Excise & Health Reform, Part I, or: “What is an Excise & How Would this Tax on Cadillac Plans Work?”
Filed under: Health Benefit Costs, Proposed Legislation
Photo by Tamorlan
[Ed. Note: We are very pleased to introduce James Christiano to the blog. He is a law student here at Seton Hall Law and, after receiving his B.A. in psychology in 2002, worked from 2003 to 2008 as a District Adjudications Officer for the United States Citizenship and Immigration Services (USCIS), an agency within the Department of Homeland Security. During his time with USCIS, James was primarily responsible for adjudicating applications for immigration benefits, including naturalization, lawful permanent resident status, and work authorization. As you might imagine, James has an eye for regulatory analysis, and will be offering a series of posts (to start) on provisions in the health reform bill regarding "excise" along with analysis as to their potential impact.]
One of the many controversial aspects of healthcare reform is the Senate’s proposed excise on high-cost health insurance plans. Such high-cost plans have often been referred to, arguably inappropriately, as “Cadillac plans.” This post provides an introduction to the proposed excise on high-cost plans as provided in the Senate Bill. Subsequent posts will address the ramifications and controversies of the excise. (Note: The Senate Bill contains other excise provisions, including a 5% excise on elective cosmetic surgery procedures, which this post does not discuss.)
What is an excise?
Black’s Law Dictionary defines excise as “[a] tax imposed on the manufacture, sale, or use of goods (such as a cigarette tax), or on an occupation or activity (such as a license tax or an attorney occupation fee).” Excises are commonly, and redundantly, referred to as “excise taxes.”
A quick skim of Subtitles D and E of Title 26 of the United State Code provides one an idea of the types of goods and activities that Congress has deemed deserving of an excise. A few examples are luxury passenger automobiles, certain vaccines, communications services, authorized and unauthorized wagers (i.e., gambling), petroleum, firearms, cigarettes, and “excess expenditures to influence legislation.”
Excise currently imposed on group health plans
Federal law already subjects group health plans to an excise under certain circumstances. For instance, 26 USC § 5000 imposes an excise on certain group and large group health plans deemed “nonconforming” — i.e., those that do not comply with the requirements of particular subsections of 42 USC § 1395y(b)(1) and (2). Additionally, 26 USC § 4980B and D impose an excise (as a form of penalty) on group health plans that fail to meet HIPAA and COBRA requirements.
Excise on high-cost plans in the Senate Bill
The Senate Bill includes a provision imposing a 40% excise tax on high-cost, employer-sponsored health insurance plans. High-cost plans would include those costing $8,500 for individuals and $23,000 for those other than self-only, beginning in the year 2013. Starting in 2014, the threshold for high-cost plans would be increased annually by the change in the Consumer Price Index (CPI) plus 1%. These thresholds are further increased for individuals employed (or previously employed) in certain high-risk professions or the repair or installation of electrical or communications lines. Also, residents of states that rank in the top 17 among the highest-costing average employer-sponsored health insurance plans would be subject to more lenient thresholds for the years 2013, 2014, and 2015 (120%, 110%, and 105% of the threshold, respectively).
For each given high-cost plan, the coverage provider would be responsible for paying a 40% tax on the amount equal to the cost of the coverage exceeding the threshold. For example, a coverage provider would be subject to an excise of $400 for a plan costing $24,000 in 2013 ($24,000 - $23,000 = $1,000; $1,000 x 40% = $400). A coverage provider may be the insurance issuer, the benefits plan administrator, or the employer, depending on the coverage arrangement.
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