The ACA’s Cadillac Tax on High Cost Health Coverage
For taxable years beginning in 2018, the 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.
The Cadillac tax provision taxes the amount, if any, by which the monthly cost of an employee’s applicable employer-sponsored health coverage exceeds the annual limitation. The amount of the tax for each employee’s coverage will be calculated by the employer and paid by the coverage provider.
The Cadillac tax applies to employer-sponsored coverage. Generally, applicable employer-sponsored coverage includes governmental plans. In addition, coverage under any group health plan for a self-employed individual will be treated as applicable employer-sponsored coverage, and will be subject to the Cadillac tax, if a deduction is allowable under Code section 162(l) for all or any portion of the cost of that coverage.
Features (Coverages) Not-Included
- Long-term care
- Separate dental and vision plans
- Accident-only or disability income insurance (or any combination thereof)
- Supplemental liability insurance
- Liability insurance, including general and automobile liability insurance
- Workers’ compensation or similar insurance;
- Automobile medical payment insurance
- Credit-only insurance
- Other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits
Independent, non-coordinated coverage for a specified disease or illness only, or hospital indemnity or other fixed indemnity insurance, is also not subject to the Cadillac tax if:
- Payment is not excludable from the employee’s gross income
- In the case of self-employed individuals
Employers will be responsible for calculating the Cadillac tax owed for each employee’s employer-sponsored coverage, as well as the share attributable to each coverage provider. In the case of multi-employer plans, the plan sponsor will be required to calculate and report each coverage provider’s portion of the taxable excess amount.
In addition, employers or plan sponsors will be responsible for reporting the taxable excess benefit attributed to each coverage provider to both that coverage provider and to the IRS.
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