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The Internal Revenue Service has published Notice 2015-16, the first of several to address Section 49801 of the Internal Revenue Code, commonly referred to as the "Cadillac tax." Enacted under the Affordable Care Act of 2010 (ACA), this excise tax takes effect January 1, 2018.

The provision imposes an excise tax on insurers or plan administrators if the total value of employer-provided health insurance coverage exceeds a designated threshold amount. For 2018, the threshold amounts are $10,200 for individuals and $27,500 for families.

The nondeductible excise tax is equal to 40 percent of the total value that exceeds the threshold amount. The tax is paid by insurers and plan administrators, and could therefore result in a rate as high as 60 percent for employers, depending on whether the employer needs to "gross up" the amount paid to insurers or plan administrators to cover the tax costs related to the provision.

Notice 2015-16 describes potential approaches to several issues and offers a glimpse of the complex requirements facing employers, insurers, and plan administrators who will need to be in compliance by January 2018. The notice encourages public comments on the provisions as well as the employer scenarios included in the notice which could appear in future proposed (and final) regulations. The notice primarily addresses the:

  • Definition of applicable coverage.
  • Determination of the cost of applicable coverage.
  • Application of the annual statutory dollar limit to the cost of applicable coverage.

The ACA sets forth types of coverage to be included in applicable coverage:

  • Health Flexible Spending Accounts.
  • Archer Medical Savings Accounts (but certain contributions by individuals are not included).
  • Health Savings Accounts (but after-tax contributions by individuals are not included).
  • Governmental plans for civilian employees.
  • Coverage for on-site medical clinics (but clinics that provide only de minimis medical care are excluded).
  • Retiree coverage.
  • Multiemployer plans.
  • Coverage only for a specified disease or illness and hospital indemnity or other fixed indemnity insurance, under certain circumstances.

Types of coverage to be excluded from applicable coverage:

  • Coverage, whether through insurance or otherwise, that includes:
    • coverage only for accident, or disability income insurance, or any combination thereof.
    • coverage issued as a supplement to liability insurance.
    • liability insurance, including general liability insurance and automobile liability insurance.
    • workers' compensation or similar insurance.
    • automobile medical payment insurance.
    • credit-only insurance.
    • other insurance coverage, as specified in regulations, similar to the coverage listed above and under which benefits for medical care are secondary or incidental to other insurance benefits.
  • Coverage, whether through insurance or otherwise, for long-term care.
  • Dental and vision policies. The IRS says it is considering excluding all limited scope dental and vision benefits that qualify as excepted benefits (insured and self-funded).
  • Coverage only for a specified disease or illness and hospital indemnity or other fixed indemnity insurance, under certain circumstances.

The Department of the Treasury and the IRS are considering whether to propose that employee assistance programs which qualify as an excepted benefit pursuant to the recently issued regulations on excepted benefits be excluded from applicable coverage for purposes of the excise tax.

Public comments should be submitted no later than May 15.


Mary Bachinger

Director, Tax Policy


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