What is the "Cadillac Tax"?

Beginning in 2018, the Affordable Care Act (ACA) will impose a 40% excise tax -- the "Cadillac Tax" -- on insurance plans that exceed specified thresholds. The tax will only apply to the benefit amount that exceeds the threshold. The thresholds for 2018 are currently pegged at $27,500 for a family plan and $10,500 for an individual plan.

Let's look at an example of how the tax will be calculated. If we assume that the threshold for a family plan is $27,500, and the aggregate cost of a given family plan is $32,500, then the tax will be 40% of the difference between $32,500 and $27,500, which comes to $2,000. [($32,500 - $27,500) x .40 = $2,000].
Whether a plan exceeds the threshold will be determined on a monthly basis.

The tax applies to the aggregate cost of “applicable employer-sponsored coverage,” i.e., coverage under a group plan. Applicable employer-sponsored coverage also includes:

medical and prescription drugs
dental and vision, but not if those are under separate policies
employee and employer contributions to a health FSA
employer contributions to an HRA
employer contributions to an HSA
on-site clinics

Generally, the aggregate cost of employer-sponsored coverage will likely be determined in the same way as you would calculate an employee’s COBRA premium for the tax year.

The tax does not apply to “excepted benefits,” including:

a separate dental or vision policy
fixed indemnity health coverage purchased by the employee with after-tax dollars
long-term care under an accident or health plan
coverage only for accident and/or disability income
liability insurance
coverage issued as a supplement to liability insurance
workers’ compensation insurance
automobile medical payment insurance
credit-only insurance
other coverage under which benefits for medical care are incidental

Again, for 2018, the Cadillac Tax thresholds are as follows:

$10,200 annually for individuals ($850/month)
$27,500 annually for families ($2,291.67/month)
These thresholds might be increased before the tax actually becomes effective.

The thresholds are set higher($11,850 and $30,950) for “qualified retirees” (i.e., an individual that is 55 years old, receiving retiree coverage, and is not eligible for Medicare) and “high-risk profession” employees (e.g., law enforcement, firemen, construction). If the majority of employees in a group plan are in “high-risk professions,” the entire group may qualify for the higher thresholds.

The Cadillac Tax is not without controversy, and some commentators believe there is a possibility that the tax will be delayed, altered, or entirely repealed. So, stay tuned . . . .

[NOTE: The information provided here is not intended to convey legal or tax advice. If you have specific questions, please consult your legal counsel or tax advisor.]