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The House of Representatives overwhelmingly voted to repeal the “Cadillac Tax” under the Affordable Care Act (ACA). The Cadillac Tax (“tax”) is a tax on high-cost health care plans that was passed to finance health care expansion under the ACA.

The tax was originally set to take effect in 2018 but was delayed twice by legislation until 2022. The Senate still needs to vote on the repeal before the tax is eliminated. It is unclear whether Senate Majority Leader Mitch McConnell will bring up the bill for a vote.

The tax is unpopular with both Republicans and Democrats, as the tax impacts high-earners and union-sponsored plans and does not appropriately account for the annual increases in health care costs. The tax is especially unpopular with employers, who have the burden of calculating the tax and are expected to absorb the 40% tax on employer-sponsored plans whose cost exceed a statutory threshold. Below are some frequently asked questions about the tax.

What is the Cadillac Tax?

The Cadillac Tax (“tax”) was originally passed as a provision of the Affordable Care Act (ACA) in 2010 to finance health care expansion and control the cost of health care.

The tax is on employer-sponsored “Cadillac plans,” or expensive health care plans. A 40% tax is levied on the cost of coverage over a statutory amount, which was projected to be $11,200 for single coverage and $30,100 for family coverage in 2020 (which would be adjusted annually).

The cost of coverage includes the total amount in employer and employee contributions to health insurance premiums, health savings accounts (HSAs), health reimbursement arrangements (HRAs) and medical flexible spending accounts (FSAs). This means that these employer and employee contributions “count against” the statutory maximum, and any amounts above the statutory maximum will be subject to a 40% tax.

Who is subject to the Cadillac Tax?

The tax is calculated by employers on a per employee basis. The tax is levied on carriers for fully insured health care plans, employers for HSAs and Archer MSAs, and third-party administrators for other health benefits. It was expected that carriers and third parties would pass the cost of the tax on to employers.

How does the Cadillac Tax effect employers?

Employers were projected to modify employees’ health benefits in order to avoid the tax by eliminating higher-cost insurance options, lowering contributions to FSAs, HSAs, and HRAs, and eliminating covered services. In addition, employers are responsible for calculating the tax for each employee.

Summary

Most employers will welcome the repeal of the Cadillac Tax, as it will allow employers to offer their choice of health care benefits to their employees without having to consider whether they will be subject to additional taxes and reporting requirements.

Since the repeal of the tax garners bipartisan support and the start date has been pushed back on two occasions, it is likely that the tax will be repealed prior to its 2022 start date. In the meantime, employers should keep an eye on whether Congress repeals the tax.

The information and materials on this blog are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided in this blog may not reflect the most current legal developments and may vary by jurisdiction. The content on this blog is for general informational purposes only and does not apply to any particular facts or circumstances. The use of this blog does not in any way establish an attorney-client relationship, nor should any such relationship be implied, and the contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction. The contributing authors expressly disclaim all liability to any persons or entities with respect to any action or inaction based on the contents of this blog.

Emerald Law – Emerald is a Client Compliance Consultant for Sequoia, where she works with our clients to optimize and streamline benefits compliance. In her free time, Emerald enjoys stand-up comedy, live music and writing non-fiction.