What Employers Need to Know About the ACA’s Cadillac Tax

PastedGraphic-5Beginning in 2018, the Internal Revenue Service will subject plan sponsors to an excise tax if they provide overly generous levels of health benefits to employees above a certain threshold. The IRS recently released Notice 2015-16 to introduce the future excise tax on high cost employer-sponsored health coverage, also known as the Cadillac Tax.

The Cadillac Tax will impose a 40% excise tax on any excess benefit an employer provides to an employee through its applicable employer-sponsored health coverage. The IRS will tax plans where the aggregate cost of the applicable employer-sponsored health coverage exceeds a statutory dollar limit ($10,200 for self-only coverage and $27,500 for self and spouse or dependent coverage), subject to various adjustments.

As so much is at stake for employers, we have compiled a quick article with common FAQs to help begin the process of understanding the Cadillac Tax.

Who will be responsible for determining whether an employer sponsored health plan is considered high cost coverage?

Employers will be responsible for calculating whether the health plans employees enroll in provide an excess benefit. The calculations are based on the health coverage the employee actually enrolls in, not just what is offered to the employee. ALL employer plans, not just large employers, are potentially subject to the Cadillac Tax.
Since the Department of Treasury (“Treasury”) and IRS are still working on developing final regulations for the Cadillac Tax, the Treasury and the IRS have invited comments on issues related to the Cadillac Tax.

What law governs the Cadillac Tax?

The Cadillac Tax was added as part of the Affordable Care Act by Section 49801 of the Internal Revenue Code (Code). IRS Code section 4980I (a) imposes a 40% excise tax on any “excess benefit” provided to an employee, and section 4980I (b) provides that an excess benefit is the excess, if any, of the aggregate cost of the applicable coverage of the employee for the month over the applicable dollar limit for the employee for the month.

When does the Cadillac Tax go into effect?

The IRS will begin to enforce the Cadillac Tax for taxable years beginning after December 31, 2017. This means that the Cadillac Tax will first apply in 2018.

What is “applicable employer-sponsored” coverage?

The Cadillac Tax applies to applicable employer-sponsored coverage. Applicable employer-sponsored coverage (“applicable coverage”) is coverage under any group health plan that an employer makes available to an employee and that is excludable from the employee’s gross income or would be excludable if it were employer-provided coverage. A “group health plan” means a plan (including a self-insured plan) that provides health care to employees, former employees, the employer, other people associated or formerly associated with the employer in a business relationship, or their families.

The types of coverage included in applicable coverage are:

  1. Health Flexible Spending Accounts (FSAs);
  2. Archer Medical Savings Accounts (MSAs);
  3. Heath Savings Accounts (HSAs) (including employer contributions and employee pre-tax salary reduction contributions);
  4. Governmental plans, which is defined as coverage under any group health plan established and maintained primarily for its civilian employees of the federal government, state government, political subdivision, or an agency of the government;
  5. Coverage for on-site medical clinics, but excludes on-site medical clinics that only provide minimal medical care;
  6. Retiree coverage;
  7. Multiemployer plans;
  8. Certain excepted benefits offered as independent, non-coordinated benefits (including coverage only for a specified disease or illness and hospital indemnity or other fixed indemnity insurance) if the payment for the coverage is excluded from gross income or a deduction is allowed; and
  9. Coverage provided through an on-site medical clinic (more guidance needed).
    The Cadillac Tax is a critical and expensive part of the ACA. It is important for all employers and anyone involved as part of the HR and/or finance team to have strong connections and resources to understanding this aspect of the law.