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The Affordable Care Act Cadillac Tax

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.

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.
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
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

*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