Scheduled to take effect in 2018, the “Cadillac Tax” is a 40% non-deductible excise tax on employer-sponsored health coverage that provides high-cost benefits.
On February 23, 2015, the Internal Revenue Service (IRS) issued a notice covering a number of issues concerning the Cadillac Tax, and requested comments on the possible approaches that could ultimately be incorporated into proposed regulations. No regulations have been issued to date.
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CADILLAC TAX |
| What it is/fee duration |
Permanent, non-deductible, annual tax beginning in 2018 on high-cost employer-sponsored health coverage. |
| Purposes |
- Reduce tax preferred treatment of employer provided health care
- Reduce excess health care spending by employees and employers
- Help finance the expansion of health coverage under the Patient Protection and Affordable Care Act (PPACA)
|
| Amount |
- The tax is 40% of the cost of health coverage that exceeds predetermined threshold amounts.
- Cost of coverage includes the total contributions paid by both the employer and employees, but not cost-sharing amounts such as deductibles, coinsurance and copays when care is received.
- For planning purposes, the thresholds for high-cost plans are currently $10,200 for individual coverage, and $27,500 for family coverage.
- These thresholds will be updated for 2018 when final regulations are issued and thereafter indexed for inflation in future years.
- The thresholds will also be increased:
- If the majority of covered employees are engaged in specified high-risk professions such as law enforcement and construction, and
- For group demographics including age and gender.
- For pre-65 retirees and individuals in high-risk professions, the threshold amounts are currently $11,850 for individual coverage and $30,950 for family coverage.
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| Who calculates and pays |
- Insured: Employers calculate and insurers pay
- Self-funded: Employers calculate and “the person who administers the plan benefits” pays
- HSAs and Archer MSAs: Employers calculate and employers pay
|
| How a group health plan’s cost is determined |
- The tax is based on the total cost of each employee’s coverage above the threshold amount.
- The cost includes contributions toward the cost of coverage made by employers and employees.
- The statute states that costs of coverage will be calculated under rules similar to the rules for calculating COBRA premium.
|
| How the tax will be paid |
Forms and instructions for paying the tax are not yet available. |
| Tax implications |
Cadillac Tax payments are not deductible for federal tax purposes. |
| Applicable types of coverage |
- Insured and self-insured group health plans (including behavioral, and prescription drug coverage)
- Wellness programs that are group health plans (most wellness programs)
- Health Flexible Spending Accounts (FSAs)
- Health Savings Accounts (HSAs), employer and employee pre-tax contributions*
- Health Reimbursement Accounts (HRAs)*
- Archer Medical Savings Accounts (MSAs), all pre-tax contributions*
- On-site medical clinics providing more than de minimis care*
- Executive Physical Programs*
- Pre-tax coverage for a specified disease or illness
- Hospital indemnity or other fixed indemnity insurance
- Federal/State/Local government-sponsored plans for its employees
- Retiree coverage
- Multi-employer (Taft-Hartley) plans
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| Excluded types of coverage |
- U.S.-issued expatriate plans for most categories of expatriates
- Coverage for accident only, or disability income insurance, or any combination thereof
- Supplemental liability insurance
- Liability insurance, including general liability insurance and automobile liability insurance
- Worker’s compensation or similar insurance
- Automobile medical payment insurance
- Credit-only insurance
- Other insurance coverage as specified in regulations under which benefits for medical care are secondary or incidental to other insurance benefits
- Long Term Care
- Standalone dental and vision*
- Coverage for the military sponsored by federal, state or local governments*
- Employee Assistance Programs*
- Employee After-Tax Contributions to HSAs and MSAs*
- Coverage for a specified disease or illness and hospital indemnity or other fixed indemnity insurance if payment is not excluded from gross income
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*As indicated by IRS notice issued on February 23, 2015 and subject to future regulatory clarification.
How it works: Examples based on current threshold amounts
Self-only coverage
A $12,000 individual plan would pay an excise tax of $720 per covered employee:
$12,000 – $10,200 = $1,800 above the $10,200 threshold
$1,800 x 40% = $720
Family coverage
A $32,000 family plan would pay an excise tax of $1,800 per covered employee:
$32,000 – $27,500 = $4,500 above the $27,500 threshold
$4,500 x 40% = $1,800
These charts show how the tax increases as the plan’s cost increases.
Self-only coverage
| Plan Cost |
$11,000 |
$12,000 |
$13,000 |
$14,000 |
$15,000 |
| Tax |
$320 |
$720 |
$1,120 |
$1,520 |
$1,920 |
Family coverage
| Plan Cost |
$28,000 |
$30,000 |
$32,000 |
$34,000 |
$36,000 |
| Tax |
$200 |
$1,000 |
$1,800 |
$2,600 |
$3,400 |
