Beginning in 2018, plans that provide coverage that exceeds a threshold will owe an excise tax that is frequently referred to as the “Cadillac tax.” The threshold generally will be $10,200 for single benefits and $27,500 for benefits provided to an employee, retiree, or member of a bargaining unit and dependents. The tax is 40% of the value of coverage provided over that threshold level.
The IRS is beginning the process of writing regulations that will provide details on how this tax will operate. On February 23, 2015, the IRS issued Notice 2015–16, which provides some information on the types of benefits that will count toward the tax. It has requested input on how best to value some of these benefits. It also said in the Notice that as part of the process it plans to finally provide guidance on how Consolidated Omnibus Budget Reconciliation Act (COBRA) premiums should be calculated.
The types of coverage likely to be included in the taxation process include:
- Employer or employee contributions to health flexible spending accounts;
- Employer or pre-tax employee contributions to Archer medical savings accounts;
- Employer or pre-tax employee contributions to health savings accounts;
- Plans maintained for civilian employees by the federal, state, or local governments;
- On-site medical clinics (except for clinics that provide only de minimis medical care, such as first aid, immunizations, nonprescription pain killers, or work injuries to current employees without charge);
- Retiree coverage;
- Multiemployer plan coverage;
- Executive physical programs;
- Health reimbursement arrangements; and
- Specified disease or fixed indemnity coverage if the cost of coverage is excluded or deducted from taxes.
Likely not to be included are:
- Other forms of excepted benefit coverage such as accident or disability income insurance, workers’ compensation, auto-medical payment coverage, or liability coverage;
- Long-term care insurance;
- Dental and vision insurance covered by a separate policy (including both insured and self-insured coverage);
- Specified disease or indemnity insurance when payment is taxable;
- Employee after-tax contributions to Archer MSAs and to HSAs; and
- Employee assistance programs that provided limited medical benefits.
The IRS notes that valuing an HRA can be difficult. It is considering valuing HRAs based either on the amount made newly available to an employee under an HRA each year, or on the total amount spent through HRAs each year by employees divided by the number of covered employees.
Comments are due by May 15, 2015. The IRS also said it expects to request comments on other aspects of the tax. This deliberate approach means that it is not likely that proposed, much less final, regulations will be released in the near future.
For the answers to the top 5 questions about the Cadillac Tax, read our recent blog.
For more information about Cadillac Tax inclusions and exclusions, cost of coverage calculations, changes in coverage and more, download UBA’s PPACA Advisor: Highlights of the Excise Tax on High-Cost Plans (the “Cadillac Tax”).