ACA Excise Tax: A Collision of “Cadillacs” and “Bicycle” Plans


The Affordable Care Act (ACA) has now survived two Supreme Court lawsuits. And, odds are the ACA will continue to face legislative efforts to fully repeal the law through next year’s presidential election.  In the meantime, employers and employees are revving their engines and gearing up for the anticipated 40% excise tax also known as the “Cadillac tax.”

Starting in 2018, a provision of the ACA will impose a tax on employers whose health care plans exceed certain thresholds. The tax is the third largest single source of revenue in the ACA. However, recent projected revenues from the Cadillac tax have plunged. But at the same time, the government expects it will collect more in payroll and income taxes, because workers will get more of their compensation in taxable wages and less in tax-free fringe benefits such as employer-sponsored health insurance.

Historically, employer-provided health benefits have not been taxed, but that is exactly what the Cadillac tax does. It is broad, too - the tax applies to health savings and flexible spending accounts, supplemental insurance plans, and more. In addition, even less generous (so called bicycle plans) that are not hit by the 40% tax in 2018 soon could be. After all, the Cadillac tax is linked to the consumer price index plus 1%. Medical and insurance costs are growing far faster, so more and more plans will be hit with the tax each year.

Over 150 million American employees have traditionally obtained health insurance through their employer. You might wonder, why are these popular employer-provided benefits being penalized for offering a generous health plan? Doesn’t that go directly contrary to what proponents of the ACA represented?

The excise tax provision is unintentionally encouraging employers to make benefit design changes to avoid the penalty and is discouraging employer efforts to promote employee wellness and prevention.  As a result of these benefit changes, some employees will be negatively impacted by higher copays and deductibles and could even decline employer-provided health care. Furthermore, even though there are more Americans enrolled to receive health benefits, the quality of care is simply not the same because of health plan changes resulting from the impending excise tax. The average American, as an example, may forego health treatment due to unanticipated out-of-pocket cost expenses.

So, while legislative pundits continue to debate the viability of the ACA, Congress should consider proposals to avoid a collision of all health plan types. SHRM remains supportive of reform that lowers health care costs and improves access to high-quality and affordable coverage, including strengthening and improving the employer-based health care system. That’s why SHRM supports congressional reforms, such as repealing the anticipated excise tax on high-value health care plans.

Chatrane Birbal is senior advisor, government relations at the Society for Human Resource Management.


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