The federal Patient Protection and Affordable Care Act (ACA) includes a 40% excise tax on high-cost employer-sponsored health coverage, often called the Cadillac tax, to be implemented in 2018 (26 U.S.C. § 48901). According to a recent analysis by the Kaiser Family Foundation, 26% of employers offering health benefits could be subject to the tax in 2018 unless they make changes to their health care plans.
The excise tax applies to the aggregate cost of an employee’s applicable coverage that exceeds a certain dollar limit, or the “excess benefit.” “Applicable coverage” includes the cost of the health coverage (e.g., insurance premium) and contributions to tax-advantaged health accounts (e.g., flexible savings accounts (FSAs) and health savings accounts (HSAs)).
In 2018, the dollar limits are $10,200 for single coverage and $27,500 for non-single coverage (e.g., family coverage or multiemployer plan coverage). Dollar limits will be adjusted for inflation in future years.
The coverage provider (e.g., employer or insurer) is responsible for paying the excise tax. Experts expect that employers will reduce the health coverage they offer employees to limit the impact of the excise tax. According to Kaiser, this will result in employers shifting health care expenses to employees who will have to pay a greater share of their health care costs out of pocket.
The excise tax was included in the ACA to raise revenue to cover the costs of other ACA provisions and to discourage employers from offering overly generous health plans to help contain overall health care spending.
For more details about the Cadillac tax, see Kaiser’s Issue Brief and the Congressional Research Service’s report, both from August 2015.