Alert / Employee Benefits
House votes to send the Cadillac tax to the junkyard

House votes to send the Cadillac tax to the junkyard, Senate passage remains uncertain

Yesterday the US House of Representatives voted overwhelmingly to repeal the Affordable Care Act’s much-maligned Cadillac tax, a 40% tax on employer-provided health coverage that exceeds certain benefit thresholds. The Cadillac tax was set to take effect in 2018, but it has twice been deferred by Congress. The tax is currently set to apply in 2022. The measure now moves to the Senate where passage, perhaps surprisingly, remains in doubt.

The tax has faced criticism from its inception. It was designed as a penalty tax on high-value health coverage, to convince health plan sponsors to reduce benefits. The hope was to reduce healthcare consumption and, ultimately, lead to lower healthcare demand, thereby reducing healthcare costs. But studies showed the tax would have significant cost impacts on rank-and-file employees and their dependents who were never targets of the tax.

Lockton comment: The Kaiser Family Foundation estimates that nearly one-third of plan sponsors could trigger the tax if it goes into effect in 2022. Data from the Alliance to Fight the 40, an advocacy group opposed to the tax, shows that affected plans really aren’t Cadillac plans at all. According to the Alliance, “The first plans to be hit will not be ‘Cadillac’ plans that have the most extensive benefits – they will be plans that are expensive because they cover older Americans, retirees, women, families and other individuals with chronic health conditions, those who have suffered catastrophic health events, and those living in higher-cost geographic areas.”

Challenges in the Senate

Repeal in the House is certainly good news for plan sponsors, but the repeal bill must still pass the Senate. This may prove difficult for both political and policy reasons, despite a similar Cadillac tax repeal bill having more than 40 cosponsors in the Senate.

Lockton comment: Although the Senate is controlled by Republicans, who have been opposed to nearly everything about the ACA since its passage, procedural rules are an obstacle to passing one-off legislation like this. If repeal is to pass the Senate, the expectation is that it will have to be included in a larger bill. What that bill is, or might be, remains unclear.

One of the challenges to Senate passage is that the tax was originally included to help finance the ACA. Repealing the tax without replacing it with some other revenue source arguably leaves a sizeable hole in the federal budget.

Lockton comment: Estimates about the expected revenue generated by the tax are based primarily on the assumption that plan sponsors will either pay the tax or reduce benefits and increase wages. Lockton surveys and Alliance data call these assumptions into question, meaning the size of the hole in the federal budget is likely significantly smaller than what the government previously estimated.

There are also political issues flavoring the repeal effort. Some senators have expressed skepticism about the repeal because repeal favors unions, which bargain for robust health benefits for workers. These senators are requesting more concessions from unions and union supporters before agreeing to support repeal.

Lockton comment: Lockton Government Relations continues to work with senators to address objections to repeal and show them how the Cadillac tax is negatively impacting employer health plan sponsors and everyday Americans. We encourage our readers to contact their senators to advocate for repeal and to reach out to their Lockton account team for more information about how to support repeal efforts.

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