Don’t Repeal the Cadillac Plan Tax—Replace It

Beginning in 2018, high-cost, private sector health plans will be subject to a special levy, popularly known as the “Cadillac plan” tax. Under a provision of the Affordable Care Act, health plans must pay a tax equal to 40 percent of each employee’s health benefits to the extent they exceed $10,200 for individual coverage and $27,500 for family coverage.

In many ways, the Cadillac Plan tax is a stealth tax. It doesn’t even become effective until eight years after the Affordable Care Act passed Congress. And back in 2008, the thresholds were so high that it must have seemed like the tax would apply only to a handful of employers. But health care inflation has a way of escalating base line costs through time.

So much so that a Kaiser Family Foundation study estimates that the first year it is applicable, one in four employers will be subject to the Cadillac plan tax unless they change their benefits. Going forward, the thresholds are indexed to the rate of general inflation—which historically is well below the rate of medical cost inflation. As a result, the study estimates that the share of employers potentially affected could grow to 30 percent by 2023 and 42 percent by 2028.

Ostensibly, the purpose of the Cadillac plan tax was to help pay for the cost of Obamacare. But that can’t have been its real purpose, since employers can easily avoid the tax by spending less on health benefits and more on something else—like more generous pension contributions.