For taxable years beginning in 2018, the Affordable Care Act (ACA) imposes a 40 percent excise tax on high-cost group health coverage. This tax, also known as the “Cadillac tax,” is intended to encourage companies to choose lower-cost health plans for their employees.
The Cadillac tax provision, found in Internal Revenue Code (Code) section 49801, taxes the amount, if any, by which the monthly cost of an employee’s applicable employer-sponsored health coverage exceeds the annual limitation (called the employee’s excess benefit). The amount of the tax for each employee’s coverage will be calculated by the employer and paid by the coverage provider who provided the coverage.
The Internal Revenue Service (IRS) is expected to issue guidance on the Cadillac tax requirements before they become effective in 2018.
TYPES OF COVERAGE SUBJECT TO THE TAX
The Cadillac tax applies to “applicable employer sponsored coverage.” Applicable employer-sponsored coverage is, with respect to any employee, coverage under any group health plan made available to the employee by the employer, which is excludable from the employee’s gross income under Code section 106.
The term “employee” includes any former employee, surviving spouse or other primary insured individual. In addition, aggregation rules apply for companies that are related or commonly owned. Specifically, all employees who are treated as being employed by a single employer under the controlled group or affiliated service group rules under Code sections 414(b), (c), (m) or (o) are treated as being employed by a single employer for purposes of the Cadillac tax rules.
Generally, applicable employer-sponsored coverage includes governmental plans. In addition, coverage under any group health plan for a self-employed individual will be treated as applicable employer-sponsored coverage, and will be subject to the Cadillac tax, if a deduction is allowable under Code section 162(l) for all or any portion of the cost of that coverage.
Coverage Not Subject to the Tax
The Cadillac tax does not apply to coverage for long-term care and any coverage that is considered an “excepted benefit,” other than coverage for on-site medical clinics.
• Accident-only or disability income insurance (or any combination thereof);
• Supplemental liability insurance;
• Liability insurance, including general and automobile liability insurance;
• Workers’ compensation or similar insurance;
• Automobile medical payment insurance;
• Credit-only insurance; and
• Other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits.
Likewise, separate dental and vision plans that constitute excepted benefits are not subject to the Cadillac plan tax.
Independent, non-coordinated coverage for a specified disease or illness only, or hospital indemnity or other fixed indemnity insurance, is also not subject to the Cadillac tax if:
• Payment is not excludable from the employee’s gross income (that is, if it is paid for exclusively with after-tax dollars); and
• In the case of self-employed individuals, a deduction under Code section 162(l) is not allowable.
RESPONSIBILITY FOR CALCULATING AND PAYING THE TAX
Employers will be responsible for calculating the Cadillac tax owed for each employee’s employer-sponsored coverage, as well as the share attributable to each coverage provider. In the case of multiemployer plans, the plan sponsor will be required to calculate and report each coverage provider’s portion of the taxable excess amount.
In addition, employers or plan sponsors will be responsible for reporting the taxable excess benefit attributed to each coverage provider to both that coverage provider and to the IRS.
Responsibility for paying the Cadillac tax falls on the “coverage provider.” Depending on the type of coverage, this can be the insurer, the employer or a third-party administrator.
If an employee has more than one type of coverage, each coverage provider will be responsible for paying their “applicable share” of the employee’s excess benefit. A coverage provider’s applicable share is calculated based on the percentage of the employee’s aggregate cost of coverage that is provided by that coverage provider.
CALCULATING THE CADILLAC TAX
The Cadillac tax is calculated for each taxable period with respect to an employee’s applicable employer-sponsored coverage, and equals 40 percent of the employee’s “excess benefit.” Generally, the taxable period is a calendar year, although it may be shorter. Future guidance may also specify different taxable periods for employers of varying sizes.
An employee’s excess benefit is the sum of the employee’s monthly excess amounts for the taxable period. The excess amount is the amount, if any, by which the aggregate cost of the employee’s applicable employer-sponsored coverage for the month exceeds 1/12 of the annual limitation for the calendar year.
Aggregate Cost of Employer-Sponsored Coverage
The aggregate cost of an employee’s applicable employer-sponsored coverage is the sum of the costs for each coverage. In general, the cost of a particular coverage is determined under rules similar to the rules for determining the “applicable premium” for COBRA purposes. The applicable premium is the plan’s cost for providing coverage.
For purposes of the Cadillac tax, separate cost amounts must be calculated for individual and other than individual coverage, even if for COBRA purposes the plan calculates only one premium for all qualified beneficiaries. The aggregate cost of coverage does not include the cost of any excise tax that may be due.
Employers must use the monthly aggregate cost of each applicable employer-sponsored coverage to determine the Cadillac tax amount due. If cost is ordinarily determined on a basis other than monthly, the cost must be allocated to the months in the taxable period in a manner that will be described in future IRS guidance.
For retiree coverage, employers may treat retired employees who have not attained age 65 as “similarly situated” to retired employees who have attained age 65, so that both have the same cost of coverage. Special rules also apply for determining the cost of account-based coverage, such as health flexible spending accounts (health FSAs), health savings accounts (HSAs) or Archer MSAs.