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February 10, 2016

Affordable Care Act – Cadillac Tax

One of the most controversial aspects of the Affordable Care Act (“ACA”) is its 40 percent excise tax on high cost employer sponsored health plans, nicknamed the “Cadillac Tax.” The purpose of the tax is to reduce tax preferred treatment of employer provided health care; reduce excess health care spending by employers and employees; and to help finance the expansion of health coverage under the ACA.  Under the ACA, health plans pay a 40 percent excise tax on the cost of their coverage over a threshold value, currently $10,200 for individuals or $27,500 for families. Such plans are called “Cadillac” because they offer generous health coverage. The limits are expected to adjust upward before the tax takes effect in 2020. On December 18, 2015, Congress passed a two-year delay of the tax, moving its effective date from 2018 to 2020.  President Obama signed the bill at that time. The legislation also made the Cadillac Tax deductible for those employers who pay it.

On February 9, 2016, President Obama submitted his final budget to Congress including a proposal related to the Cadillac Tax.  Under the proposal, healthcare plans would only be subject to the Cadillac Tax if they cost more than the greater of the threshold under current law and the cost of a “gold” healthcare plan in their state.  The proposal will reflect regional differences in the cost of providing health care thereby reducing the tax bite where care is especially expensive.  Instead of a single threshold across the country, more generous coverage in states could be offered where “gold” plans on the ACA’s insurance exchanges cost more than the Cadillac Tax limits. The outcome would result in fewer employers having to pay the tax.  There is of course still strong sentiment to repeal the tax in its entirety.  We will continue to monitor developments in this area.

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If you have any questions regarding the proposed rule or the Affordable Care Act, please do not hesitate to contact us.