One of the great advantages of working for an employer is the ability to use company-paid benefits. Many workers choose to work for an employer to get benefits, rather than be self-employed. A new excise tax on health care benefits may have a huge impact on your personal finances in the next few years.
The Cadillac tax
The upcoming tax is part of the Patient Protection and Affordable Care Act (PPACA). This legislation imposes a 40% tax on the value of health care programs above a certain dollar amount threshold. This excise tax is referred to as the “Cadillac tax”, since it is designed to tax the most generous health care programs.
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Towers Watson has a great article that explains this tax. Half of all large US companies will be affected by the excise tax in 2018- when it is first assessed. The cumulative effect of the tax is estimated to be $78 billion between 2018 and 2023. This is a non-deductible tax paid by the employer. Since it is non-deductible, the tax has a bigger impact on a company’s earnings.
Casting a wide net
Like many taxes, the devil is in the details. There are factors that allow the excise tax to cast a wide net- and tax more dollars. These factors expand the definition of a “health care program”.
- Employer and employee premium payments: The tax applies to both company and worker paid premiums for insurance. Now, if the worker is paying the premiums- how is that a “worker benefit”? I don’t know- but their premiums payments count toward the value of the program.
- Other components that are taxed: The excise tax covers flexible spending dollars, health care reimbursement benefits and pre-tax contributions to a health savings account. So, the tax is based on more than just the value of the medical coverage itself. You need to distinguish between the value of your medical plan- and the benefits your company gives you to pay for that plan.
- Increases in the tax threshold: Perhaps the biggest impact on the potential tax liability is how the tax threshold is increased over time. The tax threshold is indexed to inflation- specifically to the Consumer Price Index, or CPI. Inflation is increasing at a much slower rate than the increase in health care costs. While inflation may adjust the threshold by 1.5 to 2%, health care cost increases may be 5-10% or higher. The result is that more health plans will move above the threshold- and be subject to the tax.
The impact on your finances
The Cadillac tax may affect you in several ways:
- Less attractive benefits: Your firm may reduce the value of your health benefits to avoid going over the tax threshold.
- Higher taxes: A company that is subject to the tax may pass on the cost of that tax to employees. The cost may be recovered by the firm by increasing the worker’s share of the health care costs.
- Fewer full-time employees: Given the cost of the plan- and the additional potential taxes- companies may limit the number of workers they hire that are eligible for health care benefits.
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Pay attention to how your employer addresses the Cadillac tax issue. Their choices can have a big impact on your finances. If you stay informed, you can plan for the impact- and have some peace of mind.
Has your employer addresses this upcoming tax? I’d love to hear from you.
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