What the ACA’s “Cadillac” Tax Will Mean for Cities and Towns

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Over the past several weeks, there has been increasing concern expressed about the Affordable Care Act’s excise tax, more commonly referred to as the “Cadillac” tax.  So I thought I would provide city and town officials with some very simple, straightforward facts about what it is and what it means for your city and town.

1.  What does the Affordable Care Act’s excise (Cadillac) tax mean for every city and town?

Quite simply, it means that if the value of your city or town’s health care benefits exceeds $10,200 for individuals and $27,500 for families, your city or town will be subject to a 40 percent excise tax on the value of the insurance that exceeds the threshold.

2.  What should every city and town know about the excise tax? 

Here are the basics:

  • Beginning in 2018, a 40 percent excise tax will be imposed on the value of health insurance benefits exceeding certain thresholds.
  • For individuals, the threshold will be $10, 200.  For families, the threshold will be $27,500.
  • Once the threshold is crossed, the cost in excess of the threshold will be subject to the tax.
  • All thresholds may be adjusted upwards if the IRS determines that medical inflation rates warrant such a change.
  • The thresholds will be higher for persons in high-risk professions and for employers that have a disproportionate share of older workers or women. However, these will be set by the IRS through regulation.
  • The tax will apply to fully insured and self-funded insurance plans.  In the case of fully insured plans, the issuer (insurance company) will be responsible for paying the excise tax; in the case of self-funded plans, the administrator (usually the employer) will be responsible for paying the tax.
  • The tax is permanent unless Congress and the President agree to end it; in other words it will not expire and will continue to impact any health insurance plan that exceeds the established threshold for a tax year.

3.  What should my city or town do to prepare for the excise tax?

If  you believe that in 2018 the value of your health care benefits will exceed the thresholds, you should begin to think about whether you would rather pay the excise tax or seek to reduce health care benefits in order to avoid the tax.

In truth, there is no right or wrong decision here.  The law does not prohibit any employer from providing health care benefits that exceed the thresholds.  Rather the health care law imposes the tax as a way to try to level or lower the costs of health care.

No matter what you ultimately decide — and you will have to decide one way or another if your city is approaching or likely to go over the threshold — now is the time to begin to think about how the choice you make will impact your city or town.

Here are some situations and questions you may wish to answer as you decide:

  • If your city is self-insured you will be responsible for paying the tax.  What will that additional cost mean to your city’s budget?
  • If you are fully insured (that is, you purchase your employees’ health insurance from an insurance company) your provider will pay the tax, but no doubt your provider will raise your rates to make up for the additional expense.  What will that mean to your city’s budget?
  • If you decide to flatten or reduce health care benefits, your employees may not be happy.  What will that mean for employer-employee relations?
  • What will be the political ramifications of any decision you make?

These are not the easiest questions to address, but they are questions that will have to be addressed in the next three years, because any choice you make is likely to have an impact on your community.

On a related topic, NLC and the U.S. Department of Health and Human Services will be hosting a webinar on the Health Insurance Marketplace and Small Business Health insurance Options Program (SHOP) on Wednesday, August 28 from 2 – 3 pm ET.  Click here for more information and to register.