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The Cadillac tax was part of the Affordable Care Act (ACA). But it was among the more controversial provisions of the law, and was eventually repealed—after being delayed twice—before it ever took effect. This article will explain how the tax would have worked, the controversy around it, and why it was ultimately repealed.
The Cadillac tax was originally supposed to be implemented in 2018, but in December 2015, lawmakers passed an omnibus spending bill that included a two-year delay on the Cadillac tax. Then in early 2018, another spending bill again delayed the Cadillac tax, this time until 2022.
And in late 2019, an appropriations act that officially repealed the Cadillac tax was enacted, after passing with strong support in both chambers of Congress.
The Cadillac tax was designed to impose a 40% excise tax on the portion of employer-sponsored health insurance premiums above a specified dollar level. The revenue from the tax would have been used to cover other ACA provisions, like the premium subsidies in the exchanges.
Before the tax was repealed, the Congressional Budget Office had estimated that the initial threshold above which the excise tax would apply in 2022 was $11,200 in total annual premiums for a single individual, and $30,100 in annual premiums for family coverage.
These amounts would have included both the portion of the premium that the employee paid (via a paycheck deduction), as well as the employer's contribution to the premium, and the dollar amount would have increased with inflation over time.
So let's imagine that the tax hadn't been repealed, and had been implemented as scheduled in 2022: If your employer-sponsored health insurance plan's annual premium had been above those amounts in 2022, your employer would have to pay a 40% excise tax on the portion of the premium above those levels. Clearly, this was intended to incentivize employers to take steps to keep total premiums below the level at which the Cadillac tax applies.
For perspective, average total premiums in 2022 for employer-sponsored health coverage were about $7,991 for a single employee, and $22,463 for family coverage. So most health plans were well under the projected 2022 thresholds for the Cadillac tax.
But there is a significant premium variation from one area of the country to another, and premiums for employer-sponsored health coverage have been rising fairly quickly for many years. Both of these factors contributed to the controversial nature of the Cadillac tax.
The idea behind the Cadillac tax was to make very high-end health plans less attractive for employers, and thus less common.
The concern is that when people have health plans that have very little cost-sharing and lots of "bells and whistles," they may be more likely to overutilize health care. This is because the insurance plan—rather than the patient—is paying for all or nearly all of the cost.
And employer-sponsored health insurance has long been excluded from taxable income. So when we look at total compensation for employees—including wages in addition to health insurance and other benefits—there's an incentive for employers to provide a larger portion of the compensation in the form of health insurance benefits, rather than wages.
Combined with the ever-increasing cost of health care, that incentive and the concerns about over-utilization led to the inclusion of the Cadillac tax in the ACA.
The tax exclusion for employer-sponsored health coverage is the largest expenditure in the current U.S. tax code, and economists noted that the Cadillac tax would effectively have capped the amount of the tax exclusion, eventually resulting in lower healthcare costs.
In addition, very high-end plans are generally provided by cash-flush employers and offered to employees who tend to be highly compensated in general. So some policymakers felt that it would help to make the overall healthcare system more equitable if employers that continued to offer these very generous plans were also paying an excise tax that would help to make coverage and health care more affordable for people who have to buy their own coverage.
But it's also important to note that geographic variation in healthcare costs—as opposed to employers' wealth and employees' overall compensation—results in health plans being more expensive in some parts of the country. Critics of the Cadillac tax noted that it would unfairly penalize employers based in those areas.
Various policymakers proposed changes to the Cadillac tax to address issues like this, but the tax was eventually scrapped altogether.
When the Cadillac tax was originally scheduled to take effect in 2018, the premium threshold above which the tax would have applied was $10,200 for employee-only coverage and $27,500 for family coverage.
The premium threshold—above which the Cadillac tax would have applied—was slated to increase by the same percentage as Consumer Price Index (CPI) growth each year.
With the four-year delay that had already been implemented before the tax was repealed, that threshold was projected to have increased by $1,000 for employee-only coverage and by nearly $3,000 for family coverage (to an estimated $11,200 and $30,100, respectively).
Picture a scenario in which the Cadillac tax wasn't repealed, and a health plan with a 2022 annual premium of $12,000 for a single employee. The portion of the premium over approximately $11,200 (in other words, $800) would have been subject to the Cadillac tax. And while that tax would have been assessed on the employer, economists generally agree that such costs are passed through to the health plan enrollees (via higher premiums, for example).
The problem? Healthcare spending had been rising faster than the CPI for a long time. And while it's possible that could change in future years, lawmakers were concerned about the distinct possibility that it wouldn't.
That could have resulted in the Cadillac tax eventually becoming a "Chevy tax." That would have been the case if average premiums had continued to rise faster than the premium threshold where the Cadillac tax would have applied.
A 2019 Kaiser Family Foundation Analysis determined that one in five employers offering health coverage would have had at least one health plan subject to the Cadillac tax as of 2022, and that could have increased to more than one in three by 2030. (Large employers typically offer more than one plan, with some plans having richer benefits than others; an employer might have had some health plans that were not subject to the Cadillac tax, but others that were.)
It's important to understand that this analysis applied to employers rather than employees. According to the Congressional Budget Office, about 15% of covered workers were in plans that were expected to be subject to the tax in 2022, but that could have grown to 25% by 2028.
While it's fairly rare today to have a health insurance plan with an annual premium over $11,200 for a single person, or $30,100 for a family, it might NOT be rare to have a health plan that hits those amounts (increased by the CPI) in 2030 or 2035, if health insurance premiums continue to increase faster than the CPI.
The way the Cadillac tax was designed, an increasing number of plans would have been subject to the excise tax each year, assuming premium growth continues to outpace overall inflation. And eventually, run-of-the-mill plans (as opposed to just high-end plans) might have been impacted.
The Cadillac tax was repealed before it was ever implemented. But the general consensus was that employers would have tried to avoid paying it, and would thus have worked to structure their health plans so that total annual premiums remained below the Cadillac tax threshold.
The most obvious way of doing that would have been to increase the cost-sharing on the plan, via higher deductibles, copays, and out-of-pocket maximums (within the maximum out-of-pocket constraints required by the ACA).
Of course, that would have tackled the problem that the Cadillac tax was designed to solve, since the whole idea was to move away from plans that cover all or nearly all of an enrollee's healthcare costs, in an effort to ensure that people aren't overutilizing health care.
And while that would have been a likely outcome, the problem is that when out-of-pocket costs increase, people tend to cut back not only on unnecessary health care but also on necessary health care.
Over the long run, that can result in chronic conditions that aren't well-controlled. The result can be healthcare costs that are higher than they would have been if the care hadn't been avoided due to costs.
There was also a concern that some employers might have had a health plan that wasn't particularly "Cadillac" in nature (i.e. its benefits weren't dramatically better than average), but that had higher-than-average premiums due to other factors.
That could have included claims history, the employer's industry, or simply being in a geographic area of the country where healthcare costs are higher than average.
The ACA's ban on using claims history or industry categories to set premiums only applies in the individual and small group markets; in the large group market, claims history and industry can still play a role in premiums.
So while the Cadillac tax was aimed at reducing the number of plans that offer truly high-end coverage, the use of a metric that judges plan based on premiums alone would have been flawed. Some high-premium plans might have high premiums for reasons other than their benefit design.
Geographic location can be used to set premiums for employer-sponsored plans of all sizes. So there were also concerns that employers in states like Wyoming and Alaska—where health care is more expensive than average—would have been disproportionately subject to the excise tax, despite providing relatively average benefits.
The Cadillac tax generally had support from economists, including the President's Council of Economic Advisors . But employers, unions, consumers, and politicians—on both sides of the aisle—were largely opposed to it.
In July 2019, the House of Representatives voted 419-6 in favor of legislation that included repeal of the Cadillac tax, and the legislation that eventually repealed the tax had strong support in both chambers of Congress.
But there was certainly not universal agreement that the Cadillac tax should have been repealed. Policy analysts and economists explained extensively why the tax should have been allowed to take effect, noting that it would incentivize value rather than increased spending in health care.
The ACA's Cadillac tax was an excise tax on expensive employer-sponsored health insurance plans. The tax was initially supposed to take effect in 2018, but was delayed and then ultimately repealed before it ever took effect. The Cadillac tax was controversial from the start, over concerns that its CPI inflation-adjusted thresholds might not keep pace with the growth of health care costs.
Although the Cadillac tax generated considerable controversy in the early years of the ACA, it was never implemented. It has been permanently repealed, so your employer-sponsored health plan will not be subject to this tax, even if it's a very expensive plan.
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By Louise Norris
Norris is a licensed health insurance agent, book author, and freelance writer. She graduated magna cum laude from Colorado State University.
