The myth of the “Cadillac health plan”

There’s a dangerous myth out there in the health reform debate: the myth of the “Cadillac plan” with lavish benefits.  The myth is dangerous because it leads some to conclude that it’s a good idea to make health benefits subject to income and other taxes, since a only a few rich people with overly-generous benefits would have to pay the tax.

Sure, there are a few CEOs who get extra health benefits along with their stock options and company jets.  But those aren’t the only ones who’d have to pay if benefits were taxed, according to a recent study in the law journal Tax Notes.

The study, by Elise Gould, of the Economic Policy Institute, and Alexandra Minicozzi, of the Congressional Budget Office, concluded, “Our findings contradict the unsubstantiated, often

repeated claim that those with overly generous plans - ‘Cadillac plans’ - are the biggest winners under the current tax treatment.”

The companies and workers with the highest premiums - those who would have to pay up if high-cost policies were taxed - are small companies and employers with an older workforce.  Small companies are charged more by insurance companies. Older workers use more health services than younger ones, on average, and that’s why premiums are higher.

By the way, even young employees who happen to have lots of older co-workers would be subject to a tax penalty.

Gould and Minicozzi also found that it’s not only a few workers who would pay.  For example, one proposal from a 2005 tax reform study group called for taxing benefits that cost more than $5,000 for individuals or $12,500 for families.  Under that plan, the tax would hit 19.5 percent of single workers and 41.1 percent of workers with families, the study found.    

The authors advised, “The administration of such a policy could be costly for employers and create unanticipated problems for affected workers.”  

We’ve posted an “issue spotlight” on the issue of taxing benefits.