United States: The "Cadillac Tax": A Tankful Of Issues

Last Updated: August 11 2015
Article by Jessica S. Sackin and Larry R. Goldstein

McGuireWoods Healthcare Reform Guide: Installment No. 52

This is the 52nd in a series of WorkCite articles concerning the Patient Protection and Affordable Care Act and its companion statute, the Health Care and Education Reconciliation Act of 2010 (referred to collectively as the ACA). The article discusses Notice 2015-52 (the Notice) recently issued by the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS), supplementing Notice 2015-16 (the Prior Notice) issued earlier this year. The two notices address issues under Section 4980I of the Internal Revenue Code of 1986 (Code) − added by the ACA − which imposes an excise tax on "high-cost employer sponsored health coverage," the so-called "Cadillac tax," which takes effect beginning in 2018.


The Cadillac tax is a 40 percent nondeductible excise tax that applies to the cost of employer-sponsored health coverage provided to an "employee" that exceeds a statutory dollar limit. In connection with developing regulations for this tax, the Treasury and the IRS issued the notices requesting comment on a number of design and implementation issues, including identifying coverage to which the tax applies, determining the aggregate cost of the applicable coverage, determining the applicable dollar limit, identifying the taxpayers who may be liable for the tax and treating all controlled group members as a single employer when computing and imposing the tax.

The Treasury and the IRS have invited comments on all of these issues and any other issues relating to implementation of the tax. Such comments must be submitted by October 1, 2015.

Computing the Cadillac Tax

The Cadillac tax will equal 40 percent of the "excess benefit" – the portion of the aggregate cost of the employer-sponsored coverage of an employee that exceeds the applicable dollar limit. The applicable dollar limit will differ for self-only coverage and coverage other than self-only coverage. In 2018, each applicable dollar limit will be the baseline dollar limit specified in Section 4980I, $10,200 for self-only coverage and $27,500 for other-than-self-only coverage, multiplied by the "health cost adjustment percentage." That percentage is equal to 100 percent plus the excess, if any, of (i) the percentage by which the per-employee cost for providing coverage under the Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefits Plan (FEHBP) for plan year 2018 (determined by using the benefit package for such coverage in 2010) exceeds such cost for plan year 2010, over (ii) 55 percent.

The dollar limits will also be subject to various other adjustments:

  • Age and gender : To account for differences in the age and gender characteristics of an employer's workforce from those of the national workforce, the applicable dollar limits will be increased by an amount equal to the excess, if any, of (i) the premium cost of the Blue Cross/Blue Shield standard benefit option under the FEHBP for the type of coverage provided to an individual in a taxable period if priced for the age and gender characteristics of all employees of the individual's employer, over (ii) the premium cost for the provision of such coverage under such option in such taxable period if priced for the age and gender characteristics of the national workforce. There is no downward adjustment of the applicable dollar limits on account of the age and gender characteristics of an employer's workforce versus the national workforce.
  • Inflation: In 2019 and later years, the applicable dollar limits will be adjusted for inflation.
  • Certain individuals: Increased baseline dollar limits will apply to certain retirees and to participants in a plan sponsored by an employer the majority of whose employees covered by the plan are considered to be engaged in a high-risk profession or are employed to repair or install electrical or telecommunications lines.

"Employees" who are taken into account for purposes of the Cadillac tax include former employees, surviving spouses, and "other primary insured individual[s]."

Under Section 4980I, the sponsoring employer is responsible for determining the total amount of any tax owed and for allocating that amount among the parties liable for paying the tax. The employer must notify the liable parties as well as the IRS of the taxes due from each party. In the event a liable party pays less than the amount of tax owed due to a miscalculation by the employer, the party must pay the remaining tax owed and the employer may also be required to pay a penalty equal to the amount of the missed tax as well as interest on the underpayment.

Design and Implementation Issues Up for Comment under the Notices

  • Coverage to which the Cadillac tax applies : The Cadillac tax applies to "employer-sponsored coverage," which may include any coverage under an insured or self-funded group health plan – without regard to whether the employer or the employee pays for the coverage. The Prior Notice indicated that the following are all types of coverage that are required to be taken into account (or are likely to be required to be taken into account under future guidance):
    • All contributions to health flexible spending accounts (FSAs)
    • Employer contributions, and salary reduction contributions, to Archer medical savings accounts (MSAs) and health savings accounts (HSAs)
    • On-site medical clinics offering more than de minimis medical care
    • Retiree coverage
    • Multiemployer plans
    • Executive physical programs
    • Health reimbursement accounts
  • The Prior Notice also indicated that the following are excluded types of coverage for purposes of the Cadillac tax:
    • Employee after-tax contributions to an Archer MSA or an HSA
    • On-site medical clinics offering only de minimis medical care
    • Coverage for long-term care
    • Any coverage under a "separate policy, certificate, or contract of insurance" that provides benefits substantially all of which are for treatment of the mouth or eye
    • Coverage only for a specified disease or illness, or hospital indemnity or other fixed indemnity insurance, if offered as an independent, non-coordinated benefit and paid for with after-tax dollars
    • Coverage only for accident, or disability income insurance, or any combination thereof
    • Liability insurance, including general liability insurance and automobile liability insurance, or coverage issued as a supplement to liability insurance
    • Workers' compensation or similar insurance
    • Automobile medical payment insurance
    • Credit-only insurance
    • Other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits
  • The exclusion for coverage under a "separate policy, certificate, or contract of insurance" for the treatment of the mouth or eye could be interpreted to mean that there is no exclusion for self-funded stand-alone dental and vision benefits. The Prior Notice indicated that the Treasury and the IRS are considering specifically excluding these plans in future guidance.
  • In addition to the types of coverage listed, the Prior Notice indicated that Treasury and the IRS are considering excluding employee assistance programs that qualify as "excepted benefits" under the ACA and on-site medical clinics that provide certain services in addition to, or in lieu of, first aid (e.g., immunizations, injections of antigens − for example, for allergy injections − provided by employees, provision of a variety of aspirin and other nonprescription pain relievers, and treatment of injuries caused by accidents at work beyond first aid).
  • Determining the aggregate cost of employer-sponsored coverage : The Cadillac tax applies to the excess, if any, of the aggregate cost of the "applicable employer-sponsored coverage" of an employee over the applicable dollar limit. The Prior Notice clarified that such "applicable" coverage includes only the coverage in which the employee is actually enrolled, and not coverage offered to the employee in which the employee does not enroll.
  • Section 4980I provides that the cost of applicable coverage must be calculated separately for self-only coverage and other-than-self-only coverage, and is equal to the cost of applicable coverage using rules similar to the rules for determining the "applicable premium" for COBRA health continuation coverage. The COBRA applicable premium is defined in the Code as the cost to the plan for the relevant period of continuation coverage for similarly situated beneficiaries who have not experienced a "qualifying event" (without regard to whether such cost is paid by the employer or employee). Comments are requested on the application of the methods currently used for COBRA purposes to determining the cost under a self-funded plan and on the method for determining similarly situated beneficiaries in general. As to retirees, Section 4980I specifically provides that a plan may elect to treat pre-65 retirees and post-65 retirees as similarly situated beneficiaries.
  • There are special rules under Section 4980I for calculating the cost of applicable coverage under a health FSA, an Archer MSA or an HSA. The Notice indicates that Treasury and the IRS are considering an approach under which contributions to such account-based plans would be allocated on a pro-rata basis over the period to which the contributions relate (generally, the plan year), regardless of the timing of the contributions during the period. Comment is requested on the method of determining cost of coverage under an HRA.
  • Determining the applicable dollar limit: As indicated above, the Code provides two annual dollar limits – one for employees with self-only coverage and one for employees with other-than-self-only coverage. Generally, the prorated annual limitation that applies for any given month is determined based on the type of coverage provided to the employee by the employer as of the first day of the month. Individuals who are covered under multiemployer plans are treated as having other-than-self-only coverage regardless of their actual coverage type.
  • The Prior Notice proposed two different approaches regarding employees who have both self-only and other-than-self-only coverage simultaneously.
    • Under the first approach, the applicable dollar limit for an employee would depend on which type of coverage is considered the employee's primary coverage/major medical coverage. For this purpose, an employee's primary coverage/major medical coverage would be the type of coverage that accounts for the majority of the aggregate cost of applicable coverage. If self-only and other-than-self-only coverage make up equal amounts of the aggregate cost of the applicable coverage, the other-than-self-only coverage dollar limit would apply to the employee.
    • Under the alternative approach, a composite dollar limit would be determined by prorating the dollar limits for each employee according to the ratio of the cost of the self-only coverage and the cost of the other-than-self-only coverage provided to the employee.
  • The Treasury and the IRS request comments on these potential approaches, including potential administrative difficulties in applying them.
  • Entities potentially liable for payment of the tax: Section 4980I provides that the "coverage provider" is liable for payment of the tax. The meaning of "coverage provider" depends on the type of coverage provided. If the coverage is provided under an insured group health plan, the coverage provider is the health insurance issuer. If the coverage is under an HSA or Archer MSA, the coverage provider is the employer. For all other types of coverage, the coverage provider is "the person that administers the plan benefits." That term is not defined in Section 4980I, but that section does state that it includes the plan sponsor if the plan sponsor administers benefits under the plan.
  • The Notice summarizes two different approaches being considered by the Treasury and the IRS for determining the identity of "the person that administers plan benefits." Under either approach, it is expected that the "person" that administers the plan benefits will generally be an entity.
    • Under one approach, "the person that administers the plan benefits" would be the person/entity responsible for performing the day-to-day functions that constitute the administration of plan benefits (for example, receiving and processing claims for benefits, responding to inquiries, or providing a technology platform for benefits information). For self-insured plans, this would generally be a third-party administrator. The Notice requests comments regarding identification of the relevant entity in situations where multiple parties perform the relevant administrative functions with respect to a benefit package for which a single cost of applicable coverage is determined.
    • Under the alternative approach, "the person that administers the plan benefits" would be the person/entity that has the ultimate authority or responsibility with respect to the administration of the plan benefits (e.g., eligibility determinations, claims administration, or arrangements with service providers), regardless of whether that person/entity routinely exercises that authority or responsibility. Again, the Notice requests comment regarding circumstances in which multiple parties have ultimate authority or responsibility for different relevant administrative matters with respect to the same benefit package.
  • Aggregation of controlled group members: Section 4980I provides that for purposes of computing and imposing the Cadillac tax, all members of a controlled group are treated as a single employer. In the Notice, the Treasury and the IRS indicate that they are considering how to apply these employer aggregation rules for purposes of computing and imposing the tax.

After reviewing all feedback, the Treasury and the IRS intend to issue proposed regulations. An additional opportunity for comment will be available once the proposed regulations are issued.


The two notices demonstrate the complexity of the Cadillac tax and the difficulties that its implementation will present. Comments that the Treasury and the IRS have already received in response to the Prior Notice express deep concerns as to the tax and the possibility that ordinary inflation in medical costs will cause plans simply meeting the ACA's minimum value requirements to progressively approach the Section 4980I thresholds. For example, the United States Chamber of Commerce urges the Treasury and the IRS "to carefully promulgate rules that only impose the tax on the plans that Congress intended − the excessively generous group health plans − and not group health plans that merely provide the minimum required level of coverage."

The American Benefits Council (ABC) has commented that "employers should not − and cannot − be put in the untenable position of having to choose between offering qualifying coverage under Code Section 4980H (the employer shared responsibility requirement) or offering coverage that is not subject to the 40 Percent Tax" under Section 4980I. "It is crucial," says the ABC, "that the [Treasury] signal clearly and early that in no event would solely offering the minimum coverage necessary to avoid an excise tax for purposes of Code Section 4980H result in an excise tax for purposes of Code Section 4980I."

An effort to repeal the Cadillac tax has been led by the "Alliance to Fight the 40," which describes itself on its website as a "broad based coalition comprised of public and private sector employer organizations, unions, health care companies, businesses and other stakeholders that support employer-sponsored health coverage."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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