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Cadillac Tax Questions & Answers

Posted on December 5th, 2014

The High Cost Employer-Sponsored Health Coverage Excise Tax, more commonly known as the Cadillac Tax, is scheduled to take effect in 2018. The Cadillac Tax is described as an attempt to reduce health care usage and costs by encouraging employers to offer health plans that are more cost effective and that engage employees in the cost of care.  Experts estimate that the tax will raise $80 billion over a 10 year time period and will finance various components of the Affordable Care Act (ACA).
 
Below are some questions and answers about the Cadillac Tax.
 
How much is the Cadillac Tax? The tax is 40% of amounts that exceed $10,200 for single coverage and $27,500 for family coverage. These amounts are expected to be adjusted in 2018 for inflation. The amounts will also be higher for pre-65 retiree plans and high risk professions such as law enforcement and construction.
 
What is included when determining the cost of coverage? The cost includes premiums paid by both the employer and employee for health coverage. The cost will also include employer contributions to Flexible Spending Accounts (FSAs), Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs). It’s not clear if employee contributions to FSAs or HSAs will need to be included. Final regulations are expected to clarify this issue. The cost of providing certain employee assistance programs may also need to be included.  
 
How long will the Cadillac Tax last? It is expected to be a permanent tax.
 
Who calculates and pays the tax?  Employers with fully insured coverage are expected to calculate the excise tax, but insurers are expected to pay the tax. Employers with self-insured coverage are expected to calculate and pay the tax on their own.  
 
What types of plans are excluded from the cost of coverage? Stand-alone dental/vision plans, accident coverage and disability benefits are examples of plans that are not included in the cost of coverage.
 
How will the tax be paid? Forms and instructions have not been drafted.  
 
Are there other tax implications? The excise tax is not a tax deductible expense.   
 
What is an example of how much the tax will be? Assume an employer has determined the cost of coverage to be $12,000 for single coverage. The excise tax would be ($12,000 - $10,200) = $1,800 x 40% = $720 per employee with single coverage.  
 
Will the Cadillac Tax rules change? The final regulations in regards to the Cadillac Tax have not yet been drafted. In addition, there are several parties working to have the Cadillac Tax delayed or even eliminated. Only time will tell.
 
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The materials contained within this communication are provided for informational purposes only and do not constitute legal or tax advice.
 

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