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What You Need to Know about the ACA’s ‘Cadillac Tax’

The Cadillac brand is synonymous with American-made luxury and now, thanks to the Affordable Care Act (ACA), it is commonly identified as an excise tax that employers offering high-cost insurance plans are likely to face beginning in 2018.

The “Cadillac tax” targets health plans that provide workers the most generous level of benefits, with little cost-sharing for employees. Proponents argue that such plans encourage the overuse of care, which would ultimately raise the cost of health care overall. The Cadillac tax seeks to eliminate this excess spending, while also providing a source of funding for the expansion of health coverage under the ACA.

The tax already impacts employers’ group health plans, causing many organizations to prepare for the implementation of the Cadillac tax. Below is a complete breakdown of all the tax entails and the ways it may impact employers’ group health plans, including Flexible Spending Accounts (FSA).

Breaking Down the Cadillac Tax

The ACA added Section 4980I to the Internal Revenue Code, which imposes a 40 percent excise tax on high-cost insurance plans beginning in 2018. Employers who sponsor a group health plan are subject to the Cadillac tax and will be taxed on any excess benefit provided to an employee. Excess benefit is defined as the excess of the aggregate cost of the applicable coverage in which the employee is enrolled for the month over the applicable dollar limit for the employee during the month. In 2018, the baseline dollar limits are $10,200 for self-only coverage and $27,500 for other than self-only coverage.

After 2018, the baseline dollar limits will be determined by a cost of living adjustment. Certain exceptions apply, including increased dollar-limit amounts for employees engaged in certain high-risk jobs.

Group Health Plans Impacted, FSAs in the Spotlight

To be applicable for the tax, the group health plan must be made available to an employee by an employer and excludable from the employee’s gross income. Essentially, the tax threshold includes not just the value of premiums, but also any additional benefit offered by employers.

Some examples of applicable coverage includes major medical plans, health reimbursement arrangements, FSAs, Archer Medical Savings Accounts (MSA), health savings account (HAS) contributions, governmental plans, retiree coverage, multiemployer plans and specified disease, hospital indemnity or other fixed-indemnity insurance when premiums are paid on a pre-tax basis.

Employers offering FSAs may be more apt to triggering the tax, as contributions made will count toward the tax calculation. This includes both portions made by employees and their employers. For 2015, the maximum contribution amount by law for FSAs is $2,550 a year, which could push into the Cadillac tax’s threshold.

Based on research by The Henry J. Kaiser Family Foundation, if FSAs remain part of the tax, nearly 26 percent of employers would have at least one health plan that surpasses the individual threshold in 2018 and 42 percent in 2028. However, if FSAs are taken out of the equation, then only 16 percent would exceed the threshold in 2018.

Plans Not Included in Threshold Calculations

Some plans, such as accident-only coverage plans, disability insurance, liability insurance, long-term-care coverage and stand-alone dental and vision are excludable and not subject to the Cadillac tax.

Responsible Parties and Requirements

The health insurance issuer is responsible for paying the Cadillac tax when the applicable coverage is provided under an insured plan. However, the employer is subject to the payment if the applicable coverage consists of coverage under which the employer makes contributions to an HSA or Archer MSA. In the case of any other applicable coverage, the person who administers the plan is responsible for payment of the tax.

Employers will be responsible for calculating the Cadillac tax, as well as W-2 reporting requirements on costs of applicable coverage provided. Employers should be knowledgeable of the plans their employees are enrolled in to determine what amounts need to be included in the aggregate cost of applicable coverage.

Although currently there is growing bipartisan support for the repeal of the Cadillac tax, employers should remain attentive to future developments by following the IRS for anticipated rules that will offer further guidance.

The content of this blog is intended to keep interested parties informed of legal and industry developments for educational purposes only.  It is not intended as legal opinion or tax advice and should not be regarded as a substitute for legal or tax advice.