The last major piece of President Barack Obama's health care law could raise costs for thrifty consumers as well as large corporations and union members when it takes effect in 2018.
The so-called Cadillac tax was meant to discourage extravagant coverage. Critics say it's a tax on essentials, not luxuries. It's getting attention now because employers plan ahead for major costs like health care.
With time, an increasing number of companies will be exposed to the tax, according to a recent study. The risk is that middle-class workers could see their job-based benefits diminished.
First to go might be the "flexible spending accounts" offered by many companies. The accounts allow employees to set aside money tax-free for annual insurance deductibles and out-of-pocket health costs. That money comes out of employees' paychecks, and they're not able to use it for other expenses. Savvy consumers see it as a way to stretch their health care dollars.
The catch is that under the law those employee contributions count toward the thresholds for triggering the tax.
There are other wrinkles: Companies in areas with high medical costs, such as San Francisco, are more likely to be exposed to the Cadillac tax than those in lower-cost areas like Los Angeles. Ditto for employers with unionized workers who won better benefits through bargaining.
Republicans in Congress and a sizable contingent of Democrats are calling for repealing the tax. Hillary Rodham Clinton, the front-runner Democratic presidential candidate, says she's concerned and would re-examine the tax. Since it doesn't take effect right away, it's an issue for the next president.
"As currently structured, I worry that it may create an incentive to substantially lower the value of the benefits package and shift more and more costs to consumers," Clinton said in response to a candidate questionnaire from the American Federation of Teachers.
The Cadillac tax has two purposes: to act as a brake on health care spending and to raise money for covering the uninsured.
The value of employer-sponsored health insurance is tax-free to workers and tax-deductible for companies. It amounts to an income tax break worth $206 billion this year, according to the president's budget. Many economists call that an indirect subsidy that encourages wasteful spending. They argue that if not the Cadillac tax, some other kind of limit is needed. Major Republican health overhaul plans have also proposed curbs.
A recent study from the nonpartisan Kaiser Family Foundation estimated that 26 percent of all employers would face the tax in at least one of their plans during its first year, 2018. Nearly half of larger companies would face the consequences of the tax that same year, because they tend to offer better benefits.
"It is a pretty broad-based tax that has a powerful effect on controlling the growth of premiums," said Larry Levitt, a co-author of the study. "The downside is workers may see an increase in their out-of-pocket costs."
Since the tax is indexed to general inflation, which rises more slowly than health insurance premiums, over time it would affect a growing share of health plans.
The Obama administration says such studies overstate the potential impact. The Treasury Department said in a statement that only "a small fraction of workers" would be affected. Regulations to implement the tax could soften some feared consequences, but proposed rules aren't expected until late this year or early next.
The Cadillac tax is 40 percent of the value of employer-sponsored plans that exceeds certain thresholds: $10,200 for individual coverage and $27,500 for family coverage. The tax is levied on insurers and plan administrators, who are expected to pass it back to employers. The 40 percent rate is well above the income tax rates that most workers face.
Joe Kra of the benefits consultancy Mercer said he believes many employers will be required to make fundamental changes in their health plans to mitigate the tax's impact. Measures such as ditching flexible spending accounts may not be enough. That would accelerate a shift to high-deductible plans that require workers to pay a bigger share of health costs before insurance kicks in.
Here are some other potential twists:
— The Treasury Department says it is considering an exemption for flexible spending account contributions for dental and vision care, which are two popular uses.
The health care law already limited FSA contributions and without such accommodations, the Cadillac tax could lead to their demise.
"A benefit that you are offering your employees so they can save money on taxes is going to wind up costing you money," said economist Paul Fronstin of nonprofit Employee Benefit Research Institute.
— Treasury is also trying to figure what do about a different kind of workplace arrangement called a "health savings account."
A growing number of workers have high-deductible health insurance that comes with tax-sheltered health savings accounts, or HSAs, that they and their employer can contribute to.
But if an employee has his or her contribution deducted from their paycheck, it could potentially trigger the tax.
Officials say they're considering options.
