Questions on ACA ‘Cadillac Tax’: Part I

Internal Revenue Code section 4980I, as enacted by the Patient Protection and Affordable Care Act (ACA), imposes a 40%, nondeductible excise tax (Excise Tax) on employers, health insurance issuers, and/or other entities administering health plan benefits if the aggregate value of applicable employer-sponsored coverage exceeds a specified annual dollar limit.
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The tax is referred to by some as the “Cadillac Tax.” Below are responses to recent questions received regarding the Excise Tax.

When is the Excise Tax effective?   

The Excise Tax is effective beginning for taxable years beginning in 2018.  It is likely that any tax owed based on the 2018 tax year will be payable in 2019.

Is there any agency guidance on the Excise Tax? 

No, Treasury and the Internal Revenue Service (IRS) have not yet issued any guidance on the Excise Tax. 

Are all types of health coverage taken into account in determining whether the Excise Tax applies?   

The Excise Tax applies to “applicable employer-sponsored coverage” of employees. Applicable employer-sponsored coverage generally means coverage under any group health plan made available to the employee by an employer that “is excludable from the employee’s gross income under Code Section 106, or would be so excludable if it were employer-provided coverage (within the meaning of Code Section 106).” Thus, both the employer and employee-paid portions of premiums are taken into account. The Excise Tax applies to insured and self-funded plans, as well as governmental plans and coverage providing health insurance to self-employed individuals.

Are any types of coverage exempt from the Excise Tax? 

The following types of coverage are excluded from the definition of applicable employer-sponsored coverage under the statutory language:

Coverage for long-term care.

Coverage (whether through insurance or otherwise) described in Code section 9832(c)(1) (other than coverage for on-site medical clinics):

  • Coverage only for accident, or disability income insurance, or any combination thereof;
  • Coverage issued as a supplement to liability insurance;
  • Liability insurance, including general liability insurance and automobile liability insurance;
  • Workers’ compensation or similar insurance;
  • Automobile medical payment insurance;
  • Credit-only insurance; and
  • Other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits.

Any coverage under a separate policy, certificate, or contract of insurance which provides benefits substantially all of which are for treatment of the mouth (including any organ or structure within the mouth) or for treatment of the eye.

Coverage for a specified disease or illness, or for hospital indemnity or other fixed indemnity insurance, as described in Code section 9832(c)(3), if paid on an after-tax basis (or, in the case of a self-employed individual, on a not deductible basis) and offered as an independent, non-coordinated benefit.

 

Does the Excise Tax apply to employer-sponsored coverage provided to former employees? 

Yes, the definition of “employee” includes any former employees (as well as surviving spouses or other primary insured individuals).

How is the Excise Tax calculated?    

The Excise Tax for a year is 40% of the “excess benefit” provided under an employer-sponsored plan. The “excess benefit” is calculated on a monthly basis based on the amount, if any, by which the “aggregate cost” of an employee’s applicable employer-sponsored coverage for the month exceeds 1/12 of the applicable “annual limitation” for the calendar year that includes that month.

 

Got a health-care reform question?  You can ask YOUR health-care reform legislation question online at http://www.surveymonkey.com/s/second_opinions  

You can find a handy list of Key Provisions of the Patient Protection and Affordable Care Act and their effective dates at http://www.groom.com/HCR-Chart.html  

Contributors:  

Christy Tinnes is a principal in the Health & Welfare Group of Groom Law Group in Washington, D.C. She is involved in all aspects of health and welfare plans, including ERISA, HIPAA portability, HIPAA privacy, COBRA, and Medicare. She represents employers designing health plans as well as insurers designing new products. Most recently, she has been extensively involved in the insurance market reform and employer mandate provisions of the health-care reform legislation.   

Brigen Winters is a principal at Groom Law Group, Chartered, where he co-chairs the firm's Policy and Legislation group. He counsels plan sponsors, insurers, and other financial institutions regarding health and welfare, executive compensation, and tax-qualified arrangements, and advises clients on legislative and regulatory matters, with a particular focus on the recently enacted health-reform legislation.  

 

PLEASE NOTE:  This feature is intended to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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