Much has been made of the tax on "Cadillac" health care plans proposed within the Senate health care bill. Any employer-provided plan with premiums in excess of $8,500 for individuals or $23,000 for families would be subject to a 40% tax on premiums in excess of that cap.
The goal of this "Cadillac" tax is twofold. It would force employers to cut benefits to teachers, firefighters and others with "Cadillac" plans. This would, theoretically, cut the percentage of GDP spent on health care costs. It would also raise an estimated $150 billion to pay for those newly-covered under the health care bill.
My guess, however, is that this plan will just shift costs. And here's why...
For purposes of full disclosure, I run unified bargaining meetings for my county's affiliate to the Michigan Education Association. During our meetings, we review contract negotiations at dozens of local school districts.
And the reality is that each teacher has a number attached to his or her name. That number includes the total cost of the teacher to the district. It includes wages, retirement contributions and health care premium payments.
There are many possibilities when a contract is negotiated. Many districts, faced by the rise in health care premiums, have held the line on wage increases. So, essentially, teachers have been subsidizing the costs of "Cadillac" plans via reductions in wages. And, honestly, most teachers are willing to pay that price to ensure that their families have quality care.
However, I can see a different dynamic possible with the proposed health care bill. It is certainly possible to bargain a contract that pays health care premiums up to the "Cadillac" plan limit. Any additional premium amounts could be charged to the teacher in the form of an employee contribution.
This employee contribution to the health care plan could then be matched by the employer and paid into straight wages. This money would certainly be subject to taxation. However, there are many ways to avoid taxation in that circumstance. A teacher could shift that money into a pre-tax 403b or 457 plan and defer taxation. A teacher could use that to pay for pre-tax life insurance policies.
I would also be interested to know if any kind of cafeteria-style pre-tax plan would be possible under the new health care bill. If these are allowed, it might be possible to shift the "Cadillac" plan excess into wages and then dump them directly into the cafeteria plan. Then, possibly, an employee could use the cafeteria plan to pay for the increased employee health care contributions.
Hehe. I think that last idea might be just a bit too tricky. But the point remains that there will be many ways to avoid the tax on "Cadillac" plans if this proposed health care reform is implemented. And I question the idea that this provision will, in fact, bring billions of dollars into the U.S. Treasury.