Excise Tax on High Cost Plans (Cadillac Tax)

Effective January 1, 2020, a 40% nondeductible excise tax will be imposed on “coverage providers” (insurance companies or plan administrators of self-funded plans) to the extent the aggregate value of specified employer-sponsored health coverage exceeds certain threshold amounts - generally $10,800 for individual coverage and $29,500 for family coverage. Thresholds will be higher for plans that cover employees in high-risk professions or retired individuals age 55 and older and not eligible for Medicare. Thresholds will be indexed to growth in the consumer price index for subsequent years.

Costs are likely to be passed on to employers. Employers are responsible for calculating (on a per month basis) the value of the coverage that each employee selects and, if coverage for any individual exceeds the applicable threshold, notifying the entity required to pay the tax and the IRS.

There are many open questions about the Cadillac Tax, which will need to be answered by regulations. However, for employers who are seeking to estimate the impact the Cadillac Tax could have on their plans, the following are some of the key concepts it may be helpful to understand:

Employers Subject to the Cadillac Tax

All employers that provide specified health coverage to employees are subject to the Cadillac Tax.

Benefits Subject to the Cadillac Tax

  • The following benefits are subject to the Cadillac Tax: major medical (including retiree medical), prescription drug coverage, Health FSAs, HRAs, HSAs (to the extent contributions are made by the employer, or made by the employee via pre-tax salary deferral), gap coverage, and, if purchased on a pre-tax basis, specified disease, hospital indemnity, and other fixed indemnity insurance. Certain wellness benefits or on-site clinics may also be subject to the Cadillac Tax if they are considered group health plans.
  • The following benefits are not subject to the Cadillac Tax: standalone dental, vision, long-term care, accident, and disability coverage.

Inflation Prior to 2020

The current thresholds are the ones that are expected to take effect in 2020, although if health costs increase more than anticipated the thresholds will be increased. To estimate the impact of the Cadillac Tax based on an employer's current plan costs, the employer may want to project what its current plan might cost in 2020. An actuary is best positioned to perform this calculation. However, to develop a rough estimate, based on trends over the last several years one could anticipate that medical inflation will cause health plan costs to increase 7% - 10% per year. 

Inflation After 2020

The Cadillac Tax thresholds are indexed to the Consumer Price Index for All Urban Consumers (CPI-U) plus 1% for 2019, and then simply to increases in CPI-U for future years. Because CPI-U typically increases more slowly than medical inflation (3 - 4% compared to 7 - 10% per year), the Congressional Budget Office has estimated that more employers will become subject to the Cadillac Tax each year.

Value of the Coverage

The values for determining whether an employee’s coverage exceeds the relevant threshold is to be calculated under the rules that apply for COBRA coverage. If the plan has the same COBRA value for both individual and family coverage (e.g., for Health FSA contributions), the employer is required to develop both individual and family values. The value of coverage for pre-65 and post-65 retirees may be combined at the employer's discretion for the purposes of determining the applicable cost. Future regulations are expected to clarify the rules related to valuing coverage.

Neither American Fidelity Assurance Company nor American Fidelity Administrative Services provides tax or legal advice and, given the complexity of these laws, we always recommend working with your legal counsel on how the laws impact your specific situation.