What Was the Tax on Cadillac Health Plans?

The “Cadillac tax” was a never-implemented provision of the Affordable Care Act (ACA), formally known as the High-Cost Plan Tax. It was designed as a 40% excise tax on the value of employer-sponsored health plans that exceeded certain annual cost thresholds. After multiple delays, Congress fully repealed the Cadillac tax before it could take effect. Consequently, no employer or insurance provider has ever been required to pay it.

Understanding the Proposed Cadillac Tax

The Cadillac tax was conceived with two primary goals: to help slow the rising tide of national health care spending and to generate revenue for other coverage expansions under the ACA. The tax aimed to discourage the use of overly generous health plans, which can sometimes lead to the overconsumption of medical services. By making these high-cost plans more expensive for employers, the policy intended to create an incentive for companies to offer more cost-effective health benefit options.

The liability for paying the tax was not placed directly on employees. Instead, the responsibility would have fallen on the entity providing the health coverage, such as the health insurance issuer for insured plans or the employer itself in the case of self-funded plans. While employees would not have seen a line item for the Cadillac tax on their pay stubs, the financial burden could have been indirectly passed down to them. This could have occurred through higher premiums, increased deductibles and copayments, or slower wage growth as companies diverted funds to cover the tax.

The policy was also intended to address a feature of the U.S. tax code. Employer-paid premiums for health insurance are excluded from an employee’s taxable income, which represents a tax preference. The Cadillac tax was designed to place a functional limit on this exclusion, discouraging companies from offering ever-increasing compensation in the form of untaxed health benefits instead of taxable wages.

How the Tax Would Have Been Calculated

The mechanics of the Cadillac tax centered on a specific tax rate and detailed cost thresholds. The law stipulated a 40% excise tax on the value of employer-sponsored health coverage that exceeded predetermined annual limits. When originally enacted, these thresholds were set at $10,200 for individual coverage and $27,500 for family coverage. The tax would only apply to the cost of the plan that surpassed these amounts. For example, an individual plan costing $12,000 would have incurred a tax of $720, which is 40% of the $1,800 excess over the $10,200 threshold.

The “total cost of coverage” was defined comprehensively and was not limited to insurance premiums. The calculation was designed to capture the full value of tax-advantaged health benefits. Specifically, the cost would have also included employer and employee contributions to accounts like Health Savings Accounts (HSAs), Archer Medical Savings Accounts (MSAs), and most Flexible Spending Arrangements (FSAs). This was meant to prevent employers from shifting compensation to these accounts to avoid the tax.

The Internal Revenue Service (IRS) was tasked with developing the specific rules for calculating the cost. The initial thresholds were also designed to be adjusted for inflation to prevent more plans from becoming subject to the tax over time due to rising healthcare costs. The law also included provisions for higher thresholds for certain groups, such as workers in high-risk professions, and adjustments based on the age and gender demographics of a company’s workforce.

The Repeal of the Cadillac Tax

The Cadillac tax faced a political journey that ended in its demise. Originally scheduled to take effect in 2018, its start date was first pushed to 2020 and then delayed again to 2022 by congressional action. These delays reflected deep and widespread opposition from a diverse coalition of stakeholders, including both Republicans and Democrats.

One concern was that the tax would disproportionately affect employers and workers based on factors beyond their control. For instance, companies operating in geographic areas with high healthcare costs or those with an older, less healthy workforce would have been more likely to trigger the tax, even with standard benefit plans. Labor unions were vocal in their opposition, arguing that the tax would unfairly penalize workers who had negotiated for comprehensive health benefits in lieu of higher wages during collective bargaining.

Critics argued that the “Cadillac” label was misleading and that the tax would eventually hit middle-class workers with modest health plans, not just executives with luxury benefits. The fear was that employers, to avoid the 40% penalty, would respond by offering plans with narrower networks, higher deductibles, and increased out-of-pocket costs for employees. This sustained pressure led Congress to permanently repeal the tax as part of the Further Consolidated Appropriations Act of 2020, signed into law in December 2019.