IRS Moving Ahead on 40% Cadillac Tax Penalty
Who: Anyone with an employer-sponsored health plan where 2018 aggregate annualized cost of applicable coverage exceeds $10,200 for “self-only” or $27,500 for “other than self only” coverage.
When: Effective for taxable years beginning January 1, 2018 or later. The IRS published initial guidance (Notice 2015-16) on February 23, 2015. The Notice requests written comments to IRS by May 15, 2015.
What: Employer plans may be subject to a 40% tax on health plan costs in excess of the IRS limits.
Executive Summary: Insurers will pay a “Cadillac Tax” of 40% tax, if the plan is insured. Employers pay the tax for High Deductible Health Plans, if they are contributing to HSAs. Third Party Administrators (TPAs) pay the tax for all other plans. Cadillac taxes are NOT deductible for federal tax purposes.
The limits in the ACA will be increased if the growth in BlueCross BlueShield’s standard benefit option under the Federal Employee Health Benefits Plan exceeds 55% from plan years 2010 to 2018. Beginning 2018, dollar limits will be subject to cost-of-living adjustments. To calculate the cost of applicable coverage the ACA relies on the rules for establishing COBRA premiums.
The cost of applicable coverage and the tax will be considered on a monthly basis.
Applicable Coverage is generally insurance that is excludable from an employee’s gross income.
The ACA specifically lists the following employer paid plans as applicable coverages: Health FSAs, HSAs (, Archer MSAs, governmental plans, on-site medical clinics, retiree coverage, multi-employer plans, and coverage for specified disease or illness (the later only if paid pre-tax).
Specifically excluded from being considered “applicable coverage” are accident or disability income, supplemental insurance, liability insurance, worker’s compensation, automobile medical payment insurance, credit-only insurance, long term care, and fixed indemnity insurance. The IRS is asking for input to clarify the classification of: coverage provided to military by State or Federal governments, on-site clinics that provide minimal services, limited dental and vision, Employee Assistance Programs (EAPs)s, Health Reimbursement Arrangements (HRAs), pre-tax employee HSA contributions, and executive physical exams.
Actions: Employers, Insurers, TPAS, agents/brokers/consultants, and potentially affected employees should review Notice 2015-16 and subsequent IRS releases on the Cadillac tax. The IRS requests comments on this Notice by May 15, 2015. Send comments to:
CC:PA:LPD:PR (Notice 2015-16),
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
The information presented and contained within this article was submitted by Ronald E. Bachman, President & CEO of Healthcare Visions and Chairman of the IHC Editorial Advisory Board. This information is general information only, and does not, and is not intended to constitute legal advice. You should consult legal advisors to determine the laws and regulations applicable to your company. Any opinions expressed within this document are solely the opinion of the individual author.