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How Obamacare's Cadillac Tax Will Affect You

Obamacare has been controversial since it was first proposed, and the debate about the law has only gotten more heated as more of its provisions take effect. With Americans now starting to see more of Obamacare's elements take shape, such as state health-insurance exchanges geared toward getting insurance coverage for the currently uninsured, analysts are turning their attention to some of the less-followed but equally important aspects of the Affordable Care Act that could have a big impact in the future.

One part of Obamacare that has become newly controversial applies to its taxation of employer-provided health insurance policies that offer extremely valuable benefits. Dubbed the Cadillac tax, this rule doesn't take effect until 2018, but when it does, the impact could be draconian. Let's take a closer look at exactly what the Cadillac tax does and how it could affect you.

President Obama at the 2013 State of the Union address. Source: White House.

How the Cadillac tax works
The way Obamacare will impose the Cadillac tax is deceptively simple. Under the law, if an individual health-insurance policy costs more than $10,200, the employer has to pay a 40% excise tax for any amount above that $10,200 threshold. For family policies, the corresponding threshold is $27,500.

Given those high dollar amounts, you might imagine that not many policies would be subject to the Cadillac tax. But initial projections estimated the potential revenue from the Cadillac tax at $137 billion over the next decade, and even though the Congressional Budget Office recently reduced that estimate to $80 billion, that tax corresponds to $200 billion in additional insurance-value above the Cadillac tax thresholds. Moreover, even though the threshold figures are indexed for inflation, rising health care costs that have historically climbed more quickly than the Consumer Price Index could leave an increasing number of employers having to pay the tax.

Moreover, one big problem with the threshold figures is that they're the same for people of all ages. That doesn't match up with the economics of health insurance, where policies for older workers cost far more than policies with identical benefits for younger workers.

As a result, older workers are more likely to trigger the Cadillac tax for their employers over time, giving employers yet another incentive to favor a younger workforce even as more workers approaching retirement age seek to extend their careers. In addition, although retirees not covered by Medicare who are fortunate enough to get health-insurance coverage from their employers would be subject to higher thresholds of $11,850 for individual plans and $30,950 for family plans, the tax would nevertheless pose another obstacle in convincing employers to provide those valuable benefits for their retired workers.

What employers are doing
Even though the excise tax is still more than four years from taking effect, employers are taking steps now to try to manage its effects. Given the need for many employers to engage in collective bargaining with their employees in order to implement major changes to health-insurance coverage, four years isn't as long as it seems in trying to adapt to avoid the Cadillac tax down the road. The opposition of labor unions against the tax bears out the need for early action.

So far, companies have looked to reduce costs in a number of ways. Wal-Mart (NYSE: WMT  ) has looked at paying for health-related travel costs to get patients suffering from heart and spine ailments to hospitals with better track records of success. Cummins (NYSE: CMI  ) has already moved some workers to high-deductible health plans that put more of the onus on employees to control their health care costs, but it has also implemented wellness programs to try to encourage healthier living that reduces the likelihood of incurring high costs from chronic conditions later in life.

Despite these innovative ideas, the simplest way to cut costs below the Cadillac-tax threshold is to reduce benefits. As a result, you can expect some of the most generous plans offered to employees, whether they work in the public or private sector, to slowly degrade in quality by the time the tax takes effect.

Will health insurers suffer?
Meanwhile, efforts to get rid of high-cost plans could have a negative impact on UnitedHealth (NYSE: UNH  ) , WellPoint (NYSE: WLP  ) , and other health-insurance companies. By imposing a fixed-percentage medical-loss ratio limitation on profits based on premium revenue, Obamacare allows higher-cost plans to retain a higher dollar value for administrative costs and profits than plans that charge lower premiums.

Moreover, because of those limitations, employers' efforts to get their workers to be healthier could end up actually hurting insurers' profits. Ordinarily, a health-insurance company would want to reduce medical claims, because paying less in claims would boost its bottom line. However, once the Obamacare profit limitations kick in, insurers have to return excess profits to customers in the form of rebates. That reduces their incentive to help their customers implement cost-savings strategies, changing the dynamic between insurers and their employer-clients.

Watch your policy
Between now and 2018, you'll want to keep a close eye on your insurance coverage. With a growing number of employers making major modifications to their health-insurance plans, you might find yourself bearing an increasing burden of the cost of your health care in the years to come.

Obamacare has plenty of far-reaching effects beyond the Cadillac tax. The Motley Fool's new free report "Everything You Need to Know About Obamacare" lets you know how your health insurance, your taxes, and your portfolio will be affected. Click here to read more.


Read/Post Comments (10) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On May 30, 2013, at 3:24 PM, michaelmar wrote:

    Congress made employee health care benefits tax free to encourage them...and being rational economic people employers and employees decided on the best mix of salary and benefits to maximize the total compensation at the least cost...and now that they have done so the liberals exemplified by Obama are shocked and aghast that they have taken advantage of what was encouraged, and now wants to penalize them. You really can't take any promise they make seriously...what will happen when people and employers adjust to the new rules and regulations and it does not do what he expects based on his static economic viewpoint? More penalties, never acknowledging the system they set up is the problem

  • Report this Comment On May 30, 2013, at 3:50 PM, LadyMantle wrote:

    Obviously the ACA is nothing more than a scam to pay down the deficit. When they start calling it "Cadillac tax" with potential revnue of over $137 billion in the next decade, you know they are just trying to scam the people for money they do not have and forget about it meaning anything concerning your health or lack thereof.

    How can they wager such taxes are employers for their employees well being? This is an outrage and the people of this country should be up in arms, marching in the streets.

    Is there no end to the American people have to clean up the spending sprees of our elected officials with the taxpayers dollars?

  • Report this Comment On May 30, 2013, at 4:26 PM, doco177 wrote:

    1. Millions are and will lose the insurance Obama promised they could keep. Because ObamaCare forces employers to offer expensive Cadillac plans but also offers the option of paying a fine for not providing health insurance that can be cheaper than providing it, between seven and twenty million Americans are likely to lose their health insurance coverage according to the Congressional Budget Office. The original estimate was closer to four million.

    2. The cost of healthcare premiums is about to further skyrocket. Premium costs have already exploded, but that is a slow-motion explosion. In the near future, we could see costs double or worse. Naturally, these costs will hit an already burdened middle class hardest.

    3. Lost jobs. Lost jobs.

    The Federal Reserve's March beige book on economic activity noted that businesses "cited the unknown effects of the Affordable Care Act as reasons for planned layoffs and reluctance to hire more staff."

    Meanwhile, human resources consulting firm Adecco found that half of the small businesses it surveyed in January either plan to cut their workforce, not hire new workers, or shift to part-time or temporary help because of ObamaCare.

    4. Potential doctor shortages that will mean rationing: The healthcare industry is already a bureaucratic quagmire. ObamaCare is about to add steroids. As the profession becomes tyrannized by government, the talented people currently practicing medicine plan to get out sooner than expected. Who knows how many will choose not to get in.

    Doctor shortages are what lead to the nightmare known as rationed care. Here's an unsettling example already being practiced.

    5. Somewhere around $800 billion in tax increases will hit America's middle class. This added burden will not only further oppress a middle class already reeling from a drop in wages over the last few years, but could damage the overall economy.

    6. Inflation, the cruelest tax on the poor. When businesses get socked with added costs brought about by higher taxes and burdensome government mandates, they pass those cost along to the consumer in the form of higher prices.

    7. Added bureaucracy. Even those Obama lapdogs over at the Washington Post's Wonk Blog are admitting that applying for health care is about to get more burdensome than the byzantine paperwork involved in buying a home.

    8. To cut costs or to avoid having to provide insurance, workers on the economic margins are already losing hours, which means a lower paycheck. There are a million sad stories in ObamaVille; here are just a few of them.

    9. ObamaCare is projected to add $6.2 TRILLION to a deficit the GAO has already declared "unsustainable." That's "trillion" with a "t".

    10. More taxes than currently estimated are likely to hit because of situations like this one.

    Three years ago, Obama, Democrats, and his media lied to us about cutting the cost of health care, being able to keep our insurance, and not taxing the middle class.

    Today, those lies and what ObamaCare is and will do to the working and middle class are the biggest untold story in America.

    The govt becoming more involved in health care is the reason the costs have increased. So...Govt creates a crisis, then provides a solution that comes at the expense of liberty and freedom, costs trillions, and by most accounts won't solve the problem but in fact make it far worse.Corruption, incompetence, disregard of the Constitution, and above all lying are integral to the way that this country is being run.

  • Report this Comment On May 30, 2013, at 5:41 PM, beairdboy wrote:

    Won't effect me!!

  • Report this Comment On May 31, 2013, at 1:41 AM, The1MAGE wrote:

    bearidboy - Yes it will.

    We don't live in a vacuum.

  • Report this Comment On May 31, 2013, at 8:20 AM, jamesmmm wrote:

    Reduce the bureacracies, cut the corruption and cut the added paperwork by switching to a single payor system as described by www.MedicareForALL.org or www.pnhp.org. Related taxes will plummet (other hiring will increase), people's health will be better. It's a win-win-win situtation, and the infrastructure is already set up by Medicare to handle it.

  • Report this Comment On May 31, 2013, at 10:22 AM, BESK67 wrote:

    It comes down to obummer wanting everyone on hie healthcare so we are depending on the gov.

    this is sad i pay for the highest health care plan my company has so my oldest child will get the care she needs. after reading this i know that i will loose that coverage. so again thank you obummer for taking more away that worked and giving us something that will NOT work. BUT sence you dont have to use it why would they care?

  • Report this Comment On May 31, 2013, at 10:28 AM, hherr011 wrote:

    if you voted for him.. you were warned, so you should not complain you asked for it, so take it and the media needs to stop protecting him; fair and objective news used to be the medias slogan not under obama,, anything goes...

  • Report this Comment On May 31, 2013, at 7:29 PM, FactChecker101 wrote:

    You will pay 30% more in premiums if you are obese and 50% more if you smoke. I still say by doing this the government is going to a nanny state of governing. What ever happened to freedom without oppression?

  • Report this Comment On June 25, 2013, at 2:48 PM, sheetrockqueen wrote:

    I found out that if you don't have insurance when this Obama care goes in to effect,you will be fined a tax for each month that you are not insured.And I got it from a good source.Also if you have someone living with you and they are your dependent on your taxes,you will be fined for them too.Looks like this is going to put a lot of older people out of jobs.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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