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The Congressional Research Service recently published a detailed study on the projected economic impact of the so-called Cadillac tax on employer-sponsored health insurance plans, which is scheduled to take effect in 2018. ("The Excise Tax on High-Cost Employer-Sponsored Health Coverage: Background and Economic Analysis, Congressional Research Service, August 20, 2015). The report includes estimates of the number of employer-sponsored plans in California which will be impacted by the tax.

What is the "Cadillac Tax?"  The Patient Protection and Affordable Care Act ("ACA"), also known as ObamaCare, had a number of objectives. The primary ACA goal was to reduce the number of Americans who were uninsured. But a secondary goal was to reduce the cost of health insurance, or at least to reduce over time the rate of increase of such costs. Many economists believe that employer-sponsored insurance ("ESI") encourages waste and over consumption of health benefits, by providing "excessive" benefits in very high cost plans. The reasoning behind this belief is that employers have an incentive to provide high cost insurance plans to their employees in lieu of wage or salary increases because of the tax incentives available to employers who sponsor such plans. Similarly, employees have an incentive to accept high benefit employer-sponsored plans in lieu of wages or salary because the value of such plans are not taxed to the employee. The concern is that these tax incentives skew the combination of wages and benefits in the direction of high cost health insurance plans and so encourage waste of of health services.

To address this concern, the ACA imposes a 40 percent excise tax on employer-sponsored health insurance plans with annual premiums in excess of $10,200 for single employees and $27,500 for families. The tax first takes effect in 2018. The expectation is that over time employers will scale-back these high cost insurance plans to avoid the excise tax, and will instead offer employees a commensurate increase in wages or salary. As a result, employer-sponsored plans will be leaner and contain fewer "frills," health care costs (or at least the rate of increase in costs) will fall, and employees will receive higher (taxable) wages in exchange for unnecessary (non-taxable) health benefits. However, some groups opposed to the tax and lobbying for its repeal, dispute that these results will follow.

It is worth noting that the Cadillac tax applies only to employee-sponsored insurance plans. Plans purchased by individuals - no matter how expensive the premium may be - are not subject to the excise tax. 

Impact on California.  One of the more interesting portions of the Congressional Research Service report is its estimate of the impact of the tax on a nationwide and a state by state basis. The report projects that nationwide 10.2 percent of all employer sponsored plans covering single persons exceed the $10,200 premium limit and so will be subject to the 40 percent excise tax, and that 6.0 percent of all such plans covering families exceed the $27,500 limit and so will be subject to the tax. In California, a somewhat higher percentage of plans covering single persons -- 13.7 percent -- will be taxable, and a slightly lower percentage of plans covering families -- 5.7 percent -- will be taxable.    

Impact on Small Business.  In theory, employer-sponsored insurance purchased through the Small Business Health Options Program ("SHOP") exchanges could trigger the ACA excise tax. However, the Congressional Research Service report, on examining available national data on average premiums in the SHOP exchanges concludes that this is an unlikely result in most cases. "[I]t is unlikely that these less generous plans in the SHOP exchanges will be subject to the Cadillac tax in the foreseeable future, given that the silver- and bronze-leveled plans in the SHOP are less generous than the hypothetical plan analyzed in the [applicable] section of this report." Page 16. 

Lookinf Ahead. Although the Cadillac tax will not take effect until 2018, its impact is already being felt as insurers, health care providers, employers and labor unions plan for it, and as lobbyists, politicians and economists game out its broader effect on the political economy. Should be interesting to observe over the next two-plus years.

For all of your insurance needs: health, home, auto, business and commercial, and life, contact

Alex Pfeifer
Pfeifer Insurance Brokers
650 762-8087

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