Q&A: What you should know about the ACA’s “Cadillac tax”

The Affordable Care Act’s tax on high-cost employer health plans will affect an estimated one in four U.S. employers when it takes effect in 2018 and could jeopardize the ever-popular flexible spending accounts (which lets employees set aside pre-tax money for certain medical expenses). Michael Morrisey, PhD, department head of healthy policy and management at the Texas A&M Health Science Center School of Public Health, weighs in on the “Cadillac tax” and what it means for consumers and employers alike.

Q: What is the “Cadillac tax?”

A: The “Cadillac tax” affects employer-sponsored health insurance plans beginning in 2018. Plans (plus flexible spending accounts—or FSAs) that exceed $10,200 for individuals and $27,500 for family coverage would be affected. The tax is 40 percent of the value above the threshold. Estimates suggest that about 16 percent of employers will be affected in 2018, and approximately 75 percent by 2029. The number affected rises so substantially because the threshold value, by law, increases with general inflation, but health insurance premiums have historically increased much faster. So, more firms will be affected.

FSAs are more likely to be offered by larger employers.  Estimates suggest that about three-quarters of employers with 200 or more employees offer an FSA. People can contribute up to $2,500.

Q: What do consumers need to know about the Cadillac tax?

A: If consumers have relatively generous health insurance plans through their employers, the “Cadillac tax” will affect them; if not in 2018 then soon after. The tax will affect the nature of their compensation. Employers will try to reduce health insurance elements to minimize or eliminate the tax while still satisfying the coverage requirements of the ACA.  So, expect firms to eliminate FSAs and increase deductibles. Some will increase wages to compensate for these reductions, but employees will have to pay taxes on those higher wages.

Q: What do employers need to know to plan?

A: Many employers have been aware of this impending liability since the enactment of the ACA and have been seeking advice from their benefits consultants and brokers. I suspect many who would be affected in 2018 have already started to tweak their benefits to minimize the impact—probably raising deductibles now and getting ready to eliminate FSAs in 2018.  Other firms have more time, because their benefits are still under the threshold, but they too are preparing to make changes.

Q: Does this also affect health care spending accounts?

A: Health care spending accounts, or HSAs, are not affected by the “Cadillac tax.” I expect that we will see substantial growth of HSAs linked to the higher deductible health plans.

Q: How will the “Cadillac tax” affect health care costs in the long-run?

A: The “Cadillac tax” is one of the few components of the ACA that is actually likely to lead to reduced health care spending.  The argument is that if we have to pay more out of pocket, because our insurance hasn’t kicked-in, we will consume less health care. Common sense and some pretty good research supports that view. The tax, however, does generate a lot of revenue. One estimate I’ve seen suggests that the tax would generate approximately $931 billion in tax revenue between 2020 and 2029.  It’s numbers like that that make it hard for the Congress to find alternative budget savings.  Eliminating the “Cadillac Tax” does mean that health care costs will rise more rapidly than they otherwise would have.