Just as employers were working to ensure compliance with 2015 Affordable Care Act mandates like employer “Play or Pay” and health coverage information reporting IRS reminded everyone that the ACA “Cadillac Tax” is looming on the horizon.

A central component of the 2010 healthcare reform law, this 40% excise tax on the value of coverage that exceeds certain limits is intended both to raise new revenue for premium subsidies for lower and moderate income households and to slow the growth of health costs.  

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IRS to Employers: Get Ready for the ACA Cadillac Tax!

Wed Apr 15, 2015

Just as employers were working to ensure compliance with 2015 Affordable Care Act mandates like employer “Play or Pay” and health coverage information reporting, the IRS reminded everyone that the ACA “Cadillac Tax” is looming on the horizon.

A central component of the 2010 healthcare reform law, this 40% excise tax on the value of coverage that exceeds certain limits is intended both to raise new revenue for premium subsidies for lower and moderate income households - and to slow the growth of health costs.

In Notice 2015-16, “Excise Tax on High Cost Employer-Sponsored Health Coverage” IRS expressed the intention to develop regulations on several thorny issues:

  • What types of health coverage are subject to the tax
  • How the total cost of health coverage is to be calculated
  • Possible adjustments to the annual statutory dollar limits that will trigger the tax.

Anticipating that the Cadillac Tax on high-value health plans could be a game-changer for employee health benefits, employer plan sponsors have been asking a number of key questions, including:

  • How will IRS define the “excess benefit” to which the 40% tax will be applied?
  • What types of coverages will be included in “applicable health coverage” subject to the tax and what coverages will be excluded?
  • How will the “aggregate cost” of applicable health coverage be calculated, and how will this relate to W-2 Box 12 reporting of the aggregate cost of health coverage now in effect? And how will COBRA rules be applied to self-insured health plans?
  •  How will the statutory baseline dollar limits, $10,200 for self-only coverage and $27,500 for other than self-only coverage, be adjusted for inflation and other factors?
  • Will employers be responsible for calculating and also paying the excise tax?
  • How will IRS rules differentiate among groups of employees enrolled in different health benefit packages in determining the aggregate cost of applicable coverage for specific employees?

Right now the IRS, as well as employers, have many questions - but few answers. Notice 2015-16 is helpful in identifying the key issues, outlining the statutory requirements and alerting employers to the direction IRS will be going in crafting regulations as early as next year.

But the recent notice suggests two inevitable conclusions: one, the Cadillac Tax could affect employee health benefits more than all the other Affordable Care Act mandates; and two, prudent employers will begin taking steps now to manage the costs of health plans so as to keep values below the excise tax trigger dollar limits.

For employers the pre-2018 ACA seems all about compliance; the post-2018 ACA could be all about change.