IRS Invites Comments on Cadillac Tax Implementation for 2018 (Part 1)
Posted on: March 3, 2015Categories: HR & ComplianceFor taxable years beginning in 2018, the Affordable Care Act (ACA) imposes a 40 percent excise tax on high-cost group health coverage. This tax, also known as the “Cadillac tax,” is intended to encourage companies to choose lower-cost health plans for their employees.
On Feb. 23, 2015, the Internal Revenue Service (IRS) issued Notice 2015-16 to begin the process of developing guidance to implement the Cadillac tax. Proposed or final regulations have not yet been issued on the ACA’s Cadillac tax provision.
This notice describes potential approaches with regard to a number of issues under the Cadillac tax and invites comments on these approaches. Public comments may be submitted to the IRS until May 15, 2015.
Taxpayers may not rely on the information provided in Notice 2015-16. However, the IRS notes that these potential approaches could be incorporated in future proposed regulations.
Overview of the Cadillac Tax
The Cadillac tax provision is found in Internal Revenue Code (Code) Section 4980I. This provision taxes the amount of an employee’s “excess benefit.” The excess benefit is the amount by which the monthly cost of an employee’s employer-sponsored health coverage exceeds the annual limitation.
For 2018, the statutory dollar limits are:
- $10,200 per employee for self-only coverage; and
- $27,500 per employee for other-than-self-only coverage.
The cost of applicable coverage for purposes of the Cadillac tax is determined under rules similar to those used for determining the COBRA applicable premium. The tax amount for each employee’s coverage will be calculated by the employer and paid by the coverage provider.
Applicable Employer-sponsored Coverage
The Cadillac tax applies to “applicable employer-sponsored coverage” (both insured and self-insured). Applicable employer-sponsored coverage is coverage under any group health plan made available to the employee by the employer, which is excludable from the employee’s gross income under Code Section 106. The term “employee” includes any former employee, surviving spouse or other primary insured individual.
Applicable coverage also includes health FSAs, HSAs, on-site medical clinics, retiree coverage, multiemployer plans and coverage only for a specified disease or illness and hospital indemnity or other fixed indemnity insurance (if paid on a pre-tax basis or a Section 162(l) deduction is allowed).
Some types of coverage are generally excluded from applicable coverage, including coverage under which medical benefits are secondary or incidental to other insurance benefits, long-term care coverage, limited scope dental and vision coverage and coverage only for a specified disease or illness and hospital indemnity or other fixed indemnity insurance (if paid for exclusively with after-tax dollars or a Section 162(l) deduction is not allowed).
Look out for part 2 on Thursday which provides an overview of IRS proposals.
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