Preliminary Information on the Cadillac Tax under the Affordable Care Act

Starting in 2018, health insurers, employers and/or plan sponsors will be charged a 40 percent excise tax on any excess group health benefit provided to employees, former employees, surviving spouses, and other primary insured individuals. The excess benefit is the amount by which the cost of employer-sponsored health coverage exceeds the annual threshold.

While regulations have not been issued, the recently issued IRS Notice 2015-16 provides preliminary information on approaches under consideration by the IRS.

Here is an outline of current IRS considerations:

Applicable coverage:

  • Fully-insured or self-insured coverage under any employer-sponsored group health plan that is excludable from the employee’s gross income under IRC § 106
  • Employers and employee contributions (whether pre-tax or after-tax) to the health care cost are included

Plan Types included:

  • Health FSAs
  • Governmental plans
  • Multiemployer plans
  • Retiree coverage
  • Coverage for only a specified disease or illness and hospital indemnity or other fixed indemnity insurance, if the payment for the coverage is excluded from gross income or a deduction is allowed

Plan types excluded:

  • Accident or disability income insurance
  • Liability insurance, including general and auto liability coverage, and liability insurance supplements
  • Auto medical payment insurance
  • Fully-insured dental or vision plans: any standalone coverage under a separate policy or contract
  • Coverage for only a specified disease or illness and hospital indemnity or other fixed indemnity insurance, if the payment for the coverage is not excluded from gross income or a deduction is not allowed for it

Plan types that are uncertain about application:

  • HSAs and Archer MSAs: Employee pre-tax contributions included; awaiting guidance on employer contributions and employee after-tax contributions
  • HRAs, on-site medical clinics (may be based on services offered), executive physical programs, standalone self-funded dental or vision plans, military coverage (likely excluded), Employee Assistance Programs

See IRS Notice 2015-16 – Excise Tax on High Cost Employer-Sponsored Health Coverage for more details. MSEC will provide updates as guidance is issued.