What is the Cadillac Tax? The Affordable Care Act contains a provision that has become known as the “Cadillac Tax” and establishes a tax on health insurance plans with higher premiums. This provision was put in place to help control the increasing costs of health insurance premiums that are generated from benefit-rich health insurance plans. The concern with such plans is that employers are providing benefit-rich plans, which result in higher premiums that are not taxable, instead of providing a higher income and a plan that does not offer as many benefits. Therefore, the employee is receiving the same total benefit, but less tax is being generated from that benefit (because more of the benefit is from the non-taxable premiums).
How is the Cadillac Tax calculated? The Cadillac Tax provides that “coverage providers” are required to pay a 40% tax on the “value” of any employer-sponsored plan that exceeds $10,200 annually ($850 monthly) for individual coverage and/or $27,500 annually ($2,291.67 per month) for family coverage. The “value” of an employer-sponsored plan is calculated by the employer, and could include premium expenses, Flexible Spending Account (FSA) contributions, and amounts available through a Health Reimbursement Account (HRA). The total “value” of the employer-sponsored plan that is above the maximum limits of $10,200 and $27,500 is known as the “excess benefit”.
Who pays the Cadillac Tax? When assessing responsibility for any tax imposed on the excess benefit, the insurer and the employer would determine the proportion each contributes toward the total benefit offered and divide the tax accordingly. For example, if the total value of the plan is $1,000 per month for single coverage, and premiums equal $600 per month (60%), employer/employee FSA contributions equal $100 per month (10%), and employer/employee HRA contributions equal $300 per month (30%); the excess benefit would be $150 per month, and the total tax imposed would be $60 per month. In this scenario, the insurer would pay $36 of the tax (or 60% of the total tax), and the employer would pay $24 of the tax (or 40% of the total tax).
When calculating who pays the tax, there are some additional considerations for self-funded insurance plans (where the employer is funding the totality of the insurance) and partially self-funded insurance plans (where the employer is funding a portion of the insurance and/or is ‘buying down’ the premiums or deductibles).
The excise tax is calculated monthly, but is paid on an annual basis. When Congress amended the effective date of the Cadillac Tax in December 2015 (see below), they also stated that any tax paid would be a deductible expense, which was a change from the previous version of the law that stated the tax would not be a deductible expense. In an effort to fully educate employees on the effect of continuing coverage under a benefit-rich plan that triggers a Cadillac Tax, employers should discuss any Cadillac Tax implications with employees during the collective bargaining process.
When does the Cadillac Tax take effect? This provision was originally expected to be effective for taxable years beginning on or after January 1, 2018. However, on December 18, 2015, Congress voted to delay the Cadillac Tax two years - until 2020. President Obama signed the bill on December 21, 2015. Because of the delay, employers now have until the taxable year beginning on or after January 1, 2020, to assess their health insurance coverage as it relates to the Cadillac Tax.
If you have questions regarding the Affordable Care Act or the Cadillac Tax, please contact Emily K. Ellingson at Lynch Dallas, P.C. at firstname.lastname@example.org or 319-365-9101.