Excise Tax on Cadillac Plans: IRS Seeks Employer Input

Author: Alice Gilman

March 4, 2015

In Notice 2015-16, the IRS seeks comments from employers on the scope of regulations it plans to propose regarding the 40% excise tax on high-cost group health plans.

Under the Affordable Care Act (ACA), beginning in 2018, high-cost group health plans - group health plans exceeding $10,200 per employee in aggregate costs for self-only coverage, and $27,500 per employee in aggregate costs for other than self-only coverage - will be subject to a 40% excise tax. These group health plans are often referred to as Cadillac plans; the excise tax is often called the Cadillac tax.

Cadillac Plans

The ACA imposes a 40% excise tax on any excess benefit, which is defined as the aggregate cost of an employee's applicable coverage over the applicable dollar limit for the employee's coverage for the month. The ACA requires that, in addition to the underlying group health plan, applicable coverage includes the following:

  • Health flexible spending accounts (FSAs);
  • Health savings accounts (HSAs);
  • Medical savings accounts (MSAs);
  • Health reimbursement accounts (HRAs);
  • On-site medical clinics;
  • Retiree coverage; and
  • Coverage for specified diseases or illnesses and hospital, or other fixed, indemnity insurance, if the coverage is excluded from the income of employees.

The premium for an employee's applicable coverage is determined under the rules that apply to COBRA continuation coverage. The baseline dollar limits are $10,200 per employee in aggregate costs for self-only coverage, and $27,500 per employee in aggregate costs for other than self-only coverage. Adjustments must be made to arrive at the applicable dollar amount.

For purposes of the excise tax, employees include retirees, surviving spouses and other covered individuals. Health insurers, employers that provide employees with HSAs or Archer MSAs, self-insured employers or other plan administrators (e.g., unions) may be liable for the tax.

Proposed Regulatory Approach

Notice 2015-16 describes the issues the IRS will cover in proposed regulations and asks for input as those regulations are being developed. The Notice relates to the definition of applicable coverage, the determination of the cost of applicable coverage and the application of the annual dollar limit to the cost of applicable coverage.

The IRS states in the Notice that applicable coverage under the proposed regulations would include all employer contributions and employees' pretax contributions to HSAs and MSAs. Employers seeking to lower the overall cost of coverage could eliminate these contributions, thus making this coverage less attractive to employees. Employees' after-tax contributions to HSAs or MSAs would be excluded from the definition of applicable coverage.

HRAs, which have become key features of employer-provided retiree coverage, would be applicable coverage, but the IRS is requesting suggestions on how to determine their cost. One approach, according to the Notice, would be to determine the cost based on amounts newly made available at the beginning of a year and to exclude carry-over amounts or amounts newly made available before 2018.

The IRS is contemplating excluding from applicable coverage stand-alone dental and vision plans, as well as employee assistance plans that are considered excepted benefits. On-site medical clinics that are limited to providing first aid during employees' working hours would also be excluded from applicable coverage.

The IRS is proposing to limit the aggregate cost of the applicable coverage to coverage in which an employee is actually enrolled. The IRS has also provided a number of potential approaches to determine the cost of applicable coverage.

Request for Comments

The IRS will accept comments through May 15, 2015. Comments should refer to Notice 2015-16. All comments will be available for public inspection and copying. Comments may be submitted in the following formats:

  • Employers may mail comments to: CC:PA:LPD:PR (Notice 2015-16), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044;
  • Employers may hand deliver comments to: CC:PA:LPD:PR (Notice 2015-16), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20044, Monday through Friday between the hours of 8 a.m. and 4 p.m.; or