The Cadillac Tax – What’s this mean to me?


The Cadillac Tax is an interesting part of the Affordable Care Act.  It was added to the law in an effort to control healthcare spending in the future – implementation of the tax was delayed until 2018.

What is it?

The Cadillac Tax is an excise tax on deluxe health plans.  The tax is assessed on the plan value that is over a statutory limit, currently set at $10,200 for individuals and $27,500 for family coverage.  The portion of the plan value that exceeds these limits is taxed at 40%.  There are already some plans that fall into this category – the only criteria for being a Cadillac plan is the plan value.

Why does it exist?

The Affordable Care Act has a goal of reducing the cost of medical care.  To this point, much of the ACA implementation has surrounded affordable insurance premiums, and not necessarily the cost of care in the healthcare system.  The Cadillac tax seeks to fix that.  By creating such an onerous penalty for deluxe plans, the Cadillac tax seeks to dissuade people from purchasing those plans.  Ideally, the market will migrate to a more modest type of plan, consumers will have to pay more for their care when they receive it, as a result they will be better consumers of their care and total expenditures on health care will reduce over time.  This is because, in order to reduce the plan value, many policies are likely to have higher deductibles, higher co-payments and more cost-sharing for co-insurance and prescription.  By putting more of the cost for care onto the individual and less on the insurance company, individuals will likely reduce the amount of care they consume because of the strong financial incentive to do so.

What do you mean by plan value?

The Cadillac Tax is designed to discourage deluxe plans…not just deluxe health insurance.  Included in the plan value is wellness programs, HSA contributions, HRA amounts, wellness programs, Employee Assistance Programs, Onsite Clinics just to name a few.  The plan value is the total of the plan components.

What happens next?

Until 2018, not much.  Going into 2018 the limits for plan value will be re-evaluated and possibly adjusted for inflation.

What about after 2018?

This is where the Cadillac Tax gets pretty scary.  The value limits may seem pretty high today – $10,200 for individual coverage is plenty of money to obtain a quality health plan.  However, the limit will be adjusted annually to reflect the Consumer Price Index + 1%.  Unfortunately, health insurance costs are increasing at a rate that is well ahead of CPI + 1%.  The result, potentially, could be a limit that doesn’t rise as fast as costs do.  In turn, more and more plans will fall into the Cadillac bucket.

What can I do about this?

At this point, not much.  If you are currently managing the benefits for a union or longer term benefits contract language needs to be written into the contract so that all parties understand how to handle the Cadillac Tax; the biggest issue is who will pay the tax.  The insurance company won’t, that much is certain.

In closing, the Cadillac Tax is coming in 2018.  It is a significant piece of ACA implementation and it is extraordinarily difficult to predict what the marketplace will look like in 2018.  As a result, the best advice at this time is wait and see what happens.  Be prepared to stay flexible as implementation occurs and seek competent advice from your accountant and insurance agent on strategies to move forward.

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This blog is intended to be educational in nature.  It is not advice and should not be interpreted as such.  If you’re interested in discussing options for insurance coverage in PA or MD, we are happy to provide our expertise.