The “Cadillac Tax” was born as a part of the Affordable Care Act (“ACA”), which is really kind of funny. The whole idea behind it was that a tax on “rich” health insurance plans would help less wealthy individuals afford insurance on the exchanges. Employers, many of whom can really ill afford the “Cadillac” insurance plans that they have for their employees, but are more or less stuck with them because the employees’ unions won’t agree to less expensive plans, have been dreading the introduction of this tax since the ACA became effective. This week, employers received a holiday gift from the federal government in the form of a two year reprieve on this tax. Both houses have now approved a spending bill that would delay the implementation of the Cadillac Tax until January 1, 2020.
The Cadillac Tax provides for a 40% excise tax on employer provided health plans that exceed a value of $10,200 annually for individuals and $27,500 annually for all plans other than individual plans. The problem with such a tax is that it effectively punishes employers for providing good health care. In all likelihood, the thought when ACA was passed was probably that the tax burden would be just another burden for management. In practice, many employers, including public employers have either scaled back their excellent health benefits in favor of lesser plans or made plans to pass the excise tax on to the employees.
The Cadillac Tax has been a regular subject of collective bargaining negotiations as well. Unions have been reluctant to agree to management proposals to cut costs by decreasing plan benefits, and management has been understandably reluctant to enter into long term agreements that don’t provide adequate safeguards against the tax. In Illinois, where police and fire unions have interest arbitration to resolve impasse, arbitrators have been reluctant to provide management with any relief from the tax citing everything from the delay of other ACA provisions to the upcoming presidential election. To say the least, the issue of the Cadillac Tax has remained largely unsettled at the bargaining table.
Labor unions quickly recognized that this provision of the ACA is detrimental to their interests as well as those of management. It has always been detrimental to the interests of employers who were faced with either paying the tax or reducing the level of benefits provided to their employees. With the tax deadline looming in 2018, both political parties had some common ground on this issue. The Republicans have always sought to repeal the tax because it is bad for business. The Democrats need to offer assurances to their union backers that their interests are safe, because they need their support in 2016. The end result is rare agreement in Washington.
The bottom line is that the Cadillac Tax is probably dead. Both serious contenders for the Democratic nomination for president have indicated that they would repeal the tax. It is no secret that Republicans want to repeal the ACA in its entirety. Regardless of what ultimately happens to the ACA, I think it is likely that Cadillac Tax will never come to pass. For now it is delayed until at least 2020. For employers in Illinois, this makes the holiday season a little more merry.