Glimpsing the Future of the Cadillac Tax

cadillac taxIRS Notice 2015-16, published on February 23, 2015, addresses Section 4980I, the Excise Tax on High Cost Employer-Sponsored Health Coverage (aka the Cadillac Tax). The Notice is the first by Treasure and IRS (the Departments) on this subject, and is “intended to initiate and inform the process of developing regulatory guidance.” The Notice is not binding regulatory guidance, but rather an open letter to stakeholders asking for feedback on ideas the Departments are kicking around for implementing the Cadillac Tax, which is set to begin in 2018.

Section 4890I – added to the Code by the Affordable Care Act (ACA) – requires a 40% excise tax to be paid on the cost of applicable employer-sponsored coverage exceeding a statutory dollar limit. The baseline dollar limits for 2018 are $10,200 per employee for self-only coverage and $27,500 per employee for other-than-self-only coverage, with a health cost adjustment percentage.

The big questions not answered in the ACA are how to determine “cost” and what constitutes “applicable employer-sponsored coverage.” We have been patiently waiting upon the Departments to provide us with the answers to these questions. Notice 2015-16 doesn’t provide the answers, but it does provide a preview of what the answers might be.


Section 4890I defines applicable coverage broadly as “coverage under any group health plan made available to the employee by an employer which is excludable from the employee’s gross income under section 106, or would be excludable if it were employer-provided coverage (within the meaning of such section 106).” The term “group health plan” is also defined broadly by §5000(b)(1) as “a plan (including a self-insured plan) of, or contributed to by, an employer … to provide health care (directly or otherwise) to the employees, former employees … or their families.” Coverage that meets the basic definition of applicable coverage is applicable coverage without regard to whether the employer or the employee pays for coverage, and without regard to whether the employee pays for the coverage with pre- or post-tax dollars.

Under this broad net we find:

  • Major medical plans
  • HRAs
  • Health FSAs
  • Archer MSAs
  • HSAs
  • Governmental plans (maintained primarily for civilian employees)
  • On-site medical clinics
  • Retiree coverage
  • Multiemployer plans
  • Specified diseases/illness and hospital indemnity or other fixed indemnity insurance (if payment for coverage/insurance is excluded from gross income or a deduction under §162(l) is allowed)

Notice 2015-16 provides some insights into what the Departments are thinking with respect to a few of these benefits. For HSAs, employer contributions (including salary reduction contributions) and employee pre-tax salary reduction contributions will likely be included as “applicable coverage” while employee-after tax contributions will not be included. It looks like on-site medical clinics that provide only de minims medical care to employees will also be spared from “applicable coverage.” The Departments are, however, looking for comment on how to treat on-site medical clinics that go beyond first aid and provide immunizations, allergy injections (provided by employees), nonprescription pain relievers, and treatment of injuries caused by accidents at work. Should these on-site clinics be included in “applicable coverage” for Cadillac Tax purposes? If you have an opinion, be sure to share it with the Departments.

Explicitly excluded from the Cadillac Tax are the following:

  • Accident-only plans, disability income insurance
  • Supplemental liability insurance
  • Liability insurance (general liability insurance and automobile liability insurance)
  • Workers’ compensation insurance
  • Automobile medical payment insurance
  • Credit-only insurance
  • Other similar coverage under which benefits for medical care are secondary or incidental to other insurance benefits
  • Long-term care coverage
  • Stand-alone dental and vision coverage (if under separate policy, certificate or contract of insurance)
  • Specified diseases/illness and hospital indemnity or other fixed indemnity insurance (if payment for coverage/insurance is not excluded from gross income and a deduction under §162(l) is not allowed)

The Departments are leaning towards including coverage provided under a government plan maintained primarily for members of the military and their families among this list of benefits excluded from applicable coverage.

With respect to dental, vision and EAPs, the Departments recognize that §4980I pre-dates the most recent changes to the excepted benefit regulations and thus the two are not in alignment. The Departments are considering regulations that would conform the dental/vision/EAP rules for purposes of the Cadillac Tax with the excepted benefit rules. Simply put, if the dental/vision/EAP coverage qualifies as an excepted benefit pursuant to the recently issued regulations under §9831, then it would not be “applicable coverage” subject to the Cadillac Tax.


We already know from §4980I that the cost of applicable coverage of a health FSA is equal to the sum of salary reduction contributions plus employer flex credits used for the health FSA. We also know that the cost of applicable coverage of a HSA or Archer MSA shall be equal to employer contributions, including salary reduction contributions. But how is the cost of coverage to be determined for major medical plans?

Generally, the cost of applicable coverage is determined under rules similar to the rules of §4980B(f)(4), which apply for purposes of determining the COBRA applicable premium. COBRA applicable premium is based on the average cost of providing coverage for similarly situated non-COBRA beneficiaries. For fully insured plans, the cost of providing coverage is determined by the premium charged by the issuer. Determining the cost of provided coverage under a self-insured plan is a little trickier. Section 4980B(f)(4)(B) prescribes two acceptable methods: (1) the actuarial basis method and (2) the past cost method. Regulatory details for these methods are elusive. For example, when quantifying claims in the past cost method, should claims incurred or claims submitted be used? Should overhead expenses simply be equal to a defined percentage of claims, or presumed to be built into the fee charged for administration by a TPA?

In anticipation of Cadillac Tax regulations, the Departments are considering more detailed regulations and/or standards that should be applied under both the actuarial basis method and the past cost method. The Departments are also looking for comments on the feasibility of a method for determining the cost of applicable coverage using actual costs – basing the cost of applicable coverage for a year on the actual cost paid by the self-insured plan to provide health coverage for that year. If you have an opinion, share it with the Departments!


The 40% excise tax imposed on the excess of the aggregate cost of the applicable coverage is paid by (1) the issuer where applicable coverage is provided by an insured plan, (2) the employer where the applicable coverage consists of employer contributions to an HSA, and (3) the plan administrator for any other applicable coverage. In each case, the employer must calculate the tax and notify the entity liable for paying the tax and the IRS.


The Cadillac Tax is significant enough to be a concern to every employer sponsoring a group health plan. Although the tax is not imposed until 2018, sponsors should be working closely with their benefits consultants to determine what risk, if any, the benefits offered to employees will cross the dollar limit thresholds and expose the plan to significant tax liabilities. This Notice from the Departments is a welcome preview into future regulations governing just how the cost of applicable benefits will be quantified.

Comments to Notice 2015-16 can be submitted until May 15, 2015, and we can expect another notice describing and inviting comments on a number of other issues before the publication of proposed regulations.

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