The Effects of Obamacare’s Cadillac Tax

Flexible spending accounts allow many taxpayers to save money when it comes to dishing out costs for medical bills. However, the Affordable Care Act’s so-called Cadillac tax may do away with the popular account, as the tax stands to place a 40 percent levy on health care benefits.

“[Health savings accounts will] be one of the first things to go,” said Rich Stover, a health care actuary and principal at Buck Consultants, an employee benefits consulting firm. “It’s a death knell for them. If the Cadillac tax doesn’t change, FSAs will go away very quickly.”

Not many people know about the Cadillac tax, but come 2018, when it takes effect, several taxpayers could be in for a shock if the next president stands by it.

Even Hillary Clinton has expressed opposition to the tax, claiming: “I worry that it may create an incentive to substantially lower the value of the benefits package and shift more and more costs to consumers.”

Republicans, as expected, aren’t in favor of the tax either, and are using it as ammo in their quest to eliminate the Affordable Care Act altogether.

The Cadillac tax aims to cap (for the first time ever) the open-ended tax break employers receive for providing employees with health benefits.

As it stands, over 33 million American taxpayers count on health savings accounts to cover medical expenses. But many are looking at the Cadillac tax as a foe, demanding lawmakers discard it before it goes into effect – especially since the tax would affect a number of other areas, including supplemental insurance plans, flexible spending accounts (FSAs), and even has the potential to affect workplace clinics.

All signs point to FSAs as the first to be cut if the tax goes through, as they are a main factor in determining whether businesses will actually pay the tax. According to a Kaiser study, companies that offer FSAs to their workers are at a higher risk of paying the Cadillac tax than those that do not offer these types of accounts.

The Kaiser study went on to predict that 26 percent of employers who provide workers with FSAs will be hit with the tax in 2018. Companies that do not offer FSAs can still be liable for the tax, but only 16 percent of non-FSA offering employers would likely be liable for tax-related costs.

So what does this mean for taxpayers who hold FSA accounts?

Well, at this point we all know that tax laws can fluctuate and the issue of affordable (and fair) healthcare is on every presidential candidate’s mind. We also know that few are fans of Obamacare and many presidential hopefuls have expressed the desire to do away with the program.

At this point, it’s too early for FSA and healthcare savings account holders to fret. However, it would be in any taxpayer’s best interest to speak with a tax lawyer regarding their options, should the Cadillac tax go into effect.