- Sep 24, 2007
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We were having a discussion at the office today about the Cadillac tax and I realized how much of a game-changer this thing is going to be. To recap, the Cadillac tax is a 40% tax on premiums that exceed $10,200 for an individual or $27,500 for a family before the employer's contribution is counted. If your employer-provided insurance has an annual cost of $12,000 ($1,000/month) for an individual then the Cadillac tax is $720, regardless of how much you actually pay for the premiums out of your own pocket. In many cases the tax will be paid by the insurer, which will make employer-provided insurance more expensive, which will make the Cadillac tax more likely to trigger, in a death-spiral.
Originally I hadn't paid it too much attention as the thresholds are pretty high. What I forgot was that the thresholds are measured in 2018 dollars, not 2012 or 2010 dollars; this makes them much more scary. To whit:
For an individual with a $10,200 annual Cadillac threshold, that means the monthly premiums must be at $850. However, medical premium inflation currently runs about 6% higher than cost-of-living, which is the inflationary peg for the Cadillac tax. At 6 renewals until the Cadillac tax becomes effective, we can discount that $850/mo 2018 premium to a $599/mo 2012 premium. $599/mo before employer contribution is a "middle-class" insurance premium today, not a "Cadillac" premium. This means that many more employers will either have to scale back their insurance offerings or drop coverage entirely in order to avoid the Cadillac tax. What happens if they don't? Well, their insurance premium will trigger a Cadillac tax which will likely be paid by the insurer, which will trigger a premium increase, which will trigger a larger Cadillac tax next year.
For the family things aren't much better as the $2,292/mo premium in 2018 is actually $1,616/mo in 2012.
Add in the fact that premiums are expected to continue to outpace COLA (without even accounting for the gigantic increases expected in 2014 for the ACA go-live) and I think we'll find the Cadillac tax is this decade's version of the AMT...
Originally I hadn't paid it too much attention as the thresholds are pretty high. What I forgot was that the thresholds are measured in 2018 dollars, not 2012 or 2010 dollars; this makes them much more scary. To whit:
For an individual with a $10,200 annual Cadillac threshold, that means the monthly premiums must be at $850. However, medical premium inflation currently runs about 6% higher than cost-of-living, which is the inflationary peg for the Cadillac tax. At 6 renewals until the Cadillac tax becomes effective, we can discount that $850/mo 2018 premium to a $599/mo 2012 premium. $599/mo before employer contribution is a "middle-class" insurance premium today, not a "Cadillac" premium. This means that many more employers will either have to scale back their insurance offerings or drop coverage entirely in order to avoid the Cadillac tax. What happens if they don't? Well, their insurance premium will trigger a Cadillac tax which will likely be paid by the insurer, which will trigger a premium increase, which will trigger a larger Cadillac tax next year.
For the family things aren't much better as the $2,292/mo premium in 2018 is actually $1,616/mo in 2012.
Add in the fact that premiums are expected to continue to outpace COLA (without even accounting for the gigantic increases expected in 2014 for the ACA go-live) and I think we'll find the Cadillac tax is this decade's version of the AMT...