“Cadillac Tax” Delayed until 2022

Implementation of the “Cadillac Tax,” the Affordable Care Act’s excise tax on high-cost employer-sponsored health coverage, has been delayed until 2022. Previously, this tax—which would impose a 40% tax on plans that cost more than $10,200 (for self-only coverage) and $27,500 (for family coverage)—was set to become effective in 2020. An overview of the Cadillac Tax is below.

What is the Cadillac Tax?

Effective for taxable years beginning after 2021, an excise tax, which will be governed by the Internal Revenue Code (section 4980I) is set to be imposed on high cost employer-sponsored health coverage.

The Cadillac Tax is set to be imposed if:

  • An employee is covered under any “applicable employer-sponsored coverage”at any time during a taxable period, and
  • There is any excess benefit with respect to the coverage.

The tax is set to be equal to 40% of the excess benefit.

“Applicable employer-sponsored coverage” generally means coverage provided under any group health plan made available to the employee by an employer which is excludable from the employee’s gross income. Coverage is considered “applicable employer-sponsored coverage” without regard to whether the employer or employee pays for the coverage.

The cost of plan benefits generally cannot be above the threshold of $10,200 for self-only coverage and $27,500 for family coverage, with exceptions for certain types of coverage such as if the individual is a qualified retiree or participates in a plan where the majority of employees covered are engaged in a high-risk profession or are employed to repair or install electrical or telecommunications lines.

Liability to pay the Cadillac Tax is imposed proportionately on each coverage provider:

  • If the employer-sponsored coverage consists of health coverage under an insured group health plan, the health insurance issuer is liable to pay the tax.
  • If the employer-sponsored coverage consists of employer contributions to an Archer MSA or a health savings account (HSA), the employer is liable to pay the tax.
  • In the case of any other applicable employer-sponsored coverage, the “person that administers the plan benefits” is liable to pay the tax.

Each employer generally must calculate the excess benefit for each taxable period and the applicable share of such excess benefit for each coverage provider and notify the Secretary of Treasury and each coverage provider of the amount at such time and in such manner as the Secretary may prescribe. Employers or plan sponsors may also be penalized if they undervalue the insurance cost subject to the Tax.

This information is subject to change as Federal agencies have yet to issue proposed regulations with respect to the Cadillac Tax. At this time employers should be aware of and start to analyze the provisions of the law and IRS notices and work with their tax counsel to determine specific compliance responsibilities.