Cadillac Tax Explained

The Cadillac Tax is the next BIG provision of the Affordable Care Act to begin in 2018.  That may seem like an eternity from now.  But, given the potential impact to employer groups, I thought it was at least worth a closer review.  Below is the most digestible information I could find (from our good friends at Cigna):

Overview

Scheduled to take effect in 2018, the “Cadillac Tax” is a 40% non-deductible excise tax on employer-sponsored health coverage that provides high-cost benefits.

On February 23, 2015, the Internal Revenue Service (IRS) issued a notice covering a number of issues concerning the Cadillac Tax, and requested comments on the possible approaches that could ultimately be incorporated into proposed regulations. No regulations have been issued to date.

CADILLAC TAX
What it is/fee duration Permanent, non-deductible, annual tax beginning in 2018 on high-cost employer-sponsored health coverage.
Purposes
  • Reduce tax preferred treatment of employer provided health care
  • Reduce excess health care spending by employees and employers
  • Help finance the expansion of health coverage under the Patient Protection and Affordable Care Act (PPACA)
Amount
  • The tax is 40% of the cost of health coverage that exceeds predetermined threshold amounts.
  • Cost of coverage includes the total contributions paid by both the employer and employees, but not cost-sharing amounts such as deductibles, coinsurance and copays when care is received.
  • For planning purposes, the thresholds for high-cost plans are currently $10,200 for individual coverage, and $27,500 for family coverage.
  • These thresholds will be updated for 2018 when final regulations are issued and thereafter indexed for inflation in future years.
  • The thresholds will also be increased:
    • If the majority of covered employees are engaged in specified high-risk professions such as law enforcement and construction, and
    • For group demographics including age and gender.
  • For pre-65 retirees and individuals in high-risk professions, the threshold amounts are currently $11,850 for individual coverage and $30,950 for family coverage.
Who calculates and pays
  • Insured: Employers calculate and insurers pay
  • Self-funded: Employers calculate and pay
How a group health plan’s cost is determined
  • The tax is based on the total cost of each employee’s coverage above the threshold amount.
  • The cost includes contributions toward the cost of coverage made by employers and employees.
  • The statute states that costs of coverage will be calculated under rules similar to the rules for calculating COBRA premium.
How the tax will be paid Forms and instructions for paying the tax are not yet available.
Tax implications Cadillac Tax payments are not deductible for federal tax purposes.
Applicable types of coverage
  • Insured and self-insured group health plans (including behavioral, and prescription drug coverage)
  • Wellness programs that are group health plans
  • Health Flexible Spending Accounts (FSAs)
  • Health Savings Accounts (HSAs)(Employer pre-tax contributions only)*
  • Health Reimbursement Accounts (HRAs)*
  • Archer Medical Savings Accounts (MSAs) (Employer pre-tax contributions only)*
  • On-site medical clinics providing more than de minimis care*
  • Executive Physical Programs*
  • Pre-tax coverage for a specified disease or illness
  • Hospital indemnity or other fixed indemnity insurance
  • Federal/State/Local government-sponsored plans for its employees
  • Retiree coverage
  • Multi-employer (Taft-Hartley) plans
Excluded types of coverage
  • U.S.-issued expatriate plans for most categories of expatriates
  • Coverage for accident only, or disability income insurance, or any combination thereof
  • Supplemental liability insurance
  • Liability insurance, including general liability insurance and automobile liability insurance
  • Worker’s compensation or similar insurance
  • Automobile medical payment insurance
  • Credit-only insurance
  • Other insurance coverage as specified in regulations under which benefits for medical care are secondary or incidental to other insurance benefits
  • Long Term Care
  • Standalone dental and vision*
  • Coverage for the military sponsored by federal, state or local governments*
  • Employee Assistance Programs*
  • Employee After-Tax Contributions to HSAs and MSAs*
  • Coverage for a specified disease or illness and hospital indemnity or other fixed indemnity insurance if payment is not excluded from gross income

*As indicated by IRS notice issued on February 23, 2015 and subject to future regulatory clarification.

How it works: Examples based on current threshold amounts

Self-only coverage
A $12,000 individual plan would pay an excise tax of $720 per covered employee:
$12,000 – $10,200 = $1,800 above the $10,200 threshold
$1,800 x 40% = $720

Family coverage
A $32,000 family plan would pay an excise tax of $1,800 per covered employee:
$32,000 – $27,500 = $4,500 above the $27,500 threshold
$4,500 x 40% = $1,800

These charts show how the tax increases as the plan’s cost increases.

Self-only coverage

Plan Cost $11,000 $12,000 $13,000 $14,000 $15,000
Tax $320 $720 $1,120 $1,520 $1,920

Family coverage

Plan Cost $28,000 $30,000 $32,000 $34,000 $36,000
Tax $200 $1,000 $1,800 $2,600 $3,400

Healthcare Tax Forms

If You are a Small Business Claiming a Health Care Tax Credit

If you are a small employer claiming a small business health care tax credit, you will file Form 8941, Credit for Small Employer Health Insurance Premiums.  Here are the instructions.

If You Had Coverage the Entire Year

If you, and everyone in your household, had health coverage for the entire year you will simply check the box on line 61 of Form 1040, line 38 of Form 1040-A, or line 11 of Form 1040-EZ.

If You Enrolled in Health Insurance Through the Marketplace

If you enrolled in coverage through your state’s Health Insurance Marketplace you will receive Form 1095-A, Health Insurance Marketplace Statement.

Tip: If you did not receive a Form 1095-A in the mail, contact the state or federal Marketplace through which you enrolled.

If You Received an Advance Premium Tax Credit

If you received a Form 1095-A, Health Insurance Marketplace Statement, showing you received an advance payments of the premium tax credit in 2014, you must file a tax return in 2015 and reconcile the advance payments with the amount of the premium tax credit allowed on your return.

To reconcile the advance payments of the premium tax credit, you will make the calculations using IRS Form 8962 Premium Tax Credit (PTC).

If you are required to repay any excess advance payments of the premium tax credit, you will report the information on line 46 Form 1040 or line 29 of Form 1040-A, and cannot file Form 1040-EZ.

If You are Claiming a Premium Tax Credit

If you are claiming the premium tax credit and did not receive an advance payments of the premium tax credit, you will file a tax return and IRS Form 8962, Premium Tax Credit (PTC).

If You are Claiming an Exemption for Not Having Coverage

If you are claiming an exemption from the requirement to have health coverage (the “Individual Mandate”) for anyone on your tax return, you will complete Form 8965, Health Coverage Exemptions, and submit it with your tax return.

However, there are certain exemptions that only the Marketplace can grant. These include religious conscience exemptions or a hardship exemptions. In these situations, file an application with the Marketplace and follow the instructions below about how to report exemptions from the Marketplace on your tax return.

If you’ve applied for an exemption from the Marketplace, but do not currently have an Exemption Certificate Number, enter ‘PENDING’ in  Part I of Form 8965 Health Coverage Exemptions, and submit the form with your return.

If You are Making an Individual Shared Responsibility Payment

If you are making an Individual Shared Responsibility Payment because you did not have health coverage or qualify for an exemption for any month in 2014, you will enter the payment amount on line 61 of Form 1040, line 38 of Form 1040-A, or line 11 of Form 1040-EZ.

Conclusion

This year’s tax filing season is the first year individuals will report healthcare, premium tax credits, and Affordable Care Act compliance on taxes. The forms you need to file depends on your specific healthcare situation.