Congressional leaders have announced agreement on a mammoth $1.6 trillion spending and tax cut package that includes a 2-year delay of the Affordable Care Act’s 40% excise tax on high-value health plans. The so-called “Cadillac Tax” was scheduled to take effect in January 2018.

Assuming the House and Senate approve the new deal and President Obama signs it into law, the Cadillac Tax effective date would be postponed to January 2020.  

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Cadillac Tax 2-Year Delay: What It Means For Employers

Thu Dec 17, 2015

Congressional leaders have announced agreement on a mammoth $1.6 trillion spending and tax cut package that includes a 2-year delay of the Affordable Care Act’s 40% excise tax on high-value health plans. The so-called “Cadillac Tax” was scheduled to take effect in January 2018.

Assuming the House and Senate approve the new deal and President Obama signs it into law, the Cadillac Tax effective date would be postponed to January 2020.

The extraordinary end-of-year legislative package is comprised of two separate measures—a $1.1 trillion “omnibus” spending bill for FY 2016 and a $600 billion “tax extenders” bill that continues some 50 expiring tax breaks for individuals and businesses. Lawmakers decided to include delay of the ACA Cadillac Tax in the spending measure to ensure its approval.

The House of Representatives will vote on the two pieces of legislation on Thursday and the Senate is expected to combine them into a single legislative proposal and approve the package on Friday. The White House has signaled that President Obama will sign the bill into law.

Why did Congress put the brakes on the Cadillac Tax?

As enacted in the original 2010 healthcare reform law, the Cadillac Tax is to be levied on the value of employer-sponsored health plans that exceed a statutory dollar threshold--$10,200 for self-only coverage and $27,500 for coverage other than self-only.

The nonpartisan Congressional Budget Office estimated that the new tax would raise some $87 billion in revenue over ten years to fund government subsidies to help people pay premiums for health coverage through Affordable Care Act exchanges. The Cadillac Tax was considered one of the key cost containment features in the Affordable Care Act because it was expected to limit the rise of insurance premiums. The White House staunchly defended the Cadillac Tax.

Nevertheless, lawmakers on both sides of the aisle recently began to distance themselves from the new tax for a number of reasons.

First, stopping the Cadillac Tax became a high priority for public employee unions, an important ally of House and Senate Democrats.

Randi Weingarten, president of the American Federation of Teachers, recently wrote that the new tax “could lead employers to cut back health insurance benefits or drastically increase employees’ co-payments or deductibles.” The AFT president cited “wage trade-offs that workers make over the years to maintain their health insurance plans.”

And it isn’t just unions that oppose the Cadillac Tax. The “Alliance to Fight the 40,” a coalition of employers, unions and nonprofits, advocated repeal. The coalition argues that employers are already scaling back health plans in anticipation of the 2018 effective date, thus shifting a larger share of costs to employees.

The American Benefits Council, for example, whose members sponsor or provide services to health and retirement plans covering some 100 million Americans, said the tax was a “serious burden on employers…and imposes a number of illogical, counterproductive and ultimately unavoidable results.”

But there likely was a second reason why Congress agreed to delay the Cadillac Tax—old-fashioned legislative horse-trading. The $600 billion tax extenders legislation contains numerous tax breaks favored by Republicans and Democrats, including permanent extension of the R & D tax credit, expansion of the child tax credit, extension of the Earned Income Tax Credit and the college tuition tax credit, extension of a special tax deferral rule for multinational banks and some manufacturers, extension of the Work Opportunity Tax Credit and, in the omnibus spending bill, an end to the 40-year ban on oil exports, a top priority for congressional Republicans.

In the end, Republicans and Democrats shook hands on a spending and tax cut package for individuals and businesses that will extend some 50 tax cuts, some permanently, and that will also delay the ACA Cadillac Tax.

What does Cadillac Tax delay mean for employers?

Bipartisan action by Congress to delay the ACA Cadillac Tax represents the first major legislative change in the Affordable Care Act and suggests that both Republicans and Democrats are open to changing the 5-year old health reform law.

Indeed, on December 3, in a largely symbolic move, the Senate voted 90-10 to completely repeal the Cadillac Tax. And significantly, democratic presidential candidates Hillary Clinton and Bernie Sanders have come out in favor of Cadillac Tax repeal.

For employers all this means that the tax will not take effect in 2018 as originally prescribed, or in 2020 as specified in the new legislation. The reality is that the Cadillac Tax as a practical matter is now dead.

Delaying the Cadillac Tax for two years means that the next president, regardless of party, will negotiate a comprehensive rewrite of the Affordable Care Act to include repealing the Cadillac Tax, substituting alternative cost-containment measures and making other changes, perhaps in the employer “play or pay” mandate.

In any event, employers concerned about the potential of the 40% Cadillac Tax to force redesign of employee health benefits to keep plan values below tax triggers can breathe a sigh of relief. Today’s announcement of a 2-year delay guarantees future repeal of the Cadillac Tax.