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Excise “Cadillac” tax

This 40% tax on high-cost employer plans has been delayed from 2018 to 2022.

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Excise “Cadillac” tax

This 40% tax on high-cost employer medical plans was intended to reduce preferred treatment of employer-sponsored health plans and reduce excess health care spending.

This tax has been delayed from the original effective date of 2018 to 2022. No regulations have been issued to date, and there are many open issues that need to be addressed before the tax takes effect.

  • 40% excise tax on high-cost employer medical plans
  • Original 2018 effective date delayed until 2022
  • $10,200 individual/$27,500 family (2018 amounts to be indexed and anticipated to increase up to 10% by 2022)
  • Employers are responsible for calculating the tax
  • Insurers are responsible for paying the tax for insured plans
  • "The person who administers the plan benefits" is responsible for paying the tax for self-funded plans

40% Excise Tax

Get up to speed on the latest developments and benefit strategy considerations about the 40% Excise Tax, also known as the “Cadillac Tax” in this podcast.

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Alliance to Fight the 40

Many employers, unions, insurers and health insurance industry groups would like to see this tax repealed or modified.

The Alliance is a group of stakeholders seeking to repeal the 40% Cadillac Tax.

Learn More

Excise “Cadillac” Tax Details

On January 22, 2018, Congress passed and the President signed a two-year delay of the 40 percent excise tax on high-cost employer-sponsored health plans, also known as the “Cadillac Tax.” This delay was part of a short-term federal spending bill and changes the effective date from 2020 to 2022. The tax was delayed once before through the Consolidated Appropriations Act of 2016.

In February and July 2015, the Internal Revenue Service (IRS) issued notices covering a number of issues concerning the Cadillac Tax, and requested comments on the possible approaches that could ultimately be incorporated into proposed regulations. While the tax was originally non-tax deductible, the December 2015 changes suggest it will be tax deductible for employers who pay it.

What it is/fee duration  Permanent, annual tax beginning in 2022 on high-cost employer-sponsored health coverage
Purpose
  • Reduce tax-preferred treatment of employer-provided health care
  • Reduce excess health care spending by employees and employers.
  • Help finance the expansion of health coverage under the ACA.
Amount
  • The tax is 40% of the cost of health coverage that exceeds predetermined threshold amounts
  • Cost of coverage includes the total contributions paid by both the employer and employees, but not cost-sharing amounts such as deductibles, coinsurance and copays when care is received
  • For planning purposes, the thresholds for high-cost plans were $10,200 for individual coverage and $27,500 for family coverage in 2018
  • These thresholds will be updated before the tax takes effect in 2022 and indexed for inflation in future years. Current 2022 projections are in excess of $11,00 for individual coverage and $30,000 for family coverage.
  • The thresholds will also be increased:
    • If the majority of covered employees are engaged in specified high-risk professions such as law enforcement and construction. 
    • For group demographics, including age and gender (how to determine these adjustments is to be determined)
  • For pre-65 retirees and individuals in high-risk professions, the threshold amounts are currently $11,850 for individual coverage and $30,950 for family coverage 
    • These amounts will also be indexed before the tax takes effect
Who calculates and pays
  • Insured: Employers calculate and insurers pay
  • Self-funded: Employers calculate and “the person who administers the plan benefits” pays
  • Health Savings Accounts (HSAs) and Archer Medical Savings Accounts (MSAs): Employers calculate and pay
How a group health plan’s cost is determined
  • The tax is based on the total cost of each employee’s coverage above the threshold amount
  • The cost includes contributions toward the cost of coverage made by employers and employees
  • The statute states that costs of coverage will be calculated under rules similar to the rules for calculating COBRA premium
How the tax will be paid Forms and instructions for paying the tax are not yet available
Tax implications Based on a December 2015 change, Cadillac Tax payments are expected to be deductible for federal tax purposes
Types of coverage affected
  • Insured and self-funded group health plans (including behavioral and prescription drug coverage)
  • Wellness programs that are group health plans (most wellness programs)
  • Health Care Flexible Spending Accounts (FSAs)
  • HSAs, employer and employee pre-tax contributions*
  • Health Reimbursement Accounts (HRAs)*
  • Archer MSAs, all pre-tax contributions*
  • Onsite medical clinics providing more than de minimis care*
  • Executive Physical Programs*
  • Pre-tax coverage for a specified disease or illness
  • Hospital indemnity or other fixed indemnity insurance
  • Federal/State/Local government-sponsored plans for its employees
  • Retiree coverage
  • Multi-employer (Taft-Hartley) plans
Coverage excluded
  • U.S.-issued expatriate plans for most categories of expatriates
  • Coverage for accident only, or disability income insurance, or any combination thereof
  • Supplemental liability insurance
  • Liability insurance, including general liability insurance and automobile liability insurance
  • Worker's compensation or similar insurance
  • Automobile medical payment insurance
  • Credit-only insurance
  • Other insurance coverage as specified in regulations under which benefits for medical care are secondary or incidental to other insurance benefits
  • Long Term Care
  • Stand-alone dental and vision*
  • Coverage for the military, sponsored by federal, state or local governments*
  • Employee Assistance Plans*
  • Employee after-tax contributions to HSAs and MSAs*
  • Coverage for a specified disease or illness, and hospital indemnity or other fixed indemnity insurance if payment is not excluded from gross income

* As indicated by IRS notice issued on February 23, 2015 and subject to future regulatory clarification.

How it works: Examples based on current threshold amounts

Note: These threshold amounts will be indexed before the tax takes effect in 2022.

Self-only coverage

A $12,000 individual plan would pay an excise tax of $720 per covered employee:

$12,000 – $10,200 = $1,800 above the $10,200 threshold

$1,800 x 40% = $720

Family coverage

A $32,000 family plan would pay an excise tax of $1,800 per covered employee:

$32,000 – $27,500 = $4,500 above the $27,500 threshold

$4,500 x 40% = $1,800

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These charts show how the tax increases as the plan’s cost increases

Self-only coverage

Plan Cost $11,000 $12,000 $13,000 $14,000 $15,000
Tax $320 $720 $1,120 $1,520 $1,920

Family coverage

Plan Cost $28,000 $30,000 $32,000 $34,000 $36,000
Tax $200 $1,000 $1,800 $2,600 $3,400