Cadillac Tax Repeal Highlights Busy Week for Your Benefits in Washington

December 23, 2019

In a move that is likely to save you, your employees and insurance companies money, President Trump signed a $1.4 trillion spending deal on Friday that included a repeal of the Cadillac tax. The Cadillac tax, which was scheduled to take effect in 2022 as part of the Affordable Care Act (ACA), was a 40 percent excise tax that applied to employer-sponsored health plans exceeding certain cost thresholds ($11,200 for single coverage and $30,150 for family coverage in 2022).

Cadillac Tax repealed

Both employer and employee contributions to Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), Health Reimbursement Arrangements (HRAs) and health insurance premiums would have been included when calculating whether the value of health benefits exceeded the cost thresholds.

The Cadillac tax was to be paid by insurance companies, employers and administrators, but Tax Policy Center simulations suggested that the tax would “have the largest relative impact on after-tax income” on middle-income families. Employers facing the Cadillac tax may have opted for cheaper health plans or lower HSA, FSA and HRA contributions to avoid paying the tax, which could also have resulted in higher taxes on income and payroll.

The Cadillac tax has long faced bipartisan criticism and was opposed by healthcare advocacy organizations, such as the Employers Council on Flexible Compensation (ECFC). Discovery Benefits, a WEX company, is a longtime member of the ECFC.

“We want to thank Congress and the Administration for recognizing the deleterious effect that the Cadillac tax would have on employer sponsorship of health care plans, especially consumer-directed health plans, and for repealing the tax,” ECFC Executive Director Martin Trussell said in a press release

Tax rescinded on Commuter Benefits

Additionally, as part of the 2020 spending package, tax-exempt entities that provide their employees with Commuter Benefits will get relief from an unrelated business income tax (UBIT) provision enacted as part of the Tax Cuts and Jobs Act of 2017. This provision required tax-exempt entities to pay UBIT “on any qualified transportation fringe benefit provided to employees for which employers are no longer permitted to take a deduction.”

The spending bills signed by President Trump removed the UBIT for tax-exempt entities who offer Commuter Benefits.

“That was time and money that would have been better spent helping people in local communities,” National Council of Nonprofits Vice President of Public Policy David Thompson said of the UBIT in a press release. “Special praise goes to the thousands of nonprofits across the country who mobilized to tell Congress to fix the costly mistake.”

Additional ACA tax repeals

The 2020 spending bill includes repeals of two other ACA taxes:

  • A 2.3 percent excise tax on certain medical devices, which manufacturers, producers and importers paid on sales of specific medical devices.
  • The Health Insurance Tax (HIT), which was an annual excise tax on health insurance providers. The burden of this tax was also expected to be passed on to consumers.

ACA’s individual mandate ruled unconstitutional

A panel of judges for the Fifth Circuit Court of Appeals ruled this week that the provision of the ACA requiring most people to have health insurance is unconstitutional. The rest of the ACA remains in place, with the panel sending the case back to a federal district judge for “a more searching inquiry” into whether the ACA would remain constitutional without the individual mandate.

The ACA is expected to remain in place at least through the 2020 election.

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