In 2014, the Affordable Care Act imposed a 40 percent tax on high-cost employer-sponsored health coverage plans, more commonly known as the “Cadillac tax.” Originally, the tax was slated for 2017, but it was delayed until 2018, and Congress later passed another delay, changing the effective date to 2020.
With the recent delays, details on how the tax will affect business owners remain to be seen, prompting questions from employers and employees – especially when it comes to what they need to do to prepare. Although we are a few years from the implementation of the Cadillac tax, and regulations may evolve, it is important that accountants have accurate information about how the tax may impact their clients’ businesses and wallets.
The Purpose of the Cadillac Tax
The Cadillac tax’s purpose is threefold: to reduce tax-preferred treatment of employer-provided health care, help finance the expansion of healthcare coverage under the Affordable Care Act, and reduce both employers’ incentive to overspend on health plans and employees’ incentive to overuse services.
How the Tax is Calculated
The tax is equivalent to 40 percent of the total cost of each employee’s coverage beyond a certain threshold, depending on the type of plan. This threshold also adjusts to account for age, gender, retirement status, and high-risk professions. Originally, the thresholds were expected to be $10,200 for individual coverage and $27,500 for coverage other than individual. However, these thresholds will most likely increase in upcoming years because they are indexed for inflation.
Who is Responsible for Paying the Tax?
Because the tax is based on an employee’s total benefits package, employers are currently responsible for calculating the tax and reporting each benefits administrator’s portion of the tax to the IRS. The tax itself is then paid by the coverage provider or person who administers the plan benefits. To make things simpler, here is a breakdown:
- For a typical health insurance plan, the insurer pays the tax.
- For self-funded health care, whoever implements the plan’s benefits pays the tax.
- For health savings accounts and Archer medical savings accounts, the employers pay the tax.
What is Included in the Tax
The tax will be applied to pretax group employer-sponsored coverage, including employer- and employee-paid portions. The following coverage options are susceptible to being taxed:
- Health coverage, including medical, behavioral, and prescription drug.
- Health flexible spending accounts.
- Health savings accounts.
- Archer medical savings accounts.
- Governmental plans, with the exception of military coverage.
- On-site medical clinics, with the exception of clinics that provide minimal medical care.
- Retiree coverage.
- Multiemployer plans.
- Specified disease or illness and hospital indemnity or other fixed indemnity insurance, only when any portion of the premium is paid pretax or by the employer.
What is Not Included in the Tax
The following coverage plans are not eligible to be taxed:
- Accident insurance.
- Disability insurance.
- Life insurance.
- Supplemental liability insurance.
- Liability insurance, including general and automobile liability insurance.
- Workers’ compensation or similar insurance.
- Automobile medical payment insurance.
- Credit-only insurance.
- Stand-alone vision.
- Stand-alone dental.
- Specified disease and hospital fixed indemnity are excluded if not sponsored by the employer and paid for on an after-tax basis.
One important coverage plan that is not included in the Cadillac tax is voluntary insurance. Most voluntary insurance products are defined as “excepted benefits,” which are excluded from most of the Affordable Care Act’s market reforms. This means that if companies offer supplemental life, dental, or accident policies, they are safeguarded against any taxes being imposed.
However, two types of voluntary coverage – specified disease and hospital indemnity – are subject to the calculation of the tax, but only if they’re paid for with pretax dollars, such as through a cafeteria plan, or with excludable employer contributions. Otherwise, they are not subject to the calculation of the tax.
Educating clients about what to expect in the future is important; however, accountants need to let employers know they do not need to make changes to their policies in anticipation of the tax just yet. For now, clients can wait for further guidance because the tax and regulations may continue to change as 2020 draws near – including the tax threshold amounts and other implementation dates.
Disclaimer: This material is intended to provide general information about an evolving topic and does not constitute legal, tax, or accounting advice regarding any specific situation. Aflac cannot anticipate all the facts that a particular employer or individual will have to consider in their benefits decision-making process. We strongly encourage readers to discuss their healthcare reform situations with their advisors to determine the actions they need to take or to visit Healthcare.gov (which may also be contacted at 1-800-318-2596) for additional information.
Bradley Knox is vice president of federal relations for Aflac Inc. He also directs Aflac’s government relations and lobbying activities in Washington, DC. Prior to joining Aflac, Bradley served as chief counsel for the Committee on Small Business in the House of Representatives, founder and CEO of DigiTech Systems Solutions Inc., and as a major...