Human Capital & Careers

Cadillac Tax, Proposed Delay Don’t Pass Smell Test

The government's deceit regarding the tax on rich health plans, and a possible delay in its effective date, aren't doing plan sponsors any favors.
David McCannJanuary 18, 2018
Cadillac Tax, Proposed Delay Don’t Pass Smell Test

As Shakespeare’s Juliet famously observed, “a rose by any other name would smell as sweet.” But when it comes to public policy, pretending that a course of action is something other than what it actually is often carries with it a palpable stink.

OpinionThe occasion of this rant is a proposal by House Republicans, made late Tuesday night, for emergency temporary funding to keep the federal government running through Feb. 16. While it’s arguably preferable for the government to continue operating than to shut down, illogically attached to the proposal is a further two-year delay in the implementation of the Affordable Care Act’s infamous “Cadillac tax.”

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While I believe that, on balance, the ACA has done more good than harm, I’m not advocating either for or against the Cadillac tax. Getting rid of it might solve some problems and create others. As might keeping it. I’m also not advocating for or against delaying it.

But there are various forms of deceit related to this tax — a 40% excise tax on the value of employer health-care programs beyond an established threshold — and the proposed delay. These do nothing to help companies set and execute on sensible strategies for providing employee health benefits that serve as important recruiting and retention tools. Quite the opposite.

First, the tax itself is an elaborate masquerade. You can look at it as an ACA funding mechanism, but it’s really a way for the government to tax employees’ health-care benefits while skirting most of the blame that it would otherwise incur from an angry public for doing so.

Technically, the tax is payable by health-plan providers. But it’s a foregone conclusion that they would transfer that cost to employers in the form of premium increases. And in turn, employers would pass those costs on to their workers, many of whom might blame the employers or insurers rather than follow the trail all the way back to politicians.

How do we know employers would play along with this deceit? Because they’ve already been doing it. They haven’t had much choice.

Most employers have a benefits-planning window of 18 to 24 months. Decisions about plan designs for 2020 — when the Cadillac tax is currently slated to take effect — aren’t too far off, in many cases. And if a company knows that this tax is coming at it in two years, it’s not going to wait until then to take whatever steps may be required to avoid triggering it.

Raising employees’ share of premium costs won’t help the company in that mission, because the calculation of tax liability is to be based on the combined premium costs borne by the company and its employees. What will help is ratcheting up employees’ out-of-pocket costs, like co-pays and deductibles, which aren’t included in the calculation. Skinnying down benefits works, too. And understandably, an employer would rather do such things gradually than dump huge, negative changes on employees all at once.

So, companies have been doing those things, and for some time now. The excise tax was originally scheduled to take effect in 2018, but at the end of 2015 Congress pushed it back by two years. Now, House Republicans are advocating for another two-year delay. If companies had known back in 2013 and 2014 that the tax would not take effect until 2020 or 2022, they may not have offloaded costs to employees quite so aggressively as they did.

Making matters worse, the cost of certain programs employers have implemented in their efforts to improve their workers’ health, and thereby control their costs — health and wellness programs, onsite medical clinics, employee assistance programs — are to be included in excise-tax calculations. It’s easy to envision many such programs vanishing rather than being allowed to contribute to a triggering of the tax.

Further, all such cost-cutting efforts are doomed to be only temporarily successful, in terms of defending against the tax. If and when the tax does take effect, annual increases in the threshold above which it kicks in will be indexed to the general inflation rate, which has trailed way behind the medical-cost inflation rate every year within memory. That means virtually all companies offering even average (or worse) health-care benefits would trigger the tax within a few years of its effectiveness.

But that reality underlies a pretty big caveat to all of these concerns. What are the chances that the Cadillac tax will ever take effect? Never mind that the ACA is under heavy fire. Separately from that, there is broad bipartisan support for repealing the tax, given its potentially deleterious effect on companies. Calling the proposed delay a “delay” is likely another deceit. Meanwhile, companies are desperately trying to stave off a fate that may never come to pass.

Why doesn’t Congress just go ahead and repeal the tax now? Here lies perhaps the greatest deceit of all. As long as it stays on the books, lawmakers can continue to include “expected” revenue from it in their long-term budgetary projections to help offset budget-negative things like tax cuts and new spending.

Such shell games are common congressional tactics, of course. Another one is loading up legislation with riders that have nothing to do with the avowed purpose of the legislation, like attaching a delay of the Cadillac tax to a measure that would fund the government for one month.

Many economists argue that employee health benefits should be taxed. That may or may not be a valid viewpoint, but employers can be excused if they are confused as to the true purpose of the Cadillac tax, what to do about it, or even whether they should bother doing anything about it at all. We can thank our government’s goofy gyrations for the confusion.

Doesn’t smell good, does it?

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