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Caillac Tax

Issue Profile: The Cadillac Tax

Also known as: Excise tax on high-cost employer-sponsored health coverage

Date of birth: The Cadillac tax is scheduled to take effect Jan. 1, 2018.

Background: Part of the Affordable Care Act, the Cadillac tax is a 40 percent surcharge on employer-sponsored health insurance plans that exceed an annual spending limit on premiums. It has been said this provision is intended to reduce overall healthcare spending by discouraging employers from offering high-cost health insurance plans with robust benefits that encourage overuse of medical care, and also help finance key components of the Affordable Care Act (e.g., exchange-based subsidies).

Employers pay the tax, which will be assessed on premium amounts in excess of $10,200 for individual plans and $27,500 for family plans. Penalties are not tax deductible.

Although it may sounds as though it will only affect a handful of companies, the Cadillac tax is expected to impact about half of U.S. employers and carry a total liability of $79 billion between 2018 and 2023 for companies subject to the tax.1 Some employers, union groups and industry players want to see this provision repealed.

At-risk coverage2*:

Excluded coverage3*:

Potential threat: Higher healthcare costs for both employers and employees are expected as a result of the Cadillac tax. As explained in the St. Louis Post-Dispatch, “The tax is designed to drive down overall health care spending by curbing generous plans that encourage people to use more services than necessary. But some insurance brokers and analysts warn that the tax will cause employers insurance brokers and analysts warn that the tax will cause employers to dramatically reduce benefits or drop them altogether.”4

The HealthAffairs Blog outlined two general scenarios that would be triggered for employers and employees5:

  1. Employers will reduce employee benefits to avoid the tax but also increase employee wages to make up the difference—an increase that may or may not fully match a reduction in health benefits.
  2. Employers will reduce employee benefits and shift costs to employees without increasing wages.

An American Health Policy Institute Report from November 2014 projected that “employees could see up to a $6,150 reduction in health benefits and little or no increase in wages.”6

Projected impact on small businesses: While many employers, both large and small, may reduce their health benefits offerings and contributions, some small business owners may also decide not to offer health insurance benefits at all. Under the Affordable Care Act, those with 50 or fewer full-time employees are not required to do so. As pointed out by Kaiser Health News, small businesses are “at a particular disadvantage,” particularly because they already tend to pay more than large businesses for the same health plan because they don’t benefit from pooled risk the way larger businesses do and they also tend to have higher administrative costs.7

According to the National Federation of Independent Business, small businesses typically pay upward of 18 percent more than others for health insurance.”8 Furthermore, with rising healthcare costs, some believe that even basic coverage could trigger the Cadillac tax by the time it takes effect in 2018.

What you can do: Become familiar with what health insurance products may be impacted by the Cadillac tax and advise your group clients accordingly. Contact your congressman or congresswoman to voice your concerns.

Stay tuned for our next In the Know to learn more about the Cadillac tax’s potential impact on your small group clients and how you can help.

* Final rules have not yet been established.

1Towers Watson. “Nearly Half of U.S. Employers Expected to Hit the Health Care ‘Cadillac’ Tax in 2018 with 82% Triggering the Tax by 2023 [Press Release.]” Towers Watson. Sept. 23, 2014. http://www.towerswatson.com/en/Press/2014/09/nearly-half-us-employers-to-hit-health-care-cadillac-tax-in-2018-with-82-percent-by-2023

2Internal Revenue Service. Notice 2015-16. March 9, 2015. http://www.irs.gov/irb/2015-10_IRB/ar04.html


4Shapiro, Jordan. “Businesses Brace for Next Big Health Fight: The ‘Cadillac’ Tax.” St. Louis Post-Dispatch. July 25, 2015. http://www.stltoday.com/business/local/businesses-brace-for-next-big-health-fight-the-cadillac-tax/article_0d0afbbd-a74d-5f03-9e4f-ac73095d2f0b.html

5Castro, Jorge. “As Employers Try to Avoid the Cadillac Tax, Treasury and the IRS Need to Act.” HealthAffairs Blog. May 12, 2015. http://healthaffairs.org/blog/2015/05/12/as-employers-try-to-avoid-the-cadillac-tax-treasury-and-the-irs-need-to-act/


7Gold, Jenny. “Some Small Businesses See Burden in ‘Cadillac’ Tax.” Kaiser Health News. March 4, 2010. http://khn.org/news/cadillac-tax-small-business/

8Atkinson, William. “The Impact of PPACA’s Tax Policy on Business.” BenefitsPro. June 15, 2015. http://www.benefitspro.com/2015/06/15/the-impact-of-ppacas-tax-policy-on-business

This document is for general informational purposes only. While we have attempted to provide current and accurate information, this information is provided "as is" and we makes no representations or warranties regarding its accuracy or completeness. The information provided should not be construed as legal or tax advice or as a recommendation of any kind. External users should seek professional advice from their own attorneys and tax and benefit plan advisers with respect to their individual circumstances and needs.

About The IHC Group
The IHC Group is an organization of insurance carriers and marketing and administrative affiliates that has been providing life, health, disability, medical stop-loss and specialty insurance solutions to groups and individuals for over 30 years. Members of The IHC Group include Independence Holding Company (NYSE:IHC), American Independence Corp. (NASDAQ: AMIC), Standard Security Life Insurance Company of New York, Madison National Life Insurance Company, Inc. and Independence American Insurance Company. Each insurance carrier in The IHC Group has a financial strength rating of A- (Excellent) from A.M. Best Company, Inc., a widely recognized rating agency that rates insurance companies on their relative financial strength and ability to meet policyholder obligations. (An A++ rating from A.M. Best is its highest rating.) Collectively, the companies in The IHC Group provide insurance coverage to more than one million individuals and groups. For more information about The IHC Group, visit www.ihcgroup.com.

About IHC Specialty Benefits, Inc.
IHC Specialty Benefits, doing business as Health eDeals Insurance Solutions is a full-service marketing and distribution company that focuses on small employer, individual and consumer products. Health eDeals markets products through general agents online, telebrokerage, advisor centers, private label and directly to consumers. For more information about Health eDeals visit http://www.HealtheDeals.com.