Notice Released Regarding the “Cadillac Tax”

The Affordable Care Act’s high-cost plan tax (HCPT), called the “Cadillac plan” tax, will likely affect employer decisions about their health benefits in the future. This new tax takes effect in 2018 and proposed rules have been released by the IRS in recent months.  Although a very unpopular provision of the Affordable Care Act it’s included in the law as a revenue generator to pay for other aspects of the ACA.

What is the Cadillac Tax?  It is a permanent annual tax, starting in 2018, on high-cost employer sponsored health coverage.  The tax will be calculated based on the amount that goes over the threshold.  The yearly cost threshold amounts being considered are: single $10,200 and family $27,500.  The law allows thresholds to be adjusted upward for those with higher rates due to age/ gender, or high-risk professions.  This threshold amount will be determined by aggregating the cost of applicable coverage.

Ex: An individual with a yearly cost of $12,000.00 would be taxed $720.00

$12,000 - $10,200 = $1,800                      $1,800 x 40%= $720      

Applicable coverage is the insurance coverage in a group health plan that is not included in an employee’s income.  Employer contributions and employee pre-tax contributions will be included as applicable coverage and therefore qualify to be taxable, including health FSAs, HSAs, and HRAs.  However, after-tax contributions to HSAs would not be included.  The amount taxable due to HRAs will be determined in two possible ways that have yet to be fully defined.  The first way would be based on the amount made available each year; the second would be determined by adding together all claims and expenses attributable to the HRA for a designated period of time and dividing that sum by the number of employees.  Applicable Coverage will be the defining element of what is taxable for the Cadillac Tax.  If the coverage amount goes over the threshold it will be subject to the tax. 

Some analysts are predicting that 1 in 4 employers will be subject to the tax in 2018 and that would increase over time as trends continue.  Some things employers can do to reduce the likelihood of being subject to the tax will result in employees paying for a greater share of their health care out- of- pocket coverage including:

·     Increasing deductibles and other cost sharing;

·     Capping or eliminating tax-preferred savings accounts like Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), or Health Reimbursement Arrangements (HRAs);

·     Eliminating higher-cost health insurance options;

There will be several notices released regarding the Cadillac Tax to help employers understand, determine, and calculate the cost of coverage to submit to the IRS.  These notices may require a process similar to the IRS’s employer mandate reporting.  Changes to the Cadillac Tax are expected in future notices.  We will share future developments around this controversial issue and help you analyze any impact it may have on you.

Notice 2015-16

Notice 2015-52