For taxable years beginning in 2018, the Affordable Care Act (ACA) imposes a 40 percent excise tax on high-cost group health coverage. This tax, also known as the Cadillac tax, is intended to encourage companies to choose lower-cost health plans for their employees.
On February 23, 2015, the Internal Revenue Service (IRS) issued Notice 2015-16 to begin the process of developing guidance to implement the Cadillac tax. This notice describes potential approaches with regard to a number of issues under the Cadillac tax and invites comments on these approaches. The comments received by the IRS are expected to be used to draft proposed regulations. Public comments may be submitted to the IRS until May 15, 2015.
What is the Cadillac Tax?
The Cadillac tax provision is found in Internal Revenue Code (Code) Section 4980I. This provision taxes the amount of an employee’s “excess benefit.” The excess benefit is the amount by which the monthly cost of an employee’s employer-sponsored health coverage exceeds the annual limitation.
For 2018, the statutory dollar limits are:
- $10,200 per employee for self-only coverage; and
- $27,500 per employee for other-than-self-only coverage.
The cost of applicable coverage for purposes of the Cadillac tax is determined under rules similar to those used for determining the COBRA applicable premium. The tax amount for each employee’s coverage will be calculated by the employer and paid by the coverage provider.
For more detailed information on the Cadillac tax and Notice 2015-16, read our Healthcare Reform Legislative Brief where we cover:
- Applicable Employer-Sponsored Coverage
- Overview of IRS Proposals
- Definition of Applicable Coverage
- Determining the Cost of Applicable Coverage
- Determination Period
- Applicable Dollar Limit
- Dollar Limit Adjustments