policy

Taxing Employer Coverage

ISSUE

Beginning in 2022, the federal government will impose a 40 percent excise tax on the value of health benefits above a government-determined amount imposed by the Patient Protection and Affordable Care Act (ACA), commonly referred to as the “Cadillac Tax”.

Current tax rules permit employers to deduct their expenses for employee health care from corporate income just as they deduct employees’ wages and salaries as ordinary business expenses. Also, employees can exclude the value of these contributions from their income for tax purposes and use pre-tax dollars to pay for their share of the cost.

Some states and localities (San Francisco) have enacted taxes on employer-sponsored coverage to fund coverage expansion, Medicaid budget shortfalls, exchange-stabilizing reinsurance programs and others.

POSITION

Congress should:

  • Eliminate the ACA’s Cadillac Tax; and
  • Maintain the current tax treatment of employer-sponsored coverage.

States and localities should not tax employers, employees and their families to fund local coverage initiatives.

WHY IT MATTERS

  • Any tax that raises the cost of health benefits will harm the more than 181 million Americans who rely on and value employer-sponsored health coverage.
  • According to our survey data, absent plan changes, 73% of companies who responded will have at least one plan that triggers the ACA’s Cadillac Tax in 2022 and 94% will in 2026. If not repealed, in a few years it will affect nearly 100% of employer plans since the tax is indexed to general inflation, not medical inflation, which is consistently much higher. Additionally, the tax will disproportionately impact health plans with greater numbers of women, seniors, the sick, the disabled, and people living in high-cost areas.
  • Rather than focus on demand-side taxes that will raise costs for working Americans and their employers, Congress should focus on supply-side drivers of medical inflation and unnecessary costs.
  • The tax advantages for employer-sponsored coverage help make health care more affordable for employees and their families and encourage employers to invest in health benefits.
  • States and local local taxes on employer plans increase employers’ and employees’ costs without providing additional benefits to employees. Additionally, they increase employers’ administrative burden through increased local compliance complexity.

Also of Interest

Helth Benefits Taxation
Access all Public Policy resources on healh benefits taxation.

Excise Tax
Access all Public Policy resources on the Excise Tax.

2020 Election Health Policy Priorities
Access all Public Policy priorities leading up to the 2020 election.

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