Compensation and Benefits

GFOA Policy Statement on the 40% Exise Tax on Health Plan Premiums

The non-deductible excise tax on employer-sponsored health coverage that provides “high-cost benefits,” also known as the Cadillac tax, is a 40% excise tax on health plan premiums that cost more than $10,200 for individual plans and $27,500 for family coverage annually. The amounts are the total premiums, which is generally paid in part by the employer and in part by the employee, as well as employee contributions to health savings accounts or flexible spending accounts, which many state and local governments use to complement employee health benefits plans. Despite an age and gender adjustment for employers with higher percentages of older workers and women, there is no adjustment for regional differences in health spending, which tend to drive health-care costs. Although the tax would nominally be levied on insurers, governments are concerned that it would be passed on to employers and, ultimately, to workers in the form of more expensive health care. 

This issue is vitally important to states and municipalities, which continue to work diligently within sometimes severe budget constraints to provide benefit plans that will help them attract and retain a quality workforce, in competition with private-sector wages and salaries.

In early 2015, the Congressional Budget Office (CBO) estimated that the Cadillac tax would generate $87 billion in revenue. Of this total, 25% would comprise revenue actually received from the excise tax, while the rest – approximately 75%, or $65 billion – would come from tax revenues on increased taxable wages. In other words, the federal government is assuming that employers will decrease benefits and increase wages simultaneously, an assumption that is further complicated in states that maintain collectively-bargained contracts. In either scenario, direct costs to local governments will rise.
Recent federal legislative and regulatory efforts seek to address the excise tax tied to the Patient Protection and Affordable Care Act that has many major U.S. employers considering the costs of compliance as the 2018 implementation date draws nearer.

GFOA is committed to working with federal policy makers to develop and support the health care reform initiatives in order to expand access to quality care and control the growth of health care costs. GFOA continues to support expanded health care coverage resulting from the Affordable Care Act and acknowledges that implementation of the policy requires adequate federal funding supporting its sustainability. However, GFOA opposes efforts by the federal government to impose unfunded mandates that will further escalate the cost of employer-provided health care insurance on state and local governments. In so doing, GFOA supports legislative efforts to repeal the 40% Excise Tax on Health Plan Premiums, as well as alternative approaches that would mitigate the effect of the excise tax on state and local governments.

The means for funding the implementation of the Affordable Care Act should preserve the authority of state and local governments to design and maintain health insurance arrangements that are tailored to the specific needs of the employers. These arrangements should:

(a) provide flexibility for the significant regional variations in health care costs;
(b) support initiatives to reduce the rising costs of healthcare in order to ensure adequate health care benefits to employees, including programs designed to mitigate total health care costs such as wellness programs, on-site medical clinics and tele-medicine; and
(c) be affordable, financially prudent, and meet the sponsor’s workforce management goals.