Is there a Cadillac Tax in your future? |

For years, I’ve been working with my clients to provide special benefits; the kind that make starting and running an entrepreneurial business worthwhile. One section where I’ve been helping them is healthcare; to provide medical and dental reimbursement plans and flexible savings account plans (FSA).

Flexible savings accounts let employees put away their own money (tax-free); these funds can be used to cover health insurance co-pays, eyeglasses, and a slew of out-of-pocket expenses. The Medical and Dental Reimbursement Plans (MDRP) were for executives of the firm- and they covered these sorts of costs- and a whole lot more.

But, no more. Because these benefit programs are among the many that can trigger the 40% levy on “Cadillac Health Care” plans- the pricey health care benefits that will be (not quite) outlawed under PPACA (Obamacare) in the next two years or so.

And, while both party’s Presidential candidates are considering killing this provision, I am not willing to join them in their efforts of destruction. Because these provisions (there are more that I will discuss below) really can be modified to still provide valuable health care. For those who want these provisions to stay intact with no modifications- they should expect to pay the 40% tax on the benefits that exceed the limits ($ 10200 for singles; $27500 for families).

It’s fair and reasonable (in my opinion)- and I am going to be one clearly affected by the tax- or the diminished benefits. These provisions are among those that actually cause the overall US health care tab to keep increasing. Oh, and changing these provisons will cost the budget about $ 90 billion- either through the loss of the Cadillac tax or in higher health costs.

PPACA (Obamacare) stipulates that health care benefits that exceeed $ 10,200 for individuals or $ 27,500 for families are subject to the ‘Cadillac tax’. These thresholds are not just for the direct insurance costs, but include all health care provisions such as FSA (flexible savings accounts), MDRP (medical and dental reimbursement plans), on-site health clinics, supplemental insurance plans, among others.

Other than my clients, most of these health programs are proffered by larger firms (actually by some 80% of the larger entities)- and more than 1/4 of all their employees participate in FSA, with average contributions of some $ 1300 a year. (Currently, the maximum FSA contribution is $ 2550- and by 2018, that limit will rise to $ 2700.) That maximum means that each firm offering these benefits are 1/4 of the way towards imposition of the Cadillac Tax provisions.

And, since many of the large corporate health care plans cost $ 10,000 or more, this FSA benefit means that almost the whole FSA contribution would be subject to the 40% Cadillac tax- or a tax of some $ 1000 or more per employee! That company would then be paying almost the same amount in taxes that each employee obtains of their tax return because of the FSA provision.

Now, do you really think an employer will shell out $ 1K so its employees can save the 25 or 30% of the $ 2,700 FSA contribution on their own taxes? Yeah, you guessed right.

And, these firms would prefer to kill the FSA than change their insurance- because the other 80% of employees that don’t participate in the FSA program will continue to feel they are getting great benefits. You know the rule- provide the bestest for the mostest.

But, it’s possible that the IRS will redefine the PPACA provision on FSA plans. (Notice- this does NOT require a redefinition or change to PPACA!) So that employees will only be able to contribute after-tax funds to an FSA- and still deduct those amounts on their 1040’s. This keeps the employees whole- and excludes the Cadillac Tax imposition on the employer for FSA provisions. But, don’t bank on that change- because there’s not much clamor for this redefinition. (You are all welcome to join me in this effort!)

And, it’s entirely possible that employers will change their healthcare deductibles to insure they don’t come close to the Cadillac Tax provisions. But, you can bet that FSA’s will disappear first.

And, my clients will be adjusting their Medical and Dental Reimbursement Plans- actually, they will be surgically removing certain provisions to ensure that their firms won’t be subject to any Cadillac Tax provisions.