All About the Cadillac Tax
The Cadillac Tax is a new annual tax beginning in 2018. It is imposed on employers that provide high-cost employer-sponsored group health plans. It is expected to generate $80 billion over 10 years to help finance the expansion of health coverage under the Affordable Care Act (ACA).
The following Q&A format will help you understand what is known about the tax. The IRS is presently formulating regulations which should provide more clarity on how the tax will be administered.
1. How much is the tax?
The tax is 40% of the cost of health coverage that exceeds a threshold.
2. What is the cost threshold that triggers the tax?
For 2018 the base threshold is $10,200 per year ($850 per month) for self-only coverage and $27,500 per year ($2,291.67 per month) for all other levels of coverage.
- Health Cost Adjustment – The dollar thresholds are multiplied by a health cost adjustment percentage under which the thresholds could be increased if health care inflation (based on the cost increases of the Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefits Plan (FEHBP)) from 2010 to 2018 exceeds 55%.
- Age and Gender Adjustment – The age and gender adjustment is a complicated calculation based upon whether the FEHBP’s rates for the employer’s census is higher than the FEHBP’s rates for the national population.
- Qualified Retirees – Qualified Retirees are defined as individuals who are receiving coverage by reason of being a retiree, have attained age 55 and are not entitled to benefits or eligible for enrollment under the Medicare program.
- High-Risk Profession – Individuals who participate in “a plan sponsored by an employer where the majority of employees covered by the plan are engaged in a high-risk profession or employed to repair or install electrical or telecommunications lines.” The term high-risk profession means certain law enforcement officers and employees in fire protection activities, individuals who provide out-of-hospital emergency medical care, certain individuals whose primary work is longshore work and individuals engaged in the construction, mining, agriculture (not including food processing), forestry and fishing industries. The term also includes an employee who is retired from a high-risk profession if such employee satisfied the requirements for a period of not less than 20 years during the employee’s employment; These employees are allowed an additional $1,650 per year for single coverage in 2018 and $3,450 per year for all other levels of coverage. The additional allowance for high-risk professions will be available only if the plan primarily covers those in a high-risk profession; in that case, the additional allowance will be available to all plan participants.
- “Multi-employer plan”, as defined in Code section 414(f), Individuals who are treated as always having coverage other than self-only coverage. These individuals can use the $27,500 threshold.
3. Are there cost of living increases in the thresholds?
Yes. Starting in 2019, the base thresholds and the adjustments for qualified retirees and those in high-risk professions will be increased by the Consumer Price Index for all Urban Consumers (CPI-U) plus 1%, rounded to the nearest $50 – not medical inflation. Starting in 2020, the threshold amounts are indexed to the CPI-U, rounded to the nearest $50. In addition, if health inflation is higher than expected between now and 2018 (based on the cost of standard BlueCross/Blue Shield coverage under the federal employees’ health plan), the 2018 base amounts will be increased.
4. Are there adjustments for high cost areas of the country or for employers with a higher risk workforce?
There are no adjustments based on the part of the country in which the employer or employees are located.
There will be an adjustment allowed for age and gender for plans that are higher than the national average. Details on how that will work are not yet available. Multiemployer plans may use the family threshold with all employees, even if the employee actually has single coverage.
5. What types of plans are subject to the tax?
The tax applies to “applicable employer-sponsored coverage” which includes both insured and self-funded plans. The tax applies to grandfathered plans. It applies to all types of employers – private, government, church and not-for profit. Retiree plans – even retiree-only plans – are subject to the tax. Multiemployer plans are subject to the tax. The tax applies to coverage provided to active employees, self-employed individuals covered by the group health plan, former employees (presumably including COBRA participants) and surviving spouses.
6. What health plans are subject to the Cadillac Tax?
There is some uncertainty here. See Q&A #7
- Premiums paid by both the employer and employee
- Health Flexible Spending Accounts
- Health Reimbursement Accounts
- Health Savings Accounts
7. What aspects of the Cadillac Tax are under consideration for interpretation by the IRS?
The IRS is beginning the process of writing regulations that will provide details on how this tax will operate. On February 23, 2015, the IRS issued Notice 2015-16, which provides some information on the types of benefits that will count toward the tax. It has requested input on how best to value some of these benefits. It also said in the Notice that, as part of the process, it plans to finally provide guidance on how Consolidated Omnibus Budget Reconciliation Act (COBRA) premiums should be calculated.
The types of coverage likely to be included in the taxation process include:
- Major medical coverage (both employer and employee contributions)
- Major medical coverage provided to former employees, surviving spouses and other insured individuals
- On-site medical clinics (except for clinics that provide only de minimis medical care, such as first aid, immunizations, nonprescription pain killers, or work injuries to current employees)
- Health savings accounts (employer contributions and probably any employee contributions made pre-tax through a Section 125 plan)
- Health reimbursement arrangements
- Employer or pre-tax employee contributions to Archer medical savings accounts
- Retiree coverage
- Multiemployer plan coverage
- Executive physical programs
- Specified disease or fixed indemnity coverage if the cost of coverage is excluded or deducted from taxes
- Dental and vision benefits that are provided in connection with major medical (i.e., that are bundled with medical coverage)
What types of benefits are likely excluded from the tax?
- Dental and vision insurance covered by a separate policy (including both insured and self-insured coverage)
- Life insurance
- Short-term and long-term disability insurance
- Long-term care insurance
- Hospital indemnity, specified illness, Medicare supplement and other similar “excepted benefits,”, but only if paid 100% by the employee and with after-tax dollars
- Other forms of excepted benefit coverage such as accident, workers’ compensation, auto-medical payment coverage, or liability coverage
- Employee after-tax contributions to Archer MSAs and to HSAs, and
- Employee assistance programs that provided limited medical benefits
The IRS notes that valuing an HRA can be difficult. It is considering valuing HRAs based either on the amount made newly available to an employee under an HRA each year, or on the total amount spent through HRAs each year by employees divided by the number of covered employees.
Comments are due by May 15, 2015. The IRS also said it expects to request comments on other aspects of the tax. This deliberate approach means that it is not likely that proposed, much less final, regulations will be released in the near future.
8. What if the employee changes between self-only and family coverage during the year?
The cost will be determined monthly, based on coverage in effect on the first day of the month. If dependents receive different coverage than the employee or retiree, the employee’s allowed cost will be based on the single coverage amount (i.e., $10,200 for 2018).
9. Is the tax deductible?
No, the tax is not deductible.
10. When does the tax begin?
The tax will be calculated monthly, based on coverage offered on the first day of the month. It begins with the 2018 calendar year. It is not yet clear when the tax actually will be due. The law gives the Secretary of the Treasury the authority to have shorter taxable periods based on employer size, which raises the possibility that large employers may be required to make excise tax payments more frequently than smaller employers.
11. Who calculates the tax?
The employer is responsible for totaling the costs and then advising each coverage provider of its proportionate share of the cost. The employer also must provide the cost information and proportionate share information to the Department of the Treasury (details are not yet available on how this will work).
Example: Acme offers insured medical coverage through Carrier A. It also offers a self-administered health reimbursement arrangement (HRA) that provides benefits even after employment terminates. The annual cost of single medical coverage is $11,000 and the annual contribution to the HRA is $1,200. For each single employee, the excess benefit is $2,000 ($12,200 minus the $10,200 allowance for single coverage). The excise tax is $800 (40% of $2,000). Carrier A will owe 90.16% of the $800 ($11,000 is 90.16% of $12,200). Acme will owe 9.84% of the $800 tax.
In the case of multiemployer plans, the plan sponsor is the entity responsible for calculating each coverage provider’s portion of the taxable excess benefit, and for reporting that amount to the providers and the Department of the Treasury
12. Who must pay the tax?
The party responsible for paying the tax depends on the type of coverage being offered and each provider’s share of the excess benefit. The “coverage provider” is responsible for paying the tax. The coverage provider is:
• The insurer for health insurance coverage that it underwrites
- The employer for self-funded health insurance coverage
• The employer for health savings account (HSA) contributions, MSA contributions and HRA contributions
• The “person that administers the benefits” for all other types of coverage
If the plan sponsor administers the benefits, the plan sponsor is responsible for payment.
This blog post is a compilation from the following sources:
United Benefit Advisors PPACA Advisor publications
Groom Law Group “Second Opinions: Questions on ACA ‘Cadillac Tax’ Part I & II