Internal Revenue Code Section 4980I, better known as the “Cadillac” tax, was postponed from implementation until 2020. And while that may seem far away (think the next presidential election, for which I’m sure campaign ads will begin early next year), it needs to be fixed and fixed now to provide greater certainty for employers and their employees.
Whether you agree with the idea of a tax on richly designed health plans, the idea behind the tax has long been debated.
Congress’ Joint Committee on Taxation estimates that employer-provided health benefits are the highest revenue drain of all tax deductions and credits. Think about that for a minute: It represents more revenue loss to the U.S. Treasury Department than the home mortgage interest deduction (the second highest tax expenditure) and even the third place employer provided retirement plans (a dubious calculation since, unlike health benefits or the mortgage interest deduction, they are eventually taxed upon distribution). Nevertheless, as part of the Affordable Care Act, Congress decided to cap how much of the health plan cost could be free of tax to participants. And that’s where it starts to get sticky.
Congress, and later the Treasury, with the best of intentions, set a hard dollar cap on what that maximum tax-free amount should be. Simple, right? Well, as it turns out, not so much. Congress included all forms of health care spending in the cost calculation, not just the premium costs of the plan itself but things like employee salary reduction contributions under IRC Section 125, aka Cafeteria Plans, to a health care flexible spending account or health savings account as well as employer contributions to health reimbursement accounts or HSAs. Really?
It gets worse. Health care costs more in New York than Boise, Idaho, for the exact same plan design. And when combined with another new ACA concept — age band rating resulting in separate age rates that are no greater for a 64-year-old participant than three times that for an 18-year-old — it gets really complicated.
Two employers across the street from each other with the exact same benefit plan design but where one employer has predominately 20-year-olds and the other predominately 60-year-olds will find that the former has no Cadillac tax obligation and the latter a significant one.
This tax policy would cause employers to think twice before hiring or keeping older, experienced workers. That couldn’t possibly have been the intent of Congress when it enacted the ACA.
I’ve seen the impact of this misguided tax policy. A small manufacturing employer in Michigan that has an older workforce (the average age is 51) was offering its employees not a Platinum-level plan nor a Gold-level plan, but a Silver plan. The plan had deductibles over $2,000 for employee-only coverage and $4,000 for family coverage, with an 80-20 coinsurance level after that. If the Cadillac tax were in effect today (forget about four years from now when I suspect the cost of the plan will be somewhat increased), the insurance carrier would be subject to the Cadillac tax, which would be passed onto the employer.
Let’s give Congress the benefit of the doubt. It didn’t realize how the interaction of the various provisions of the ACA would affect Section 4980I’s Cadillac tax. But now we know what the ramifications are, and if Congress doesn’t fix it, and soon, employers will begin considering dropping health care flexible spending accounts, HRAs and HSAs altogether, putting millions of employees at risk for higher health care costs and now without a few meager tools to try to help control them. And then they’ll reduce coverage — if they offer it at all — to Bronze levels.
I have a solution for Congress (if it truly would like to fix the problem). It would continue to meet the goal (if it is still a goal) of removing the tax-free benefit of super-rich health plans. And it uses another construct first introduced in the ACA: the metal tiers.
Instead of using a hard-dollar cap for employee-only and family coverage, which will unfairly tax employers with an older workforce or who happen to be unfortunate enough to be located in a higher health care cost geographic area, or heaven forbid both, why not consider all Platinum plans to be rich, regardless of cost, and tax their premium cost (and only their premium cost) for Section 4980I purposes at 10 percent of the plan cost? That way, from a tax policy standpoint, a rich plan design is taxed not based on age or geography but rather on plan design.
Wasn’t that the point in the first place?