many individuals and businesses.

The extension was included in a government funding package that also passed the House with a vote of 71-23.

The package includes three key policy priorities, one of which is the TRIA extension.

The TRIA extension is expected to provide stability and security for those affected by terrorism-related incidents.

The package also includes an extension of the National Flood Insurance Program (NFIP) until September 30, 2020, and the permanent repeal of the Cadillac Tax.

The Cadillac tax was originally scheduled to take effect in 2018, with a premium threshold of $10,200 for employee-only coverage and $27,500 for family coverage.

The premium threshold was set to increase by the same percentage as Consumer Price Index (CPI) growth each year, which meant it would have risen to $11,200 for employee-only coverage and $30,100 for family coverage by 2022.

Healthcare spending had been rising faster than the CPI for a long time, which raised concerns that the premium threshold might not keep pace with premium growth.

A 2019 Kaiser Family Foundation Analysis found that one in five employers offering health coverage would have had at least one health plan subject to the Cadillac tax as of 2022.

By 2030, that number could have increased to more than one in three employers, with some plans having richer benefits than others.

About 15% of covered workers were in plans that were expected to be subject to the tax in 2022, but that could have grown to 25% by 2028.

The way the Cadillac tax was designed, an increasing number of plans would have been subject to the excise tax each year, assuming premium growth continues to outpace overall inflation.