Cadillac tax will cost Illinois billions without health-benefit reforms

If retiree health benefits remain unchanged, Illinois taxpayers will foot the bill for an estimated $1 billion through 2035 in Cadillac taxes on retiree health-insurance plans alone.

The Cadillac tax, a provision of the Affordable Care Act that adds an additional tax liability on generous employer-sponsored health-insurance plans, is set to begin taking effect in 2018.

This tax has big implications for employers, both public and private. In particular, government unions in Illinois and other states are fearful of its effects. The Cadillac tax will impose a 40 percent excise tax on employer plans with a value above $10,200 for an individual plan and $27,500 for a family plan. For health insurance provided through collective-bargaining agreements, the $27,500 threshold applies to both individual and family plans. The value of some states’ and municipalities’ high-end health-insurance plans is set to trigger this tax.

The California Public Employee Retirement System, for example, is now realizing what this could mean for its members. According to their own report, the Cadillac tax will cost an average of $550 for every one of their 1.4 million active and retired plan participants if the tax were in effect today. That is the equivalent of more than $700 million in taxes – without a penny being directed to their own members’ patient care.

Illinois is in a potentially more dire position. The state is awaiting a verdict from the Illinois Supreme Court on whether retiree health benefits are absolute or can be altered. If they cannot be altered, Illinois taxpayers will be locked into footing the bill for an estimated $1 billion through 2035 in Cadillac taxes on retiree health-insurance plans.

Gov. Bruce Rauner’s administration is currently negotiating a bargaining agreement with Illinois’ largest government union, the American Federation of State, County and Municipal Employees, on a contract that would be in effect for part of 2018. If health benefits are left unchanged, the value of some health-insurance plans for Illinois’ active state employees and their dependents is so generous that it could trigger $2 billion in Cadillac taxes over the next 20 years. That would be in addition to the $1 billion for retiree health insurance.

Instead of passing these cost increases on to their employees, private-sector employers are offering less generous plan options to avoid the Cadillac tax. States, such as California and Illinois, and municipalities should follow suit in order to avoid this harsh penalty. Every dollar a state spends on the Cadillac tax is money that cannot be directed toward actual health-care services nor to citizens’ top priorities.