On February 23, the Department of Treasury and the Internal Revenue Service (collectively, the “Agencies”) issued Notice 2015-16, the first piece of guidance on the Affordable Care Act’s “Cadillac Tax.” The Cadillac Tax is a 40 percent excise tax that is imposed on high-cost health plans under Section 4980I of the Internal Revenue Code (Code), which provision was added to the Code by the Affordable Care Act (ACA).

Very generally, the Cadillac Tax applies to taxable years beginning after December 31, 2017 (i.e., the 2018 plan year for calendar-year plans), and provides that a 40 percent excise tax will be imposed on “applicable employer-sponsored coverage” in excess of statutory thresholds (in 2018, $10,200 for self-only coverage, and $27,500 for “other than self only” coverage (e.g., family coverage)). Notably, the excise tax applies only to the “excess benefit,” i.e., the amount by which the cost of the applicable employer-sponsored coverage exceeds the statutory thresholds. Furthermore, this excise tax is to be calculated on a monthly basis, so that it applies only in the months in which there is an “excess benefit.” The cost of the applicable coverage is to be determined under rules similar to those used to calculate COBRA premiums.

Under Section 4980I, the employer is responsible for calculating the total amount of the excise tax and the excess benefit, while the actual liability for the excise tax rests with the insurer (in the case of an insured plan), the employer (in the case of a Health Savings Account (HSA)), or the “person that administers the plan” (in the case of other types of coverage). Hence, in the case of self-funded coverage that does not involve an HSA, it is unclear who (i.e., the plan sponsor, the third-party administrator, etc.) will be responsible for this liability (and note that Notice 2015-16 does not provide any guidance or clarity on this last point).

Purpose of Guidance

Notice 2015-16 notes initially that it “is intended to initiate and inform the process of developing regulatory guidance” regarding the Cadillac Tax. The Notice states, in several places, how the Agencies anticipate future regulations to look on certain issues, while inviting comments on many other areas. Comments on the issues raised in this Notice are due to the Agencies by May 15, 2015.

Notably, the Notice states that the Agencies anticipate issuing another notice in the near future, covering issues not addressed in this Notice, including “procedural issues relating to the calculation and assessment of the excise tax.” Thereafter, the Notice states that the Agencies anticipate issuing proposed regulations. Hence the “roadmap” of guidance here appears by this Notice, a future notice and then proposed regulations (presumably followed by final regulations and any necessary subregulatory guidance).

Definition of Applicable Coverage

The first major substantive area covered by the Notice is with respect to what constitutes “applicable coverage” to which Section 4980I applies. The Notice makes clear that “applicable coverage” is determined without regard to who (i.e., employer or employee) pays for the coverage; that “applicable coverage” includes, in addition to traditional employer-sponsored group health coverage, an enumerated list of different types of coverage (such as Health FSAs, HSAs, governmental plans, coverage for on-site medical clinics (subject to some exceptions), retiree coverage and coverage under multiemployer plans); and excludes certain other types of listed coverage (such as excepted benefits and coverage provided for military members and their families). The Notice furthermore states that, in future guidance, the Agencies expect to make clear that Health Reimbursement Arrangements (HRAs) and executive physical programs are applicable coverage subject to Section 4980I.


Per the Notice, the Agencies anticipate that the future proposed regulations will provide that (1) employer contributions to HSAs, which for these purposes includes employee pre-tax salary reduction contributions to HSAs, will be included in “applicable coverage,” and (2) employee after-tax contributions to HSAs will be excluded from “applicable coverage.” This guidance, if implemented as the Agencies anticipate, could have significant impact on the use of HSAs, and could result in the use of HSAs subjecting many employer plans to the Cadillac Tax unless the employer limits the amount an employee can contribute on a pre-tax basis.

On-Site Medical Clinics

The Notice makes clear that coverage provided through an on-site medical clinic “generally” is applicable coverage. However, the Agencies state in the Notice that they anticipate that the future proposed regulations will provide that “applicable coverage” does not include on-site medical clinics that offer only de minimis medical care to employees.

The Notice notes that, under existing COBRA regulations, on-site medical clinics do not constitute group health coverage if (1) the health care coverage consists primarily of first aid that is provided during the employer’s work hours for treatment of a health condition, illness or injury that occurs during work hours; (2) the care is provided only to current employees; and (3) the employees are not charged to use the facility. The Notice then seeks comments on whether the COBRA criteria for on-site medical clinics should be applied in the Section 4980I context, as well as how certain services, in addition to (or in lieu of) first aid (such as immunizations, injections of antigens (for example, allergy injections) provided by employees, provision of nonprescription pain relievers, such as aspirin, and treatment of injuries caused by accidents at work (beyond first aid)) should be treated when provided by on-site medical clinics.

Finally, the Notice requests comments about how, where on-site medical clinics are considered to be “applicable coverage,” the Agencies should treat such coverage, including whether the standard should be based on the nature and scope of the benefits, or should be denominated as a specific dollar limit on the cost of services provided (or some combination of these two standards).

Limited Scope Dental and Vision Benefits

The Notice points out that Section 4980I, by its terms, specifically excludes from the definition of “applicable coverage” insured dental and vision benefits. The Notice then goes on to note that, generally, whether coverage is insured or self-insured “is not relevant for purposes” of Section 4980I, which leads to the statement that the Agencies “are considering whether to exercise their regulatory authority” to exclude self-insured limited scope dental and vision benefits (if they qualify as excepted benefits) from the definition of “applicable coverage.”

Employee Assistance Plans (EAPs)

The Notice also states that the Agencies “are considering whether to exercise their regulatory authority” to exclude EAPs (if they qualify as excepted benefits) from the definition of “applicable coverage.”

Determination of Cost of Applicable Coverage

The next major substantive area covered by the Notice is with respect to how to determine the cost of “applicable coverage,” an important topic given that the 40 percent excise tax will be determined by the excess of the cost of applicable coverage over the statutory threshold. The Notice broadly notes that the rules provided under existing COBRA regulations (i.e., the regulations used to determine the cost of COBRA premiums) will likely be used for purposes of determining the cost of applicable coverage for purposes of Section 4980I.

The Notices goes on to state several rules, principles and questions, some of which may be proposed as changes to the existing COBRA regulations and others of which are broadly open to comments, to guide the calculation of the cost of applicable coverage, including the following:

  • The cost of coverage must be based on coverage that the employee is actually enrolled in, not on coverage that is merely offered to the employee.
  • The cost of coverage must be based on coverage provided to “similarly situated” individuals, which term will be determined by starting with all employees covered by a particular benefit package provided by the employer.
    • The benefit packages will be considered different based on differences in health plan coverage, meaning that a standard option and a high option (with respect to deductibles and copays) would be separate benefit packages, as would an HMO option and a PPO option.
    • Once a benefit package is determined, “mandatory disaggregation” must occur, under which the benefit package must be divided between employees covered by self-only coverage and employees covered by “other-than-self-only coverage” (e.g., family coverage).
    • After the mandatory disaggregation, employers may (pending future guidance from the Agencies) be permitted to aggregate some groups (such as aggregating all coverage for employees plus dependents into one group), and to disaggregate other groups (such as by permitting subdivisions based on, for example, bona fide employment-related criteria, while prohibiting the use of any criterion related to an individual’s health as a disaggregation criteria).
  • For self-insured plans, the Notice raises several questions about how the existing COBRA premium-calculation rules could be applied in the context of Section 4980I, and notes some areas where rules changes may be in order, such as rules limiting the ability to change between the existing calculation methods (the actuarial basis method and the past cost method); rules regarding the length of a measurement period used for calculating the cost under the past-cost method; and rules regarding what costs will be taken into account under the past-cost method.
  • For HRAs, the Agencies note that there are several potential ways to calculate the cost of applicable coverage. The Agencies state that they are considering a rule that would only take into consideration the cost of coverage by adding together all claims and administrative expenses attributable to HRAs for a particular period and dividing that figure by the number of employees covered for that period at that level of coverage. The Notice then recounts various other potential methods for determining the cost of applicable coverage under HRAs, but notes that the Agencies are concerned that multiple HRA calculation methods “could increase administrative complexity materially,” and requests comments on whether a single approach would be more beneficial.
  • Broadly, the Notice also invites comments on whether the cost of coverage could be determined in a manner other than through the method used in the COBRA regulations, including by reference to prices on the ACA’s Health Insurance Marketplaces, and asks whether such approaches would be both useful and consistent with the statutory requirements of Section 4980I.

Applicable Dollar Limit

Finally, the Notice addresses the “applicable dollar limit,” i.e., the statutory threshold above which coverage will be considered to be “excess benefits” subject to the excise tax. Specifically, the Notices points out that these limits are different depending on whether the coverage is self only or other-than-self only coverage. The Notice is concerned with situations in which the same employee may be covered by different types of “applicable coverage,” some of which are self-only and others of which are other-than-self only. The Notice provides potential alternative approaches to such a situation, including (1) applying the full cost of coverage to whichever constitutes the primary coverage (i.e., if the self-only coverage constitutes the majority of the costs, then all costs for the employee, including the cost of other-than-self only coverage, will be applied to the self-only limit); and/or (2) 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.

In addition, the Notice invites comments on the various ways in which the statutory dollar limits (i.e., for 2018, $10,200 for self-only coverage and $27,500 for other-than-self-only coverage) can or should be adjusted, including whether it would be desirable and possible to develop safe harbors that appropriately adjust dollar limit thresholds for employee populations with age and gender characteristics that are different from the national workforce.