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Cadillac tax: Is health insurance a luxury?

cadillacOne of the most controversial pieces of the current health care reform bill is the introduction of the so-called "Cadillac tax" -- an excise tax on premium insurance plans that would be used to offset the estimated $940 billion price tag for health care reform.

The term "Cadillac tax" was coined after the idea was introduced as part of President Clinton's health care proposal in the 1990s. The tax targets high dollar insurance plans provided by employers that are thought to be a luxury when compared to most insurance plans.
Sen. Max Baucus (D-Mont.) suggested using a "Cadillac tax" as part of the current health care proposal in order to pay for the plan. The tax would be imposed on high-cost plans provided by employers that exceed $8,500 for a single person or $23,000 for a family per year. Those amounts are roughly twice as much as the average annual health insurance contributions made by employers. According to a recent Kaiser Family Foundation study, the average employer contribution for health care in 2008 was $4,247 for individuals and $9,860 for families.

The tax would apply only to the amount over the cap, which is $21,000 for most workers. In other words, a $40,000 employer-provided plan for a family would be subject to an excise tax of $7,600 (40% of the difference between the benefit of $40,000 less the $21,000 cap). The employee would not be responsible for the tax; the burden would be on the insurer or on employers who act as their own insurers. In addition to raising revenue, the justification for the tax is that insurers might feel pressure to offer more cost-efficient plans.

Under the Senate plan, the cap would be raised for plans for workers in high-risk jobs and retirees over the age of 55. Those caps would be $9,850 for a single person and $26,000 for a family per year.

The cap can be modified in certain circumstances based on occupation, geography and age. Sen. Harry Reid (D-Nev.) offered a "manager's amendment" to the Senate's version of the plan, which among other things, added longshoremen to the list of those who could be exempted from the tax; other exceptions include electrical linemen, law enforcement officers, firefighters, emergency medical first responders, construction workers and farmers.

The exemptions and exceptions are thought to have been included to satisfy unions who have otherwise opposed the tax; without the support of the unions, the Democrats might not have been able to push the Senate version through. According to a study conducted by the National Opinion Research Center and published in the January 2009 issue of Health Affairs (not available online), 21% of companies with unionized workers offered benefit plans in excess of $23,000.

Flexible spending accounts (FSAs), which allow employees to use pre-tax dollars to pay for out-of-pocket costs that insurance won't cover, such as diabetic supplies, would also be affected. Under the Senate version of the bill, there would be a $2,500 annual limit on those plans. The money in the plan would also count toward the caps for purposes of the "Cadillac tax."

Although the tax is meant to affect high-dollar insurance plans, the Congressional Joint Committee on Taxation estimates that 14% of family health policies and 19% of individual policies would be hit by the tax in 2013; 37% of family policies and 41% of individual policies would be affected by 2019. As a result, Democrats have reportedly worked out a deal to delay the imposition of the Cadillac tax from 2013 to 2018; Republicans are expected to oppose the measure on procedural grounds.

President Obama's alternative proposal includes pushing off the "Cadillac tax" until 2018. Obama also suggests increases the cap to $10,200 for individuals and to $27,500 for families.

The number of proposals and alternatives keeps changing almost daily. It will be interesting to see which pieces of the bill survive a vote in the House. The final House version must be close to the Senate version if the bill is to become law. That said, if there are no changes to the Senate bill, the Joint Committee on Taxation has estimated that the caps would affect 15% of employment-based health insurance plans in the first year alone. Is yours one of them?

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