Employee Benefits Compliance, Taxes, Fees & Penalties

Preparing for the Cadillac Tax

This article was updated December 31, 2015, to reflect the 2-year delay in the effective date of the Cadillac tax, per the Omnibus Act, 2016.  See our Dec. 21 article at https://news.leavitt.com/health-care-reform/cadillac-tax-delayed-to-2020/ .

Overview of the Cadillac Tax

Beginning in 2020, if the total cost of “applicable employer-sponsored coverage” provided to an employee exceeds a specified annual dollar limit (the “tax threshold”), the excess cost is subject to a non-deductible 40% excise tax. This is often referred to as the “Cadillac” tax. Generally, the calculation of excess cost and tax amount will be determined on a month-by-month basis.

New!  The original effective date was 2018, but on Friday, December 18th Congress voted to delay the Cadillac tax for two years, so it will not be effective until 2020 rather than in 2018.  The provision is one small part of the $1.1 trillion Consolidated Appropriations Act of 2016, a government spending and tax-break package also known as the omnibus and tax reform bill.

For 2018, the tax threshold is $10,200 for self-only coverage and $27,500 for “other than self-only coverage” (referred to as “family coverage” in this article, although it also includes “employee-plus-one” coverage and all other non-self-only coverage).  Each employer must calculate annually whether the tax applies and, if it does, must notify liable coverage providers and the IRS.  Since the effective date has been delayed until 2020, the tax threshold amounts will be higher than these 2018 amounts, since the thresholds are indexed based on the Consumer Price Index (CPI).

As a simple example, in 2018 no excise tax will apply for employee A if the total aggregate cost (employer plus employee contributions) of employee self-only medical coverage (in a high-deductible health plan) + the employee pre-tax contribution to a health FSA + the employer HSA contribution + the employee pre-tax payroll reduction HSA contribution equals $10,000. However, an excise tax will apply if the total aggregate cost for these same benefits equals $11,000. The tax will be $320, which is calculated as follows: $11,000 – $10,200 (the tax threshold) = $800 * 40% = $320 annually.

Through a series of action steps for employers, this article explains what coverages are included in “applicable” employer-sponsored coverage, how to calculate the value of such coverage, the tax threshold amounts and adjustments to them, who is liable to pay the excise tax if it applies, the penalties for incorrectly calculating the tax amount, and some strategies to get or keep the cost of your coverage below the tax threshold. If you think you might need to reduce your benefits by 2018, the smart thing to do is to make incremental changes in 2016-2018, rather than to drastically reduce or eliminate benefits as of January 2018.

New!  The Consolidated Appropriations Act, 2016 also makes the Cadillac tax fully deductible for any entity to which it applies (e.g., employers and insurers).  As initially written in the ACA, it would not have been deductible.

Click here for a full copy of the white paper “Preparing for the Cadillac Tax.”