United States: IREG Update - December 18, 2015

Delaying the Cadillac tax: The story of a successful coalition of strange bedfellows

Congress has rarely found bipartisan agreement on anything relating to the Affordable Care Act (ACA). However this week they are poised to delay one of the law's key revenue provisions. Section 4980I of the Internal Revenue Code, Excise Tax on High Cost Employer-Sponsored Health Coverage, is part of the Affordable Care Act that charges an additional excise tax on certain employer-sponsored health plans that are valued over the statutorily imposed thresholds and has been called the "Cadillac tax".

The Cadillac tax is an excise tax on insurance companies that provide employer-sponsored health plans valued over a specific amount. As originally drafted, the tax was due to start in 2018 and would impose a 40 percent excise tax on health plans valued over $10,200 for individuals and $27,500 for a family. This single provision was scored to raise $91 billion in revenue over 10 years. Besides being one of the main revenue offsets in the ACA, many economists have also staunchly defended the policy behind the Cadillac tax. They argue that the provision is one of the law's most critical tools for controlling the increasing cost of healthcare. However, because those effected by the Cadillac tax are strategically and bipartisanly aligned—labor unions as well as the business community—this week Congress has intervened to delay the impact of a significant provision of the healthcare law.

Employers have received a tax benefit for the cost of the health benefits they provide to their employees since the 1940s. Because there is no upper limit on this tax benefit, some policymakers have argued it has become an incentive for employers to increase health benefits instead of wages, and that incentive has exacted a cost on the overall health system. They argue that if tax policies encourage businesses to offer more generous health policies than their employees need, then the health system bears the cost of these "Cadillac" health plans. By removing the tax benefit for these plans, policymakers argue that employers and employees would be encouraged to spend their healthcare dollars more efficiently. In 2014, healthcare spending was $3.8 trillion, up from $2.9 trillion in 2013, and some estimates indicate as much as a third of this spending can be due to overutilization of healthcare services.

Some policymakers have also argued that the revenue from this provision may never materialize because most employers and employees will shift their behavior in order to avoid the tax. This they contend would have positive impact on the health system by reducing inefficiencies due to overutilization, but the penalties from the tax would not come into the Treasury.

What is applicable coverage

Section 4980I states the Cadillac tax applies to coverage under any group health plan that is made available to the employee by an employer which is excludable from the employee's gross income. The statute further defines a group health plan to include self-insured plans and other plans employers contribute to in order to provide healthcare to their employees regardless of whether the employee or employer pays for the coverage.

How value is calculated

Those opposed to the tax argue that the definitions spelled out in guidance from the IRS have expanded the impact of the Cadillac tax beyond just "Cadillac" health plans to average health plans as well. The value of applicable coverage is determined by accounting for the entire cost of the insurance benefit. IRS guidance defines the insurance benefit to include employer-sponsored wellness plans, all contributions to flexible spending accounts (including employee-elected payroll deductions) and employer contributions to health savings accounts. Some argue this moves the tax from solely targeting luxury health plans and instead levies the tax on average health plans too.

Who is responsible for paying the tax

Employers will calculate the amount of the Cadillac tax for each of their employees with applicable coverage. The statutory language states that those responsible for paying the tax are the "coverage providers" and who that is depends on the coverage provided. For a group health plan, the health insurance issuer is the coverage provider. For contributions to a health savings account (HSA) the employer is the coverage provider. For all other coverage it is the person who administers the plan benefits. The ACA's statutory language doesn't include a definition of this final category and guidance released by the IRS indicates the agency is considering two alternatives: 1) the person responsible for performing the day-to-day functions that constitute the administration of plan benefits, or 2) the person that has the ultimate authority or responsibility under the plan with respect to the administration of plan benefits. However, no matter who pays the Cadillac tax, it is not a deductible expense.

Employers changing benefits to avoid tax

Because of the broad category of benefits included in the value calculation of health plans, there are several changes to health benefits employers can make to avoid subjecting themselves to the tax, including:

  • Increasing employee cost sharing, including increasing deductibles;
  • Utilizing narrower provider networks to bring down the cost of health plans;
  • Reducing the scope of covered benefits and higher cost insurance options; and
  • Capping employer contributions to Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs) or Health Reimbursement Arrangements (HRAs).

Experts state that employers have begun to take these steps now in order to avoid the new excise tax in 2018. One survey estimates that unless employers implement changes, 60 percent of employers will be hit by the Cadillac tax in 2018.

Who is impacted

Nearly 175 million Americans are enrolled in employer-sponsored health plans. Another concern expressed by stakeholders is that the structure of the tax will increase its impact on American households over the years. The statutory thresholds are indexed to overall inflation—not healthcare inflation—and since healthcare inflation rises at a faster rate over the course of time, the Cadillac tax will impact an increasing number of Americans. While the Cadillac tax technically is imposed on insurance companies, the increased cost is expected to be passed on to the employers which ultimately translates to increased healthcare costs to the employee.

Rare example of bipartisan synergy

When the provision was included in the ACA, the business community and labor unions both voiced their concerns with the impact of the Cadillac tax. They created an unusual bipartisan coalition in DC calling for the repeal, or at least a delay, of the tax.

A key moment in this legislative debate occurred earlier this month when the Senate voted overwhelmingly to repeal the Cadillac tax by a vote of 90-10. This strong bipartisan vote seemed to foreshadow that Congress would address the Cadillac tax in their end of the year legislative deal. Speaker Paul Ryan on Tuesday night announced that a two-year delay of the Cadillac tax had been included in Congress' end of the year legislative wrap up.

Delaying the Cadillac tax gives Republicans the opportunity to claim they have weakened a key revenue provision of the ACA—therefore undermining the financing and therefore the long term sustainability of the health law. Democrats were able to deliver a win to the unions ahead of the 2016 campaign cycle while giving themselves more time to find a way to restructure the Cadillac tax that would maintain the policy goals of the original provision as well as reinstating the lost revenue. This bipartisan agreement to kick the can down the road was delivered just in time for the holidays.


Noteworthy links from the past two weeks


  • The Federal Reserve raised its benchmark index rate for the first time in almost 10 years [The New York Times]

  • The Financial Stability Oversight Council and MetLife joined forces to fight and to make public documents behind the designation of the company as a systemically important financial institution [Law360]

  • Various aspects of the Financial Stability Oversight Council were discussed in extensive congressional testimony [Politico, Business Insurance, Reuters, A.M. Best]

Property and Casualty

  • The NAIC tasked its market regulation committee with taking a broad look at insurers' use of big data including "price optimization" techniques [JD Supra]


  • Treasury and Health and Human Services released guidance on how states can apply for innovation waivers under the Affordable Care Act [BloombergBNA]

  • The Affordable Care Act open enrollment period was extended due to high last minute demand [The New York Times]


  • Industry commenters debated the value of Solvency II [A.M. Best]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
26 Sep 2018, Conference, New York, United States

Dentons is delighted to support a global IT services and consulting firm Miratech as an event host partner at their annual conference called M-Force18 New York on September 27th. The event will be held at Dentons New York office in the heart of Midtown Manhattan, opposite Rockefeller Center.

2 Oct 2018, Seminar, Dallas, United States

We are pleased to offer a program of five sessions designed specifically for in-house counsel. Topics will include:

  • In-house corporate ethical issues
  • What recent Supreme Court decisions mean for business
  • Keeping lawyers out of your benefit plans
  • Litigation tactics for in-house counsel
  • Employment issues in the age of #MeToo
Similar Articles
Relevancy Powered by MondaqAI
Ice Miller LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Ice Miller LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions