The Cadillac Plan Tax: What Will You Pay?

By Christine Moehl

The Affordable Care Act (“ACA”) has been around since 2010 and nearly all of the major provisions of the law have been implemented in the intervening five years. However, there is one controversial element of the ACA which has not yet taken effect – the “Cadillac Plan Tax.” This tax is scheduled to take effect on January 1, 2018. The tax drew its nickname from luxury Cadillacs because it is meant to apply to high-cost, “luxury” employer-sponsored health coverage. However, many ACA experts anticipate that the Cadillac Plan Tax will have a broader impact than was initially expected, and may affect many employers who offer middle-cost coverage to their employees. Therefore, as the effective date of the Cadillac Plan Tax draws near, it is imperative that all employers examine the cost of their health benefit programs to determine if the Cadillac Plan Tax applies.

The Details:  The Cadillac Plan Tax is a 40% non-deductible excise tax on employer-sponsored health coverage that is in excess of statutory limits. The limits for 2018 are $10,200 for “self-only” coverage and $27,500 for “other-than-self-only” coverage (e.g., employee plus spouse coverage and employee plus family coverage). These limits will be adjusted in future years. The tax only applies to the cost of health coverage that exceeds the statutory limit. For example, if Greg is enrolled in self-only health insurance through his employer in 2018 and that coverage costs $12,000 in premiums per year, then the amount of Cadillac Plan Tax due would be $720 (($12,000-$10,200)*40% = $720). It does not matter whether Greg’s employer pays 100% of the premium or if Greg pays some portion of the premium himself, the entire $12,000 is included in the calculation.

In order to determine the cost of its employer-provided health coverage for purposes of the Cadillac Plan Tax, and employer must aggregate the cost of all of its employer-provided health benefits, not just the cost of a major medical health insurance plan. To determine the aggregate cost of coverage, an employer must include the cost of any Flexible Spending Account (FSA), Health Reimbursement Account (HRA), executive physical program, or Health Savings Account (HSA) that its employees are enrolled in. The cost of coverage for FSAs and HSAs include both employee contributions and employer contributions. In addition, if an employee has a supplemental health policy (such as hospitalization, cancer care, or executive care) and the cost of the policy is excluded from the employee’s gross income, then the cost of the policy must be included in the aggregate cost of health coverage. In some cases, on-site medical care will also be included in the cost of coverage as well.

Employers are responsible for determining the amount of Cadillac Plan Tax that is due (if any) for each of their employees. Employers must then apportion the tax to the responsible “coverage providers” and tell the coverage providers to pay their share of the tax. The coverage provider for a fully-insured major medical plan is the insurance carrier. In the case of an HSA, the coverage provider is the employer. For other arrangements (e.g., FSAs and HRAs) the coverage provider is most likely the employer, although more guidance is expected on this issue. Please contact the Employee Benefits & Executive Compensation Group if you have any questions about how the Cadillac Plan Tax may apply to you or your business.