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Health Care Reform and the Cadillac Tax Overview

Employee Benefits

Implementation scheduled for 2018

Section 9001 of the Affordable Care Act (ACA) imposes an excise tax on “high cost” employer-sponsored health coverage beginning with the 2018 tax year. Known as the “Cadillac Tax”, the tax is imposed if an employee is covered under any applicable employer-sponsored plan during any time during a taxable period and there is an “excess benefit” with respect to the coverage. The tax rate is scheduled to be 40% of the excess benefit.

Excess benefit amounts will be determined on a monthly basis. The excess amounts are any aggregate cost amounts (employer + employee premium cost) over 1/12 of the annual limitation for the calendar year. Annual limitations are currently determined by the type of coverage provided to the employee. The type of coverage is broken down into two categories: individual coverage and any coverage other than individual. The Health Care Reconciliation Act sets the annual limitations at the following levels:

Fiscal Year 2018 Limits

Individual coverage: $10,200

All other coverage: $27,500

Amounts in excess of these limits would be taxed at 40%.

Exceptions will apply to retirees and employees engaged in a high risk profession (ex: those employed to repair or install electrical or telecommunication lines). The limitations for these individuals will be higher than the standard limits.

Coverage providers are required to pay the tax. A “coverage provider” is defined as:

  • Health Insurance Coverage (fully insured): the health insurance issuer or carrier
  • Other Coverage (self-funded): The plan administrator
  • Health Savings Account (HSA) and Medical Savings Account (MSA) contributions: The employer

The responsibility for reporting tax liability currently rests with the employer. Each employer must determine their tax liability each period based on the amount of excess benefit. The amount of excess benefit will be subject to the tax and must be reported to the federal Department of Health and Human Services (HHS) Secretary AND each coverage provider of the amount determined for the provider.

For situations in which a plan covers multiple employers (many union plans), the plan sponsor (not the employer) is required to make the calculations and provide the notice.

Applicable employer-sponsored coverage includes any group health plan which is excludable from the employee’s income under IRC Section 106. It does not include long-term care or any coverage provided that is not excludable from gross income.

No further guidance has been issued on this provision to date.

Key Takeaway

The Cadillac Tax will not be effective until 2018. Like many components of the Affordable Care Act, it does have the potential for change before the effective date. At this point it is prudent to understand what the Cadillac Tax is, be mindful of your employee insurance costs and be aware of federal guidance/rulings may alter this federal tax.

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