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).