Risk & Compliance

Threat of Health Care ‘Cadillac Tax’ Set to Vanish

Congress, White House include a repeal of the excise tax in 2020 funding legislation that's expected to be signed into law by Friday.
David McCannDecember 17, 2019
Threat of Health Care ‘Cadillac Tax’ Set to Vanish

Years of lobbying and other efforts by companies and other health care payers, aimed at repealing the Affordable Care Act’s excise tax on high-value health plans, appear to have finally achieved their mission.

Leaders of both houses of Congress, who worked with the White House to finalize the fiscal 2020 federal government spending bill before the Dec. 20 extended deadline, reached agreement on Monday to include in the bill a repeal of the so-called “Cadillac tax.”

Should Congress pass the legislation and President Trump sign it, as is widely expected, companies will no longer be on the hook for a 40% tax on the value of health care benefits above certain thresholds. The tax is currently scheduled to take effect in 2022. The House overwhelmingly voted in July to repeal the tax, although the Senate had not yet voted.

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The way the ACA excise tax provision was written, it was expected that most or all companies would have become subject to it within no more than a few years.

The federal funding bill also would repeal two other ACA taxes. One, a 2.3% excise tax on medical devices, assessed against device manufacturers, originally took effect in 2013. It was suspended for 2016 and 2017 following stiff resistance from the device industry and again became effective last year. The extra cost, of course, flows downstream to health care payers.

The other tax expected to be repealed by Friday, assessed against insurers providing individual and fully insured group health plans, is currently slated to take effect in 2020. Here too, it’s been widely expected that employers and individuals would have ultimately taken the cost hit in the form of higher premiums.

Additionally attached to the funding bill is the Setting Every Community Up for Retirement Enhancement Act (SECURE), a package of measures designed to make it easier for people to retire. Like the excise tax repeal, it has received broad bipartisan support.

Employer benefits coalitions loudly applauded the measures. It “removes an onerous burden from health plans that 178 million Americans rely upon,” said James Klein, president of the American Benefits Council, in a release. He added that the enactment of SECURE “opens the door to greater retirement income security.”

Steve Wojcik, vice president of public policy for the National Business Group on Health, said about the excise tax repeal, “This is great news, particularly leading into 2020.” If the tax were not repealed, “it would have really taken a big center stage, because it would have been just two years away and employers need 18 to 24 months lead time to plan health benefits,” he told CFO.

Of course, employers are still challenged to control their health care costs as best they can in an environment where increases significantly outpace general inflation, year after year.

Still, if the Cadillac tax were to remain in effect, companies might take more “drastic measures,” Wojcik suggested.

“Almost all if not all employers would have had to make a decision within a few short years: Are we going to pay the tax and continue to offer benefits? Are we going to slash them to try and stay under this tax?

“And the drastic measures wouldn’t have been in anyone’s best interest,” he continued, “because employees and their families would still need health care. It likely would have affected employee morale and productivity.”

With the repeals of the ACA taxes, a majority of the law’s funding mechanisms will have been eliminated. Another key one, the individual mandate, was eliminated in late 2017 as part of the Tax Cuts and Jobs Act.

As noted in a Tuesday blog post by Mercer, the Congressional Budget Office projects that repeal of the Cadillac will cost the federal government almost $200 billion over 10 years. Earlier estimates from the CBO said repeal of the medical device tax would cost about $24 billion over a decade, while the IRS earlier this year estimated that repeal of the health insurance tax would create a revenue loss of $15.5 billion just in 2020.

A few other, relatively minor funding measures remain in place to support the ACA’s access provisions, Medicaid expansion, healthcare.gov, and the state-run health care exchanges.

In addition to the ACA tax repeals and the enactment of SECURE, the federal funding bill includes a few other measures of interest to companies. These include an extension of the tax credit for employer-paid family and medical leave, and an extension of the annual employer fee for the Patient-Centered Outreach Research Institute.

Both the House and Senate are expected to vote on the federal funding bill on Tuesday and present it to President Donald Trump without delay.