The ACA Cadillac Tax 101

The ACA Cadillac Tax 101: What You Need To Know

As one of the most controversial features of the Affordable Care Act, the so-called Cadillac Tax is currently scheduled for implementation beginning in 2018. This deadline looms large in the minds of many business owners, as the Cadillac Tax, as the law is written, will have a significant impact on businesses of all sizes.

The 40 percent tax targets plans that provide workers with the most generous level of health benefits. These plans are typically employer-paid plans, with low deductibles and little cost-sharing for employees. The excise tax will be applied in 2018 to coverage for health plans exceeding $10,200 for individual coverage and $27,500 for self and spouse or self and family coverage. Any dollar amount beyond these specified caps will be considered excess health spending, and will be penalized at 40 percent, payable by the insurer (e.g. employer).

These limits include any part of a person's income allocated to flexible spending accounts (FSAs), health reimbursement accounts (HRAs), and health savings accounts (HSAs), but exclude “excepted benefit” expenditures for stand-alone dental, vision, accident, disability, and long-term care insurance coverage. Because the tax is not a deductible business expense, employers will also pay income tax on the excise tax, significantly increasing the bottom line impact of the 40% tax. 

The Cadillac Tax applies to current employees, any former employees, surviving spouses or other primary insured individuals covered under any group health plan made available to the employee by the employer which is excludable from the employee’s gross income under IRC Section 106.

In short, the Cadillac Tax is an excise tax on high-cost health plans. The tax has been proposed in an effort to slow the rate of growth of health care costs, finance the expansion of health coverage by way of the PPACA, and address the unequal tax benefit of excluding employer-based health insurance coverage from taxes.

How so? Since employers sponsor most Cadillac plans, economists in general believe that the widespread popularity of these plans is at least partially attributable to the tax-advantaged status that employer-sponsored health plans currently enjoy. Employer-sponsored health insurance is considered part of an employee's compensation package, but is not taxed as wages. This, many argue, is essentially a government subsidy, which encourages employers to offer, and employees to enroll in, more expensive plans that cover more of the cost of medical care. Proponents of the legislation claim employees use this subsidized medical care excessively because they are insulated from its full cost.

Proponents of the legislation say that it will drive a renewed focus on cost control for employers as well as employees and will stop the overuse of health care. Opponents, however, point out that the legislation will have the effect of penalizing employers for providing a worthwhile benefit to employees, and will likely cause consumers in poor health or with chronic health conditions to have to pay much more for services they desperately need. While there is considerable discussion about re-tooling the legislation before the 2018 deadline, it is unclear at this point whether changes will be made in time to prevent employers from having to make major adjustments to their offered benefits by 2018 to avoid incurring the stiff excise tax.

So how can business owners best prepare for the Cadillac Tax and work to insulate themselves from its impact? We’ll cover that and more in our next blog post.

Do you have any questions about the Cadillac Tax? Contact us. We are here to help.