Response to NY Times Editorial on the Cadillac Tax
On August 12, 2015, a New York Times editorial called for maintaining the so-called Cadillac Tax as a part of the ACA. Their reasoning for tweaks to the law, rather than outright repeal of the tax was based on many inaccurate assumptions.
For example, the editorial makes the claim that “Employers can avoid the tax by reducing the benefits they offer (the original purpose of the tax) or by shifting more costs to employees.” Assuming that reducing benefits is not of itself a cost-shift to employees, the shift of premium expenses for maintaining the same plan does nothing to reduce the tax. Under IRC Section 4980I, the tax is based upon the total premium cost of the plan, regardless of the percentages paid by the employer or employee. The only way to avoid the tax is by reducing premium costs, and the only way to do that is to either reduce benefits or the average age of the employee and dependent population.
This brings me to the second inaccurate assumption. While the editorial does mention a necessary change to the tax dealing with the age of the employees (it also is impacted by the ages of spouses, which goes unmentioned in the editorial), in the very same sentence it discusses higher costs due to the “chronically ill.” A significant part of the ACA was the removal of health status as a determinant in the setting of premium costs, particularly for small to mid-sized employers that are unable to self-fund their health benefits. In fact, premiums for the oldest, sickest employees or dependents must be capped at no more than three times the cost of a healthy 21 year old employee. While of course health claims paid in a self-funded or experience-rated (as opposed to community-rated) plan will impact costs, it will not do so on an individual-by-individual basis.
The purpose of the Cadillac Tax was simple: gold-plated health plans should not receive the same tax-free treatment as more basic plans. In the metal tiering world, we would think of that as platinum and gold level plans. Of course, simplicity never is simple as the two IRS Notices now demonstrate. In fact, based upon factors not always in the control of plan designers, plans with much less than gold-plating will be considered high-cost plans under the new tax. So perhaps our legislators and regulators ought to consider using much more basic calculations than flat dollar limits on costs (flat dollar limits which don’t equate necessarily to high cost plans but rather to regional and workforce makeup differences). If the public policy purpose of the Cadillac Tax was to cut off tax-free benefits for gold-plated plans, then why not use the same tiering mechanism in other parts of the ACA? Why not tax only those plans deemed to be platinum or gold level status? It is much easier to determine the actuarial value of a given plan design than to set an arbitrary cost. And any employer or union that wishes to offer that higher level plan would recognize the inherent additional costs that a better designed Cadillac Tax would demand.
From the New York Times’ editorial, it appears that their opposition to making changes in the tax is rooted in the revenue generated from it, not from sound public policy. To be sure, the Cadillac Tax was indeed a compromise between two very different constituencies: the right wanted to restrict what they saw as predominately collectively bargained plans that were very rich, while the left was opposed to providing what it saw as rich plans providing a predominately higher tax benefit for highly compensated employees and business owners. The Cadillac tax was birthed from two different groups for two different reasons but with one common purpose. No wonder that both business and labor today oppose the Cadillac Tax in its current form (or at least the form that seems to be arising under the two IRS Notices in pre-guidance). We’ll have to wait and see what the IRS thinks when it finally does issue its proposed regulations.
The overall conclusion of the editorial may actually have it right, despite all of its inaccuracies. “Congress should not repeal the tax, but it should find smart ways to adjust it.” If only Congress could find smart ways to adjust any number of legislative items, we as a nation would be in much better shape.
Posted on August 12, 2015 by GARY B. KUSHNER, SPHR, CBP, PRESIDENT AND CEO