Is the ACA’s Cadillac Tax Still in Effect?
The ACA's Cadillac Tax was a provision designed to curb healthcare costs but was repealed before it took effect due to broad political opposition.
The “Cadillac Tax,” a provision of the Affordable Care Act (ACA), is no longer in effect. It was fully repealed in December 2019 as part of a broader government spending bill. The tax was designed to apply to high-cost employer-sponsored health insurance plans. Its repeal occurred before its final implementation date, which had already been pushed back multiple times from its original start date.
Defining the Cadillac Tax
The Cadillac Tax was structured as a 40% nondeductible excise tax on the value of employer-sponsored health coverage that exceeded certain annual limits. The tax was not on the entire cost of the health plan, but only on the amount that surpassed the predetermined thresholds. When first proposed, these thresholds were set at $10,200 for individual coverage and $27,500 for family coverage, with plans to adjust them for inflation over time. The responsibility for paying the tax would have fallen on the entity providing the coverage, such as an insurance company or the employer administering a self-funded plan.
Calculating the total value of a health plan was comprehensive. The calculation included contributions made by both the employer and the employee toward the health plan’s premium. It also encompassed contributions to tax-advantaged accounts like Health Savings Accounts (HSAs), Archer MSAs, and health Flexible Spending Arrangements (FSAs). The calculation specifically excluded coverage for stand-alone dental, vision, accident, or disability insurance.
Original Purpose of the Tax
The creation of the Cadillac Tax was driven by two policy objectives. The first was to help control the growth of healthcare spending in the United States. The theory was that by taxing expensive health plans, employers and employees would be incentivized to choose more cost-effective options. This would discourage overly generous plans that can insulate individuals from the true price of medical services, potentially leading to overuse.
A second function of the tax was to generate revenue to help finance other components of the Affordable Care Act. The funds raised were intended to offset the costs of provisions like the health insurance marketplace subsidies, which help eligible individuals and families afford coverage. It also sought to address the tax preference for employer-sponsored insurance, which is excluded from an employee’s taxable income.
The Path to Repeal
The Cadillac Tax’s initial implementation was scheduled for 2018, but it faced immediate and sustained political pressure. This led to a series of legislative actions that first delayed its start date to 2020 and then again to 2022. The delays reflected deep, bipartisan opposition to the measure.
The push for repeal came from a broad coalition of stakeholders. Businesses and employer groups argued that the tax would significantly increase their costs and administrative burdens. Labor unions, who had often negotiated for comprehensive health benefits in place of higher wages, were also strongly against the tax, fearing it would erode the quality of their members’ hard-won health plans. Ultimately, Congress passed and the President signed a spending bill on December 20, 2019, that included the full and permanent repeal of the Cadillac Tax.