The so-called “Cadillac Tax” on high-cost employer-based health insurance plans that will be imposed starting in 2020 will result lower premium costs for the affected employees, and billions in additional federal and state tax revenues.
Those are among the findings of a 42-page report just issued by the Congressional Budget Office.
The “Cadillac tax” is formally a 40% excise tax on employment-based health plans with premiums above thresholds specified in the Affordable Care Act. It was originally set to take effect in 2018, but legislation passed last year postponed the start date. The thresholds will be about $10,800 for a single individual and $29,100 for a family plan when the tax becomes effective, rising annually thereafter.
The CBO report notes that all employer-based health insurance, not just “Cadillac” plans, amounts to a substantial tax subsidy to companies and their insured workers.
That’s because the portion of a worker’s health insurance premiums paid by the employer –typically thousands of dollars annually – is not counted as compensation to the worker. This means it is not subject to federal income and payroll taxes. It is also exempted from taxation by most states.
In addition, the cost to the company is deductible as a business expense, reducing the income taxes the employer must pay.
Tax revenues will be about $250 billion lower this year because health insurance is excluded from taxable income, the CBO says. That amounts to a subsidy of about 30% of the average premium for employer-based coverage.
(By comparison, subsidies to lower-income consumers who buy coverage through federal and state marketplaces cost the federal government about $40 billion per year, according to the CBO.
“Cadillac” health plans, with their high benefits and premiums, benefit greatly from the tax exclusion, because they enable companies to reward selected employees with increased amounts of untaxed compensation in the form of very generous health coverage.
The introduction of the excise tax in 2020 is likely to cause many employers to scale back to plans below the threshold at which the penalty becomes effective, thus reducing or eliminated their excise tax obligation, the CBO report notes.
However, the CBO expects most companies to increase salaries and wages to attract and retain the workers who formerly benefitted from these health plans. That income will be taxable.
The combination of higher income taxes and some excise tax collections will result in $2 billion of additional tax revenue in 2020, according to the CBO, rising to $20 billion in 2025.
More broadly, the report notes that about 153 million working-age Americans now have employer-based health insurance. An additional 17 million non-elderly people are covered by individually-purchase insurance plans. (Not included in these figures are the millions more covered by Medicare and Medicaid.)
The average premium in 2015 for employment-based health insurance was $6,250 for an individual, and about $17,550 for family coverage.
Premiums are somewhat less than these for individually-purchased coverage, because on average these plans typically cover less of a policyholder’s health care costs. Individual plans on average pay about 60% of claims, compared to about 83% of claim costs for employer-based plans.
The rate of growth in health insurance costs has slowed since 2011, the year after the ACA was enacted. Premiums rose by more than 7% from 2007 to 2010, but the increase has held steady at a more moderate 4% since then. However, the rate of growth in premium costs continues to outpace the growth of the economy as a whole, the CBO points out.
While the general public may think of the health insurance market as being comprised of health insurance companies, for employer-based coverage that is not strictly true. About 60% of all firms self-insure their health plans. They collect premiums and pay claims themselves, although they may hire an insurance company to administer their plans. For companies with 1,000 to 5,000 workers, that figure is closer to 85%, while for companies with more than 5,000 worker it is almost 100%.
