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What's the largest tax break in the federal tax code? If you guessed the home mortgage deduction, you’d be wrong. It is the tax break for employer-provided health benefits.1 Not widely understood, the federal government does not tax the value of health insurance provided by employers to their workers—a tax benefit that increases in value as incomes (and therefore marginal tax brackets) go up.
This tax break will be curtailed for so called “Cadillac” health plans. A 40 percent excise tax will be assessed on the cost of employer sponsored insurance plans that exceeds $10,200 for individual coverage and $27,500 for family coverage. The tax threshold increases over time at the general rate of inflation.2 If health inflation continues to outpace general inflation, more and more plans will be hit with the tax over time. The tax was originally to go into effect in 2018, but was postponed to 2020 by Congress in December 2015. Employer surveys suggest that employers are already making changes to their health plans in response to the excise tax.3
Proponents of the tax believe that overly generous coverage plans (Cadillac plans) create an incentive for high spending by enrollees. The policy objective behind the tax was to slow the rate of growth in health spending by creating incentives to limit “Cadillac” plans and reduce overspending in healthcare.
Of concern is the possibility that the tax will lead to a cost shift to consumers rather than get plans and payers to put pressure on providers for more efficient delivery of care. Some are concerned that the Cadillac tax is too blunt, and may target necessary health spending rather than the “unnecessary” health spending that we’d all like to eliminate. This is particularly worrisome for individuals with expensive chronic conditions who stand to benefit from generous coverage and will see their out-of-pocket costs go up under less generous coverage.
While many have long advocated cutting back on tax subsidies for employer-sponsored health insurance, some proposals favor simply capping the employer-sponsored tax exclusion rather than imposing an excise tax. The tax is controversial, and may be modified before it goes into effect in 2018. Under all scenarios, however,engaging in an informed discussion over how to allocate direct and indirect government expenditures for healthcare is a conversation we need to have.
More About the Cadillac Tax
1. Rae, Matthew, Gary Claxton, Nirmita Panchal and Larry Levitt, Tax Subsidies for Private Health Insurance, Kaiser Family Foundation (Oct 27, 2014).
2. Technically, the threshold will increased by CPI plus 1 percent for the first two years (2018 and 2019) and just CPI thereafter.
3. Fronstin, Paul, What to Expect During Open-Enrollment Season: Findings From the SHRM/EBRI 2014 Health Benefits Survey, EBRI Notes (December 2014). Test