The Affordable Care Act (ACA) imposes a penalty on certain high cost employer-sponsored health coverage. Generally, a 40 percent excise tax (commonly referred to as the “Cadillac Tax”) will be assessed on the monthly cost of employer sponsored health coverage that exceeds threshold amounts defined under the ACA.  As the employer, you will want to review your benefits in the context of this tax to determine what changes might be needed.  

Welcome to the Compliance Center

Understanding the Affordable Care Act Tax (“the Cadillac Tax”)

Oct 11, 2016

Impact of the High Cost Health Coverage on Employers

October 11, 2016

What is the “Cadillac Tax”

The Affordable Care Act (ACA) imposes a penalty on certain high cost employer-sponsored health coverage. Generally, a 40 percent excise tax (commonly referred to as the “Cadillac Tax”) will be assessed on the monthly cost of employer sponsored health coverage that exceeds threshold amounts defined under the ACA. Employers are responsible for calculating the tax and each associated “coverage provider” is liable for the payment of the excise tax based on its share of the excess benefits for each employee.

The Internal Revenue Service (IRS) and Treasury Department have released IRS Notice 2015-16 and Notice 2015-52, which provide insight into how the tax might work and requesting comments on various aspects of the tax, such as which types of coverage are subject to the tax, how to determine the cost of coverage and how to apply thresholds to the cost of coverage.

Initially set to be effective in 2018, legislation enacted in 2015 delayed the effective date until 2020.

Beginning in 2020, employer sponsored health plans will be assessed a 40 percent excise tax on any “excess benefit” of an employee’s applicable employer-sponsored coverage. For these purposes, both employer and employee premium dollars must be considered when calculating the excess benefit.

The Excess Benefit Amount

The excess amount for a month is the amount by which the cost of applicable coverage exceeds 1/12 of the annual limit. Initial annual limits, based on a statutory dollar amount and subject to adjustments, are set at $10,200 for self-only coverage and $27,500 for coverage other than self-only. An excess benefit is the sum of the employee’s monthly excess amounts for the taxable period.

The term “employee” includes any former employee, surviving spouse or other primary insured individual. The taxable period for which the excess benefit is calculated is a calendar year.

The Cost of Applicable Coverage

Notice 2015-16 points out that the cost of applicable coverage for purposes of the Cadillac tax is determined under rules similar to those for determining the applicable premium under COBRA, and also acknowledges that guidance has not been provided on several issues that arise under these existing rules. IRS and Treasury suggest potential approaches for resolving the gaps in guidance and request comments on those approaches. See Notice 2015-16 for additional information.

Calculating the Tax

Employers are responsible for calculating the tax, determining the share attributable to each coverage provider, and reporting the taxable excess benefit attributed to each coverage provider and to the Department of Health and Human Services (HHS). The manner of reporting has not been provided.

Payment of the Excise Tax

Each coverage provider is liable for the payment of the excise tax on its applicable share of the excess benefit with respect to each employee. In this context, “coverage provider” means

  • For insured health coverage, the insurer
  • For HSA or Archer MSA contributions, the employer
  • For any other coverage, including self-insured health plans, the “person that administers the plan.” In Notice 2015-52, Treasury and IRS propose two approaches to determine the identity of the person that administers the plan and request comments on these approaches. See Notice 2015-52 for additional information.

 Coverage Subject to the Excise Tax

  • Coverage under a group health plan
  • Health FSAs
  • Employer contributions to HSAs, including pre-tax salary contributions
  • General Purpose HRAs

Notice 2015-16 request comments on whether to exclude self-insured limited scope dental and vision coverage and employee assistance plans (EAPs) that qualify as excepted benefits.

Deductibility

Under the ACA, the Cadillac tax was initially structured as nondeductible, but legislation passed in 2016 provided the tax will be deductible once effective.

The tax applies to “applicable Employer-sponsored coverage,” which is coverage under any group health plan made available to the employee by an employer that is excludable from the employee’s gross income under section 106 of the Internal Revenue Code. Employers will want to review their benefits in the context of this tax to determine what changes might be needed.