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What is the Cadillac Tax?

TaxAlerts Tax Article

October 2015 | Written by: Eric Linden

You may be hearing this tax being mentioned in interviews and debates as we head full steam into the Presidential election cycle. You may be wondering, "Why are they talking about a car tax? Why is that so important?" A very unusual name to be sure. How about a Ford Escort tax? A Pinto tax? The funny thing is, this tax has zero to do with automobiles and everything to do with health care. Strange? Kind of.

First off, the term “Cadillac” is coined from the fact that this tax only deals with the best healthcare plans. Meaning the plans with all the bells and whistles, or rather all the MRI and CT scans. This tax does have something to do with the landmark healthcare legislation, the Affordable Care Act, passed by Congress and introduced by the Obama Administration in 2010. In essence, this tax is paid by insurers on employee sponsored health coverage… coverage that is considered the best of the best coverage. Let’s get down to brass tacks:

Who is affected by it? Both workers and employers.

Who pays this tax? Health insurance issuers and sponsors of self-funded group health plans pay the tax. However, an excise tax in general typically results in that cost being passed on (at least in part) to the consumer.

When might I find myself affected by this tax? Well… it definitely affects the employer you work for. It could dictate what they offer in terms of healthcare plans, for sure. They may decide to offer more of the “Pinto” healthcare plan rather than the “Cadillac” plan in order to avoid paying the 40% tax that applies to the amount of premiums that exceeds the thresholds of $10,200 for individual coverage and $27,500 for family coverage.

The reason for this levy is that employers play a balancing game with employee wages and health care offerings. Companies have to pay for both. Health care packages are NOT taxed like wages are. So employers are incentivized to give more health care and less on wages. For example, union workers could potentially bargain for better healthcare in lieu of a wage increase. The government wants to step in to help increase wages, and with that increase there is a tax windfall… some $87 BILLION, according to the Congressional Budget Office and Joint Committee on Taxation. In addition to raising revenue, another goal of this tax is to encourage unnecessary health care spending. The current “tax-free” system really, in truth, encourages health care spending. Most likely, more spending than needed. The hope is that the “Cadillac Tax” will assist in reversing this.

I do want to remind everyone that this tax is not slated to go into effect until 2018. Hillary Clinton just recently made news coming out against this tax. “Too many Americans are struggling to meet the cost of rising deductibles and drug prices,” Mrs. Clinton said in a statement. “That’s why, among other steps, I encourage Congress to repeal the so-called Cadillac tax.”

On the other hand, a small group of respected economists recently spoke up to support this tax, stating that rising deductibles actually could be a benefit. They see rising health care costs as a result of bad tax policy rather than the typical arguments of malpractice lawsuits, pricey medical procedures, and hedge funders who jack up drug prices.

It has been stated that a small number of companies will actually pay the tax. Most are expected to make the necessary changes to their health care plans that will allow them to avoid paying the tax. One more point: these tax payments are NOT deductible either. So a company that pays this tax cannot enjoy that benefit.