There is, and will continue to be, much debate about whether or not the "Cadillac tax" will work when it is officially effective in 2018 or what if any consequences will arise from it. But what you do not hear discussed often is what it is exactly.
For those still in the dark about the Cadillac tax, in this article I look to share with you my insights on exactly what this impending tax will be and who could be affected.
What is the Cadillac Tax?
Let's start with the basics. While the name may be appalling to some, the Cadillac tax is an awesome nickname because it is a component of the Affordable Care Act. It is only imposed on the most costly employer-sponsored health plans (i.e., âThe Cadillacs of health coverageâ).
While it is for insurance companies to pay, it is more than likely going to be passed down to employers, and there is even some talk that employees may end up paying it. The plans that will be affected by this tax are those that have premiums for just themselves that are more than $10,200 annually or $27,500 for families.
How the Cadillac Tax Works
At the most basic level, each plan that exceeds the thresholds we covered above will have to pay a tax of 40 percent of the extra amount, starting in 2018. For example, a family pays $30,000 a year for their premium, which causes them to be over by $2,500. The tax that the insurer should have to pay would be $1,000 per plan.
The Cadillac tax originated with the purpose of cutting healthcare costs while also providing the government with more money. This is supposed to encourage employers to increase their employees' salaries instead of offering them fancy health benefits that the government is currently not benefiting from.
It is projected that less money will be spent on health care because the âCadillac plansâ give taxpayers too much and many go to the doctor when they do not need to.
In 2014, healthcare spending was $3.8 trillion, but in 2013, it was $3.6 trillion. At this rate, it will easily be over $5 trillion by the year 2022. Some experts feel as though the amount of money going into health care is wasteful and taxpayers are overusing the services.
What the Cadillac Tax Means for Accountants
It is important for accountants to stay up to date with what is going on with the Cadillac tax laws. Clients have to know what changes they need to make for their employees while also keeping in mind how the Cadillac tax is going to affect their money when tax season rolls around. Now 2018 may seem like it is a long way off, but larger corporations have to start making changes years in advance instead of throwing new changes on their employees all at once.
There are people who think the Cadillac tax is unneeded because premiums are always rising, which in the future could mean more taxpayers are affected by this tax.
Republicans and Democrats agree that it needs to be repealed even though their reasons differ.
Editor's Note: We realize there is much more to discuss with the Cadillac tax, and we certainly will keep tabs on any changes or viewpoints concerning its affects. This piece is primarily geared toward those who are still unaware or unfamilier with what the tax is or could mean. Let us know if you find this piece useful or if you have any thoughts of your own to add about this particular tax.
John Huddleston, CPA, is the founder and principal of Huddleston Tax CPAs, a firm based in the greater Seattle area that specializes in helping small businesses. In addition to being a CPA, John also holds a JD degree and a master’s degree in tax law from the...