Ever since the âCadillac taxâ was first introduced, it has been controversial among employers, labor unions, and lawmakers. This led to its first delay when the Health Care and Education Reconciliation Act of 2010 postponed the Cadillac tax's effective date from 2013 to 2018. The tax has now been delayed a second time â in December 2015, President Obama signed a spending and tax bill that delays the Cadillac tax to 2020.
The delay should be welcome news for not only businesses but also tax practitioners, who now have additional time to work with clients on preparing for the tax.
The Affordable Care Act added Section 4980I to the Internal Revenue Code, imposing a 40 percent excise tax on a health plan's excess benefits over specified thresholds â $10,200 for individual coverage and $27,500 for family coverage. These dollar thresholds are indexed to the general inflation rate, and the law permits adjustments to the thresholds for certain high-risk professions, retirees, and workforces with particular age and gender characteristics.
This excise tax is frequently known as the âCadillac taxâ because it was intended to tax only the most generous employer health plans. However, numerous studies have found that the tax will hit a larger universe of employers than just those that offer the most generous health benefits. For example, a Towers Watson study estimates that approximately 82 percent of employers will be subject to the Cadillac tax by 2023. Because the tax is indexed to general inflation, which grows more slowly than healthcare costs, an increasing number of employers will become subject to the tax as time goes on. In anticipation of potential tax liability, many employers have already begun trimming benefits and making other preparations, such as expanding their wellness programs and telemedicine offerings.
While most of the media attention has focused on the two-year delay, there is another important provision in the bill that tax practitioners should know about. In one section of the bill, lawmakers included a provision that makes the Cadillac tax deductible. This is in contrast to the general rule that excise taxes are not deductible on income tax returns.
Given the current corporate income tax rate of 35 percent, making the Cadillac tax deductible effectively changes it from a 40 percent excise tax to a 26 percent excise tax for those businesses that pay corporate income taxes. Entities not subject to corporate income taxation, such as tax-exempt organizations, would continue to be subject to a 40 percent Cadillac tax.
The bill also requires the US comptroller general to work with the National Association of Insurance Commissioners (NAIC) to conduct a study on whether the Cadillac tax uses appropriate standards in determining age and gender adjustments to the tax thresholds. The comptroller general and the NAIC will report their findings to the Senate Finance Committee and make recommendations for a more suitable set of standards. These findings are due 18 months from the bill's enactment in December.
What's Next for Tax Practitioners?
It will be important for tax practitioners to continue working with clients to assess and minimize any potential Cadillac tax liability. While 2020 is still a few years away, changes to minimize liability will take time to implement. Tax practitioners should also continue to keep their eyes open for legislative and regulatory developments. One likely issue will be the deductibility of the Cadillac tax. Making the tax less onerous for for-profit businesses is sure to be a point of political contention.
On the regulatory side, it is not clear whether the US Treasury Department and the IRS will continue the process of developing regulatory guidance around the Cadillac tax or if they will wait for the next administration. At the very least, rules on the age and gender adjustment will likely not come until after the comptroller general and the NAIC report their findings to the Senate Finance Committee.
The two-year delay also means that the next president and Congress will have an opportunity to decide the Cadillac tax's fate. Both Republican and Democratic presidential candidates have shown support for a full repeal, and the tax has been unpopular among employers and employees alike. If momentum to repeal the tax continues to build, it is conceivable that the Cadillac tax will not come to fruition.