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Guidance on the Cadillac Tax

Cadillac Tax Delayed Two Years

On December 18, 2015, Congress passed a two-year delay on the 40 percent excise tax on high-cost employer sponsored health plans, more commonly known as the Cadillac Tax.

The Cadillac Tax will now go into effect in 2020, rather than 2018 as originally expected.     
            

What is the Cadillac Tax?                                                                

As a reminder, starting now in 2020, if the aggregate cost of applicable employer-sponsored coverage provided to any employee exceeds a statutory dollar limit, the excess will be subject to a 40 percent excise tax. The current thresholds for the aggregate cost of applicable employer-sponsored coverage are $10,200 for individual coverage and $27,500 for family coverage. These thresholds will be adjusted annually for inflation.                           


How will the cost of coverage be determined?                                                                                


The current guidance suggests that the cost of coverage will be determined similar to that of COBRA; however, the IRS will need to clarify in their regulations the specific methods self-funded plans should use to determine the COBRA premium, as well as how to determine the premium for HRAs and Health FSAs.               


For self-funded plans, the IRS is considering two methods to determine the COBRA premium—the actuarial basis and the past costs method. The IRS is requesting comments on the use of these two methods, recognizing that adjustments may be required prior to the issuance of regulations.          


To whom will the Cadillac Tax apply?                              


The guidance issued by the IRS identified to whom the Cadillac Tax will apply. Applicable health plans, including self-funded and fully insured, are as follows:   

  • Health coverage including medical, behavioral, and prescription drug
  • Health Flexible Spending Accounts (FSAs)
  • Health Savings Accounts (HSAs)
  • On-site medical clinics
  • Coverage for a specified disease or illness
  • Hospital indemnity or other fixed indemnity insurance
  • Federal/state/local government-sponsored employee plans
  • Possibly other types of coverage, including executive physical programs and Health Reimbursement Arrangements (pending confirmation in future guidance)
  • Retiree coverage
  • Multi-employer plans                              

      

We will continue to monitor developments on this future tax and will relay further information as it becomes available.            

     


If you have any questions, please contact your client relationship manager.              

      

This content is being provided as an informational tool. It is believed to be accurate at the time of posting and is subject to change. It is recommended that plans consult with their own experts or counsel to review all applicable federal and state legal requirements that may apply to their group health plan. By providing this information, Meritain Health is not exercising discretionary authority or assuming a plan fiduciary role, nor is Meritain Health providing legal advice.