House Votes to Repeal Cadillac Tax in Major Employer Victory

The Cadillac tax is on its way to being repealed.

The U.S. House of Representatives voted late Wednesday to scrap the Affordable Care Act’s unpopular tax, a major victory for employers, insurers and other industry players who for years have been calling for its elimination. In a wide bipartisan vote, the House approved H.R. 748, the Middle Class Health Benefits Tax Repeal Act of 2019.

The House bill has a companion bill in the Senate, sponsored by Sen. Martin Heinrich (D-N.M.), but a vote in that chamber has not yet been scheduled.

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“Employers, employees and the general public are not in favor of this tax so a permanent elimination of it as an uncertain threat over employer plans is [a good thing],” says Steve Wojcik, vice president of public policy at the National Business Group on Health. “We’re hopeful Congress will get it done this year.”

The tax, which is among the least popular provisions of the healthcare-reform law, imposes a 40% levy of each employee’s health benefits above a certain threshold, adjusted annually for inflation. In 2022, the tax will be triggered when the cost of an employer plan surpasses $11,200 for an individual and $30,100 for a family. The cost is calculated based on spending on total health benefits, such as the average cost of the plan, employer contributions to a health- or flexible-spending account and the value of coverage in certain on-site medical clinics.

The tax was originally created as a way to help fund the ACA, but it has been a recurring pain point for employers, with many calling for its repeal. It also has had rare bipartisan opposition: Republicans and Democrats have come out in disapproval of the provision, which makes approval of repeal likely, industry experts say.

The Cadillac tax was originally scheduled to take into effect in 2018, but it has been delayed by Congress twice; if it isn’t voted down by the Senate, it’s currently set to be implemented in 2022. The looming uncertainly of whether the tax would go into effect was a recurring headache for employers planning for their health plans.

“Getting rid of that uncertainty would reassure the millions of employees who rely upon and value the coverage offered by their employers, as well as the employers, who will be able to plan better,” Wojcik says, adding that another pain point is that most employers were expected to eventually hit the tax threshold—even ones that reduced and scaled back benefits—because of a “fundamental flaw in the way the indexing was set up in the legislation.”

“It means that, as long as healthcare costs are going up faster than overall inflation, employer plans will still hit the trigger and get taxed eventually,” he says. “The vast majority of plans would hit the tax, including the high-deductible, account-based plans. It’s not just traditional plans—all plans will hit this tax.”

Roughly one in four employers is expected to be hit by the tax if it is implemented in 2022. An even larger share (31%) could be affected when workers’ voluntary contributions to FSAs are taken into account. The analysis also indicated that the tax would affect a growing share of employers over time, reaching 37% in 2030 without including FSA contributions—and 46% with them.

“Given that most estimates suggest that health costs will continue to increase faster than inflation over time, a growing number of employers will be subject to the tax unless they make changes to their health programs,” the KFF says.

Supporters of the tax argue that it would force changes or penalize some existing plans, and therefore will help curb the growth of health costs. Economists also worry that eliminating the tax would add to the country’s deficit.

But industry groups, including the Society for Human Resource Management, the American Benefits Council and the Alliance to Fight the 40—a coalition of hundreds of stakeholders—disagree and have been lobbying for the repeal.

“Healthcare is consistently ranked the most important employee benefit,” SHRM says. “Repealing the Cadillac tax will provide employers the flexibility to design healthcare benefits to meet the needs of their specific workforce.”