Archived Insight | July 18, 2019
A House bill (HR 748) to permanently repeal the Affordable Care Act’s 40 percent excise tax on high-cost health plans, often referred to as the “Cadillac tax,” passed the House of Representatives by a vote of 419-6 on July 17, 2019. A similar bill in the Senate (S 684) has 42 bipartisan sponsors but is not scheduled for further action at this time.
The 40 percent excise tax was initially scheduled to take effect in 2018. The effective date was delayed twice. The most recent delay, to January 1, 2022, was part of a Continuing Resolution to fund the federal government in 2018 (Public Law 115-120).
In May 2019, the Congressional Budget Office (CBO) and Joint Committee on Taxation projected that revenue from the tax would total $193 billion for the 10-year period from 2020 through 2029. Many plan sponsors argue that the CBO’s potential revenue impact is flawed, because the projection assumes an increase in taxable wages as a result of employers cutting health benefits and transferring employee benefits to a wage package. Nevertheless, the large budget impact projection makes permanent repeal of the excise tax a difficult hurdle, particularly in the Senate, where Senators of both parties have expressed concern about repealing the excise tax without a revenue offset.
The excise tax will be imposed on the value of employer-sponsored health plans that exceed certain high thresholds. The CBO estimates that the thresholds would be $11,200 for individual coverage and $30,100 for family coverage in 2022. The impact of the excise tax on employer-sponsored plans will be significant. A Kaiser Family Foundation study released in July 2019 found that in 2022, 21 percent of employers offering health benefits will have at least one plan whose cost would exceed the individual threshold.When health Flexible Spending Account (FSA) contributions are included, the percentage climbs to 31 percent. The percentage of employers with a plan reaching the threshold grows rapidly over time, to 37 percent in 2030, and 46 percent if FSA contributions are included. If not repealed, plan sponsors may raise already increasing deductibles and coinsurance or employee contributions to premiums in order to offset the cost of the tax.
Implications for Plan Sponsors
In addition to watching for the delay or repeal of the excise tax, sponsors of insured plans should continue to monitor any congressional action related to a delay in the imposition of the health insurance premium tax. The health insurance premium tax, also part of the Affordable Care Act, imposes a tax on insured plans based on the book of business of the particular insurer and the amount necessary to be raised from all insured plans in the aggregate. While the tax was suspended for 2019 through the Continuing Resolution, it is slated to take effect in 2020. The health insurance premium tax generally adds 2 percent or more to the cost of an insured health plan. If the tax is not suspended, sponsors of insured health plans will see these fees again for 2020. Insurers are expected to be currently filing 2020 rates based on the assumption that the tax will take effect.
Plan sponsors should expect continued activity concerning these Affordable Care Act taxes in the next few months, and may see delay or repeal of the excise tax later this year as Congress continues its budget and appropriations process.
This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.
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