Excise Tax on High Cost Plans (Cadillac Tax)
Effective January 1, 2018, a 40% nondeductible excise tax will be imposed on “coverage providers” (insurance companies or plan administrators of self-funded plans) to the extent the aggregate value of specified employer-sponsored health coverage exceeds certain threshold amounts - generally $10,200 for individual coverage and $27,500 for family coverage. For plans that cover employees in high-risk professions or retired individuals age 55 and older and not eligible for Medicare, the 2018 threshold amounts increase to $11,850 for individuals and $30,950 for families.
Costs are likely to be passed on to employers. Employers are responsible for calculating (on a per month basis) the value of the coverage that each employee selects and, if coverage for any individual exceeds the applicable threshold, notifying the entity required to pay the tax and the IRS.
There are many open questions about the Cadillac Tax, which will need to be answered by regulations. In addition, because this provision does not take effect until 2018, it’s possible that Congress could amend these requirements. However, for employers who are seeking to estimate the impact the Cadillac Tax could have on their plans, the following are some of the key concepts it may be helpful to understand:
- Employers Subject to the Cadillac Tax
All employers that provide specified health coverage to employees are subject to the Cadillac Tax.
- Benefits Subject to the Cadillac Tax
- The following benefits are subject to the Cadillac Tax: major medical (including retiree medical), prescription drug coverage, health FSAs, HRAs, HSAs (to the extent contributions are made by the employer, or made by the employee via pre-tax salary deferral), gap coverage, and, if purchased on a pre-tax basis, specified disease, hospital indemnity, and other fixed indemnity insurance. Certain wellness benefits or on-site clinics may also be subject to the Cadillac Tax if they are considered group health plans.
- The following benefits are not subject to the Cadillac Tax: stand alone dental, vision, long-term care, accident, and disability coverage.
- Inflation Prior to 2018
The current thresholds are the ones that are expected to take effect in 2018, although if health costs increase more than anticipated the thresholds will be increased. To estimate the impact of the Cadillac Tax based on an employer's current plan costs, the employer may want to project what its current plan might cost in 2018. An actuary is best positioned to perform this calculation. However, to develop a rough estimate, based on trends over the last several years one could anticipate that medical inflation will cause health plan costs to increase 7% - 10% per year. Click here to calculate how inflation, and the Cadillac Tax, could impact your plans.
- Inflation After 2018
The Cadillac Tax thresholds are indexed to the Consumer Price Index for All Urban Consumers (CPI-U) plus 1% for 2019, and then simply to increases in CPI-U for future years. Because CPI-U typically increases more slowly than medical inflation (3 - 4% compared to 7 - 10% per year), the Congressional Budget Office has estimated that more employers will become subject to the Cadillac Tax each year.
- Value of the Coverage
The values for determining whether an employee’s coverage exceeds the relevant threshold is to be calculated under the rules that apply for COBRA coverage. If the plan has the same COBRA value for both individual and family coverage (e.g., for Health FSA contributions), the employer is required to develop both individual and family values. The value of coverage for pre-65 and post-65 retirees may be combined at the employer's discretion for the purposes of determining the applicable cost. Future regulations are expected to clarify the rules related to valuing coverage.
Cadillac Tax Hot Topics & FAQs
- How is coverage valued for calculating the Cadillac tax?
Answer: The employer will be tasked with adding up the value of the coverage that each employee selects, which will include both the full cost (employee and employer shares similar to how COBRA rates are calculated) of the health coverage each employee elects. If coverage for any individual exceeds the applicable threshold, the employer will notify the entity required to pay the tax and the IRS.
- When calculating the Cadillac Tax what value of coverage is included if an employee is married? Does the employer have to find out what health coverage an employee's spouse may have?
Answer: The only amount an employer takes into account is the coverage that employer provides that is elected by the employee. If the employee elects family coverage, the total cost of family coverage is included. If the employee elects self-only coverage, the cost of the self-only coverage is included. Each employer only has to report the coverage that it provides. Whether or not another family member has additional health coverage is irrelevant for purposes of the excise tax on high cost plans
- What is the purpose of the Cadillac Tax?
Answer: The initial policy goal of the Cadillac Tax was to encourage employees to select coverage that was not as rich, which, in turn, would discourage over-utilization of medical services. The enacted version of the Cadillac Tax imposes an excise tax on the insurance companies or administrators to incentivize offering lower cost health plan options.
Understand the employer reporting obligations if a tax is owed
Calculate how health care inflation, and the Cadillac Tax, could impact your plans
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Explore your health plan cost drivers and possible solutions, which could help reduce your exposure to the Cadillac tax
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American Fidelity Assurance Company does not provide tax or legal advice.