The Cadillac Tax was originally scheduled to take effect in 2018, but legislation was previously passed which delays its effective date until 2020. This provision of the ACA applies a 40% excise tax on high-cost employer-sponsored health coverage. The intent of the tax is a two-fold designed to 1) raise money to help pay for other ACA provisions, such as Exchange subsidies and Medicaid expansion, and 2) to reduce the number or benefit-rich health plans, which some say leads to unnecessary medical treatment and an overutilization of healthcare services.

 

However, when some of the fine print started to come out in Notice 2015-16 and Notice 2015-52 issued by the Internal Revenue Service (IRS) in 2015, it started to become more clear that a lot of employers would be hit with the tax, including those with “middle-of-the-road” types of plans, absent any significant changes to their benefit structures. 

The Cadillac Tax applies to values of coverage that exceeds $10,200 for single coverage and $27,500 for family coverage, adjusted for inflation. At first glance, those may seem like high values, but here’s what the IRS has proposed would be included in the value of coverage, as quantified by the applicable COBRA premium:

It’s possible that other types of coverage may be added to the list as the IRS considers proposing more regulations. This may include self-insured dental or vision plans and certain employee assistance programs (EAPs), among other plan types.  

 

According to the Kaiser Family Foundation, the average employer-sponsored health insurance premium in 2017 for single coverage is $6,690 and for family coverage is $18,764. When you start to add in FSAs, HSAs and other benefits, it can be easy for an employer to trigger the Cadillac Tax. Some employers, labor organizations and unions are already negotiating and planning for 2020 benefit packages, and it would be welcomed relief to have the Cadillac Tax repealed.