More formally known as Section 9001 of the Affordable Care Act (ACA), the 40 percent excise tax will be levied against “excess” benefits and will be paid by the employer of a self-funded plan or an insurance company — although it’s assumed the cost will be passed on to consumers.
The amount to be taxed will vary annually. For instance, in 2018, it’s estimated that the base dollar threshold would have been $10,200 for self-only coverage, and $27,500 for other coverage — although these base limits would have been subject to adjustment based upon a variety of factors.
The intent of the tax was to rein in high-priced insurance policies offered by employers by imposing a tax on an amount considered to be an excess benefit. The hope was that the tax would produce these results:
- Employers would have a strong incentive to seek lower-price plans.
- Employers and employees would rely on more efficient hospitals, doctors and other care providers.
- Employees, who would have to pay for more of their healthcare costs with less generous plans (instead of getting a plan that covers almost everything), would use health services more judiciously.
It also was hoped that the tax would slow the growth of healthcare spending and raise money to cover the cost of the ACA. The congressional Joint Committee on Taxation estimated the tax would have brought in $2.2 billion in 2018 and $7.2 billion in 2019. Delaying the Cadillac Tax for two years is expected to add $91 billion to the deficit over a decade, according to the Committee for a Responsible Federal Budget.
While the nickname for the tax implies that it only applies to expensive health plans, over time it will increasingly apply to average plans. This is because even though premium thresholds are adjusted annually for the Consumer Price Index, the Medical Consumer Price Index is projected to rise faster. Studies indicate that 30 percent of employers will be affected by the tax by 2023 and 42 percent five years after that. This assumes their health plans remain unchanged and health costs continue rising at the same pace.
Proponents of the two-year delay say will give Congress more time to make adjustments to the regulation. Others worry that the delay will become a permanent deferral. Either way, it’s expected that companies would still cut benefits now to be in compliance by 2020.