Employer Health Benefits Saved by the Spending Bill

Internal Revenue Code section 4980I, as enacted by the Patient Protection and Affordable Care Act (ACA), imposes a 40%, nondeductible excise tax on employers, health insurance issuers, and/or other entities administering health plan benefits if the aggregate value of applicable employer-sponsored coverage exceeds a specified annual dollar limit. The industry calls this the “Cadillac Tax.”

Since enactment of the ACA, several industry groups have fought to have this portion of the bill repealed—the Alliance to Fight the 40 was established for that purpose. The appropriations bill, signed by President Donald Trump December 20 included a provision that did just that.

Prior to passage of the appropriations bill, the efforts of industry groups helped to get the effective date of the Cadillac tax delayed. First the effective date was moved to 2020, but under a subsequent bill, it was set to become effective in 2022.

In 2015, the Kaiser Family Foundation issued a report saying it was likely that many employers would revise their plans to avoid the tax, at least initially, through modifications that could include reducing options for employees or shifting costs to workers in the form of higher deductibles and other patient cost sharing.

According to Kaiser’s analysis, the tax, calculated on total costs for an employee across health benefit programs but assessed separately against coverage providers, may mean an employer using multiple providers for health benefits may not know until the end of the year whether they owe a tax or how much it would be. The potential complications associated with allocating the tax burden and managing reimbursements to insurers (and potentially other service providers) may have spurred employers to simplify their benefit arrangements, and reduce the number of options for employees and the number of coverage providers. One benefit that may have been at particular risk is the option to contribute to a flexible spending account (FSA) because, as currently structured, it allows employees to add up to several thousand dollars to their benefit costs.

Now that the appropriations bill is passed, industry groups are saying these possibilities are eliminated.

“Working families have been facing higher costs and shrinking coverage as a result of this looming tax,” said James A. Klein, president of the American Benefits Council. “Today is a great day for the 178 million Americans who get their health care coverage from an employer. Repealing this onerous tax will help protect the employer-provided health care system that efficiently and effectively covers more than half of all Americans.”

Annette Guarisco Fildes, president and CEO of the ERISA Industry Committee (ERIC), said, “The existence of the tax forced employers to scale back their benefit offerings, and increasingly shift rising health care costs to employees as the only way to avoid the tax. Now, employers will be able focus on the future with certainty, while they continue to champion innovation in the health care system to bring down costs and improve health care quality, in order to provide the high-value benefits employees and their families have come to rely on.”

According to a blog post from Mercer, other ACA changes in the appropriations bill include repeal of the taxes on health insurers and medical devices, as well as extension for ten years of the annual employer fee for the Patient-Centered Outreach Research Institute (PCORI).