Internal Revenue Code section 4980I, as enacted by the Patient Protection and Affordable Care Act (ACA), imposes a 40%, nondeductible 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.
The tax is referred to by some as the “Cadillac Tax.” We previously answered questions we received regarding the Excise Tax. Below are responses to additional questions we have received regarding the Excise Tax.
What is the annual dollar limit?
The “annual limitation” is a dollar threshold based on numerous factors and adjusted for inflation. For 2018, the general dollar threshold is $10,200 for self-only coverage, and $27,500 for coverage other than self-only coverage, but the dollar thresholds are multiplied by a “health cost adjustment percentage” under which the thresholds could be increased if health care inflation (measured based on the cost of the Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefits Plan) from 2010 to 2018 exceeds 55%.
The dollar threshold is also increased for:
- An age and gender adjustment;
- “Qualified retirees,” defined as an individual who is receiving coverage by reason of being a retiree, has attained age 55, and is not entitled to benefits or eligible for enrollment under the Medicare program under title XVIII of the Social Security Act;
- Individuals who participate in “a plan sponsored by an employer the majority of whose employees covered by the plan are engaged in a high-risk profession or employed to repair or install electrical or telecommunications lines.” The term high-risk profession means certain law enforcement officers and employees in fire protection activities, individuals who provide out-of-hospital emergency medical care, certain individuals whose primary work is longshore work, and individuals engaged in the construction, mining, agriculture (not including food processing), forestry, and fishing industries. The term also includes an employee who is retired from a high-risk profession if such employee satisfied the requirements for a period of not less than 20 years during the employee’s employment;
- Participants in a multiemployer plan (as defined in Code section 414(f)), who are treated as always having coverage other than self-only coverage (i.e., having the $27,500 dollar threshold).
In 2019, the thresholds are indexed for inflation based on increases in the Consumer Price Index for all-urban consumers (CPI-U) plus one percentage point (rounded to the nearest $50) and starting in 2020, the threshold amounts are indexed to the CPI-U (rounded to the nearest $50).
How is the age and gender adjustment determined?
The age and gender adjustment is equal to the excess (if any) of (1) the premium cost of the Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefits Plan (FEHBP) for the type of coverage provided to an individual in a taxable period if priced for the age and gender characteristics of all employees of the individual’s employer, over (2) the premium cost for the provision of such coverage under such option in such taxable period if priced for the age and gender characteristics of the national workforce.
The Joint Committee on Taxation’s Technical Explanation of the Revenue Provisions in the ACA provides the following example as to how the age and gender adjustment would be applied.
The new threshold amounts (as indexed) are then increased for any employee by the age and gender adjusted excess premium amount, if any. For an employee with individual coverage in 2019, if standard FEHBP coverage priced for the age and gender characteristics of the workforce of the employee’s employer is $11,400 and the Secretary estimates that the premium cost for individual standard FEHBP coverage priced for the age and gender characteristics of the national workforce is $10,500, the threshold for that employee is increased by $900 ($11,400 less $10,500) to $11,304 ($10,404 plus $900).
Who is responsible for paying the Excise tax?
The party responsible for paying the Excise Tax depends on the type of coverage being offered and each coverage provider’s “applicable share of the excess benefit.” The health insurance issuer is responsible for paying the share of the Excise Tax attributable to health insurance coverage that it underwrites. The employer is responsible for paying the share of the Excise Tax attributable to health savings account (HAS) and medical savings account (MSA) contributions that are applicable employer-sponsored coverage. And the “person that administers the plan benefits” is responsible for paying the share of the Excise Tax attributable to “any other applicable employer-sponsored coverage.”
Who is responsible for calculating the Excise Tax?
The employer sponsoring the plan (or, in the case of a multiemployer plan, the plan sponsor) is required to (1) determine the total amount of the Excise Tax and the applicable share of the excess benefit attributable to each coverage provider responsible for paying the tax, and (2) notify each coverage provider of the amount that it owes. If the employer (or multiemployer plan sponsor) inaccurately calculates the total excess benefit or applicable portion of the excess benefit owed by each responsible party, the employer (or plan sponsor) could be subject to a penalty equal to 100% of the underpaid portion of the Excise Tax (in addition to the portion of the Excise Tax to which it is already subject) plus interest at the IRS underpayment rate.
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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
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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