Close Close

Financial Planning > Tax Planning > Tax Reform

Cadillac dreams

Your article was successfully shared with the contacts you provided.

In Imperial China, Lingchi, or death by a thousand cuts, was punishment meted out to those who had committed serious crimes. Today, we use the phrase to mean that a lot of bad things have happened — none of them resulting in death, but devastating in their totality. For many employers and their advisors, The Patient Protection and Affordable Care Act (PPACA) and its never-ending regulation are the modern figurative embodiment of Lingchi.

It’s late fall 2015 and employers are just beginning to come to grips with 1094-C and 1095-C filings that need to be sent out early next year. This follows an avalanche of other disruptive and cumbersome regulations since PPACA’s passage. There are other considerations ahead, not the least of which is the so-called Cadillac tax.

Simply explained, the Cadillac plan tax is an excise tax on “high cost” employer-sponsored health coverage. Detail wonks can peruse Internal Revenue Code Section 4980I for all of the gory details, but the essential elements are relatively simple — by PPACA standards at least. It imposes a 40 percent excise tax on an employee’s “excess benefit.” That is the value of applicable employer-sponsored coverage that exceeds a specific dollar limit. For 2018, that dollar limit is expected to be $10,200 for single coverage and $27,500 for family coverage. Using the typical government formulae, those amounts will be indexed for inflation for 2019 onward.

For many in Congress, the tax has become a political volleyball — albeit with some strange political teammates. Business groups and labor unions are entering the battle as allies in a fight to kill the Cadillac tax. Many believe it will be a heavy lift, since repeal would leave an estimated $87 billion budget black hole. Rep. Joe Courtney, D-Conn., a critic of the tax, told Politico in April, “This is going to have a life of its own as the clock ticks closer to 2018.”

Industry experts are skeptical about a repeal of the tax. Trey Tompkins, an attorney and president of Admin America says, “Unfortunately, I have no faith in Congress to make any changes to the current constructions. Both parties have more to gain from grandstanding about the current situation than they do by fixing it.”

Even if your benefits are more like a mid-size Ford than a Cadillac, your clients are still likely to be affected. The Kaiser Family Foundation estimates that one in four employers will be affected. Mercer is more aggressive and suggests that, over time, the number of employers affected could be 60 percent or more.

What’s worse is that your clients may be affected in ways you had not anticipated. In the “unintended consequences” department, the Cadillac tax could threaten flexible savings accounts (FSAs). According to one actuary, FSAs will be among the first casualties of the tax. To restrain costs, employers have offered higher deductibles paired with FSAs and HSAs. This has helped employers deal with the ever-increasing costs of their benefits. The Cadillac runs over that strategy, since both the plans and the F/HSAs are both subject to the tax.

Admin America’s Tompkins says, “Clearly, the Cadillac tax as currently configured will make FSA offerings financially infeasible for employers who offer a high level of benefits. If they have to choose between paying the tax or dropping their FSA offering, it is easy to see which way they will go. These happen to be the same employers who are most likely to offer FSAs to their employees.”

Katie Mahoney, director of health care policy for the U.S. Chamber of Commerce, sums up the feeling of most Cadillac tax opponents. “It’s going to undermine the employer-sponsored system and it’s going to do the exact opposite of what anyone’s vision of health reform would have done, which is to provide greater access to health care coverage.”

With apologies to Lorde, if the tax is not repealed or significantly changed, the only place we will be driving Cadillacs of health care is in our dreams, and with the status quo, that kind of lux just ain’t for us! 

See also: PPACA angst: Risk corridors, ‘bailouts’ and other scary propositions