Who Will Be Most Affected by the Cadillac Tax?

The so-called Cadillac tax is one of the few aspects of the Affordable Care Act that has united Democrats and Republicans. Both parties disliked it so much that they passed a bill that delays the tax until 2020. Now a new analysis from The Commonwealth Fund has found that the tax will likely be more progressive than initially thought.

The Cadillac tax is a 40% excise tax on employer plans exceeding $10,200 in premiums per year for individuals and $27,500 for families. The tax’s features are supposed to maximize revenue and minimize coverage disruptions. And The Commonwealth Fund has determined that the tax will only have a modest impact on total health spending.

It is important to note that premium contributions by employers and employees count against the threshold as do most contributions to health savings accounts (HSAs), flexible spending accounts (FSAs), Archer medical savings accounts, and health reimbursement accounts.

According to the report, when employers offered these accounts, employees were encouraged to buy more generous plans than they normally would have, which lead to higher spending through greater demand for medical care.

“High-income workers benefit the most because they have the highest tax rates and also have access to generous benefits, take up these benefits, and contribute to savings accounts,” the authors wrote.

Ownership and funding of HSAs and FSAs are typically more skewed toward high-income workers, and as such they will be most affected, initially, by the tax. Furthermore, account balances are highest among the highest earners, according to the research brief.

The result of the Cadillac tax will likely be that employers limit contributions to FSAs and HSAs, and that employers will offer plans with more restrictive networks.

“By taxing only the portion of plan costs that exceeds a threshold, the HCPT ensures that most employer-sponsored benefits will remain intact. However, the HCPT limits the tax benefits of health savings accounts, which may reduce the appeal of high-deductible plans,” the authors concluded.