What is the "Cadillac Tax"?
Beginning in 2018, the Affordable Care Act (ACA) will impose an excise tax on the value of “excess benefits” under employer-sponsored health plans. The stated purpose of the tax is two-fold: to raise revenue to support other provisions of the ACA and to reduce demand for high-cost employer-sponsored health coverage. The excise tax rate is 40 percent and often is referred to as the “Cadillac tax”.
Think of it like this - you drive an Escalade and you just landed on the Luxury Tax square on the Monopoly board.
What are Excess Benefits?
“Excess benefits” basically means the combined value of all employer-sponsored coverage(s) for the employee that exceeds the following threshold amounts:
- $10,200 if self-only coverage; or
- $27,500 if family coverage.
IRS regulations, which are still pending, are expected to have exceptions and provide for various adjustments in the thresholds to determine excess benefits, because of course, nothing’s easy. For instance, adjustments may be allowed if the insured group’s age and gender demographics are not representative of the demographics of a national risk pool. The threshold amounts also may be increased for certain classes, such as employees in high-risk professions or retirees age 55 and older who are not eligible for Medicare.
The threshold amounts will be indexed for inflation starting in 2020.
Employers will be responsible for calculating the tax taking into account the combined value of all coverage(s) applicable to the employee. Employer will report the tax to the “coverage provider” (e.g., to the insurer or, if self-funded, to the plan administrator) and to the appropriate federal department. The coverage provider will remit the tax.
How do you calculate the value of your benefits?
Because this does not take effect until 2018 - which as we all know is light years away, the IRS has not provided regulatory guidance or detailed information about calculating the value of employer-sponsored coverage. Based on what we know now, the following types of health coverage will likely be included:
- All employer-sponsored group health coverage (other than stand-alone dental/vision plans or certain other excepted benefits);
- Employer and employee contributions to health flexible spending accounts (FSAs);
- Employer contributions to health reimbursement arrangements (HRAs);
- Employee contributions to health savings accounts (HSAs) if made through a § 125 cafeteria plan; and
- Employer HSA contributions.
The “value” of coverage generally will be based on the applicable COBRA rate (without administration fee). For FSAs and HRAs, the “value” will be the amount of contributions. Again, keep in mind it is expected that future regulations will include exceptions and adjustment formulas to determine the coverage value.
This is something we are keeping an eye on and we will continue to update our clients as new information becomes available. If you have questions about the Cadillac Tax or anything else regarding your benefits, reach out. We’re here to help.