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Financial Planning > Tax Planning

Let’s ax the “Cadillac tax”

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Two bills have been introduced in Congress to fix a major flaw in the Affordable Care Act (ACA) that threatens to deny health coverage to millions of middle-class Americans, and agents and brokers selling all lines of business ought to unite in support of those bills.

Much has been said and written about a provision included in ACA that has been dubbed the “Cadillac Tax.” The tax is a 40 percent excise tax that will be levied on so-called “overly generous” employer-sponsored health plans.

See also: CMS: ‘Cadillac’ Plan Tax Could Bend Spending Curve

Employer-sponsored coverage is by far the largest source of insurance among Americans younger than age 65. In fact, ACA even has incentives for people to take up employer policies. The Rand Corp. reports that in 2013-2015, employer-sponsored health plans showed the biggest gain, with 9.6 million newly enrolled as a result of Obamacare.

So why on the one hand would ACA encourage enrollment in employer-sponsored plans, while at the same time administer a strong disincentive, starting in 2018?

See also: Obama Eyes Caddy Plan Tax

Advocates of the Cadillac Tax are unable to explain how arbitrarily slapping some people who already have health insurance with a 40 percent excise tax will help them. Clearly, it will not. To the contrary, it will punish people simply because they already have good coverage. That’s inherently unfair. It is also counterproductive.

A time bomb

Why is this happening? This surtax is a major component intended to finance ACA. The problem is that it attempts to do this by reducing the benefits of people who already have employer-sponsored coverage. The Cadillac Tax is a time bomb set to explode in 2018 that would begin to dismantle the private sector’s system of employer-based coverage. Such a poison pill threatens to divert money away from the private sector, into expanding the government’s healthcare system.

See also: ECFC: Cadillac Plan Tax May Have Broad Impact

The 40 percent excise tax would also enable the rationing of health care. It would strip away good coverage from some people who already have it. It would disproportionately impact singles, women, families and the elderly. It would effectively lower the quality of coverage, in order to help finance a similarly lower level of coverage for more people, creating a race to the bottom. Using an excise tax to strip benefits from selected groups of middle class Americans is not only discriminatory, it runs counter to the goal of expanding access to affordable coverage for all.

A Mercer survey recently estimated that the Cadillac Tax would impact 31 percent of employers in 2018 and 51 percent of employers by 2022, indicating it will have a much broader effect than Congress intended.

More on this topic

See also: Deficit Hawks: Keep Excise Tax, Ax LTC Program

While expanding coverage and controlling healthcare costs are important goals, denying coverage to millions of middle class Americans is not the way to do it.

Unequal impact

It gets much worse. The Cadillac Tax will impact not just high-benefit plans, but moderate-benefit plans. It could also have an unequal impact based on the age, gender, family-size and geographic location of an employer’s workforce, depending on how the Internal Revenue Service (IRS) decides to implement it.

Prior to the ACA, the premiums for each individual in an employer-sponsored health plan were calculated equally, with the dollar cost the same for every plan participant. Then, the ACA permitted tiered calculation of premiums, under which premiums for older workers could be more than double those of younger workers. This provides a perverse incentive for age discrimination.

See also: ACA Cadillac plan tax: Who pays what?

The planned addition of a 40 percent surcharge to individual policies valued at $10,200 or more will likely hit mainly older workers, greatly aggravating this disparate impact.

Congress must act

PIA has endorsed two similar pieces of legislation: the “Ax the Tax on Middle Class Americans’ Health Plans Act” (H.R. 879), introduced by Congressman Frank Guinta (R-N.H.), and H.R. 2050, a bill to repeal the excise tax introduced by Rep. Joe Courtney (D-Conn.).

In addition, PIA submitted comments to the IRS on May 4 seeking guidance on how the tax will be calculated and offering suggestions to help stem unintended consequences of the law.

See also: IRS wants your advice about the Cadillac plan tax

One of our suggestions is that any rule it issues for calculating dollar limit thresholds must take age and gender of the workforce into consideration to minimize disparate impacts. 

Placing an onerous surtax on hard working, middle class Americans is bad public policy. Congress must act to Ax the Cadillac Tax!