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Tax, Bankruptcy, Business, Divorce

Obamacare's "Cadillac Tax"

The "Cadillac Tax" is a 40% penalty (excise tax) on health insurance plans and a provision of Obamacare that takes effect on January 1, 2018. On that date, employers who provide insurance plans will get hit with a 40% excise tax on insurance premiums above $10,200 for an individual or $27,500 for a family plan.  It is estimated that in 8-10  years most health insurance plans offered by employers will be subject to the tax.

The money raised from the tax -- an estimated $90 billion over the next decade -- is essential to paying the cost of the Affordable Care Act.  The tax will hit the comprehensive health plans negotiated by unions over the years, giving companies an incentive to limit or terminate health benefits -- or pass the extra costs on to employees -- rather than pay the tax.  A recent survey suggested that many companies that face the tax intend to avoid it by having their workers pay a bigger share of health-care costs.  One survey found that over half of employers that currently offer health benefits assume that they will eventually be subject to the tax, if they don't change their plans.

Companies, however, don't expect to pay the tax.  Instead, they intend to change their plans to reduce employee benefits.  Most employers will soon begin to change their plans so they don't trigger the tax.  As a result, workers will see their benefits cut.  The size of the tax and the effect it's expected to have of reducing employee benefits and increasing the employees' costs for health care costs has led to a growing consensus among politicians and interest groups against the tax.  

Hillary Clinton and Bernie Sanders have said that they support the repeal of the Cadillac tax. Their opposition is largely driven by the labor unions' dislike for the tax.  In fact, not just Hillary and Bernie, but labor unions, the U.S. Chamber of Commerce and Republicans have all lined up against the Cadillac Tax.    Workers can expect reduced health benefits and more health-care related costs very soon.  Their deductibles and share of health insurance premiums will increase.  This will be a very important issue for the next President and everyone should listen carefully to their plans.  

However, it won't be easy to replace the tax's role in controlling health-care costs, and generating tens of billions of dollars of revenue for the U.S. Treasury.  The tax helps pay for health care coverage for those who are subsidized by the federal government (health insurance paid by government) due to their low incomes. It is possible that those who don't work and have their health insurance subsidized by the government through Obamacare will have better coverage than the average worker. 

Gene Bowman, Tax Attorney & CPA