The ACA established a 40% excise tax on high-cost employer-sponsored health plans (Section 4980I). The official name is the “High Cost Employer-Sponsored Health Coverage Excise Tax” however it is known as the Cadillac Tax.
This is a permanent annual tax that is meant to help finance the expansion of health coverage under the ACA in addition to reducing excess health care spending by employees and employers, and reducing the tax preferred treatment of employer provided health care.
The original effective date of this tax was 2018. On January 22, 2019, the President signed a two-year delay therefore this tax will not be effective until 2022.
While the tax was originally non-tax deductible, the December 2015 changes make it tax deductible for employers who pay it.
The tax is 40% of the cost of health coverage that exceeds predetermined threshold amounts. Cost of health coverage includes the total contributions paid by both the employer and employees, but not cost-sharing amounts such as deductible, coinsurance and copayments.
The threshold amounts are currently set at $10,200 for individual coverage and $27,500 for family coverage.
These amounts will be updated before the tax takes effect in 2022 and will be indexed for inflation in future year. Anything in excess of these amounts will be subject to the 40% tax.
These thresholds will also be increased under certain circumstances that have to do with pre-65 retirees and individuals in high-risk professions (e.g. first responders).
In February 2015 the IRS issued Notice 2015-16 that described potential approaches that could be incorporated in future guidance and invited comments.
In July 2015 the IRS issued Notice 2015-52 which was intended to continue the process of developing regulatory guidance. This notice supplements Notice 2015-16 by addressing additional issues, including the identification of the taxpayers who may be liable for the excise tax, employer aggregation, the allocation of the tax among the applicable taxpayers, the payment of the applicable tax and further issues regarding the cost of applicable coverage that were not addressed in Notice 2015-16.
No final guidance has been issued on this top as of yet. The IRS and Treasury are currently working on the calculations that can be used to determine the cost of coverage and what needs to be included/excluded.