Is There a Cadillac Tax in Your Future?

Is there a “Cadillac” tax on your federal employee health benefits in the future? The tax goes into effect in 2018. Here are the details and how federal employees could be affected.

Federal employees have, for the most part, not been directly impacted by the Affordable Care Act (usually referred to as “Obamacare”). The biggest direct financial change for federal employees could start to take effect in 2018.

Several changes have occurred in federal health insurance plans so far. Insurance plans under the Federal Employee Health Benefit Plans (FEHB) were altered to allow adult children to remain on the health insurance plan for parents until they are 26 years old. (See Temporary Health Coverage For Adult Children of Federal Employees)

The deduction for flexible spending accounts for health care was reduced from $5000 to $2500 (then increased to $2550 for 2015). And, in 2013, the medical expense deduction threshold went from 7.5% of adjusted gross income to 10% of adjusted gross income.  In effect, this meant that Federal Employees (and most middle class Americans) would not be able to deduct medical expenses unless they move to a high deductible health plan with a health savings account.

What is the Cadillac Tax?

In 2018, the “Cadillac tax” portion of Obamacare goes into effect. This provision will impose a 40 percent tax on the cost of individual health plans above $10,200 for individuals and $27,500 for family coverage, with both employer and worker contributions included. Every dollar above those thresholds is taxed at the 40 percent rate. The tax is not deductible by the employer and the thresholds are indexed to inflation.

Jonathan Gruber, an economist at the Massachusetts Institute of Technology, has been making the news recently. He was influential in the writing of the health care law and videos have been recently found in which he explains how the law was fashioned to make it difficult to understand in order to minimize opposition to passing the law. And, with regard to the Cadillac tax on insurance plans, he noted that the real impact of the tax would fall on individual Americans: “We just tax the insurance companies, they pass on higher prices that offsets the tax break we get, it ends up being the same thing. It’s a very clever, you know, basic exploitation of the lack of economic understanding of the American voter.”

In another video, he explained that the only way to get rid of the tax preference for employer-sponsored insurance was “by mislabeling it, calling it a tax on insurance plans rather than a tax on people, when we all know it’s a tax on people who hold those insurance plans.”

The MIT health care writer also acknowledged that the “Cadillac” tax term is misleading. It is misleading because the reach of this new tax will expand. “Over time it’s gonna apply to more and more health-insurance plans,” he said. And, in a separate speech, he noted that the “tax that starts out hitting only 8% of the insurance plans essentially amounts over the next 20 years [to] essentially getting rid of the exclusion for employer-sponsored plans.”

Cadillac Tax and the FEHB

How the tax will impact future changes to the federal employee health insurance program remains to be seen. There are some companies that will be impacted in 2018 because they provide generous health insurance coverage and this tax will have to be paid. One purpose of the tax is to put financial pressure on companies to offer plans that are less generous based on the theory that if people see more of the direct costs of their health care, they will be more conservative in using their insurance. An analysis by the American Health Policy Institute found that large companies subject to the tax will pay an average of $2.1 million per year from 2018 to 2024 or about $2,700 per employee. The Congressional Budget Office projects that the tax will generate roughly $80 billion over the next 10 years for the federal government.

Since the FEHB is sponsored by the government, and the federal government is the employer, would the Office of Personnel Management (OPM) pay the tax to another federal agency? Will the FEHB cease to offer plans that may exceed the amount of $10,200 for individuals and $27,500 for family coverage to avoid paying the tax by cutting back on benefits? It would appear that OPM will either have to pay the tax on FEHB plans that exceed the benefit cap, or choose to have federal employees pay for more of their own Health Care costs as the impact of the tax gradually hits more of the health plans under the FEHB.

Since 1999, health care inflation has averaged 8.83% per year. It has been less than that for plans in the FEHB, on average.

Based on the rate of inflation in the average rate increases for plans under the FEHB, the Cadillac tax will not impact many federal employees in 2018. The SAMBA high self plan, with a current total cost of $736 per month, could be impacted by the Cadillac tax. The Blue Cross total cost per month is currently about $635 per month (about $7619 per year) for the standard self only plan. Unless there is a significant jump in the rates for the next several years, it is also unlikely to hit the “Cadillac tax” figure.

The number of federal employees who will be impacted in 2018 is likely to be very small unless insurance premiums take a big jump. The tax is likely to start having an impact in future years unless changes are made to the plans in the FEHB or the law is changed in some way.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47