Cadillac Tax: Delayed and Deductible

Beginning in 2018, certain employers were going to be liable for a 40% federal excise tax on the value of excess benefits provided through their health plan. Health plans providing high cost benefits are referred to as “Cadillac” plans, and the new federal excise tax on high cost plans has come to be known as the “Cadillac tax”.

On December 18, 2015, President Obama signed into law the Consolidated Appropriations Act, 2016, H.R. 2029 (the “2016 Appropriations Act”). The 2016 Appropriations Act includes the following three provisions relating to the Cadillac tax:

I.   Cadillac Tax Delayed Until 2020.

The 2016 Appropriations Act delays the effective date of the Cadillac tax for two years (i.e., to tax years beginning after December 31, 2019).

While the delay provides employers additional time to modify their health plans to avoid the imposition of the Cadillac tax, the additional years of higher medical cost increases will likely increase the number of health plans subject to the Cadillac tax in the initial year of application (2020). As a practical matter, this delay increases the likelihood that the implementation of the Cadillac tax will be delayed additional years or that the Cadillac tax will ultimately be repealed.

II.   The Cadillac Tax will be deductible.

The 2016 Appropriations Act provides that Section 275(a)(6) of the Internal Revenue Code of 1986 (which makes certain taxes nondeductible) will not apply to the Cadillac tax. Basically, this makes Cadillac tax payments deductible for federal income tax purposes.

In a prior post (“New IRS Excise Tax on High Cost Health Plans – “Cadillac Tax”), I noted that, even though the Cadillac tax is imposed on the “coverage provider”, employers should recognize that they will ultimately be responsible for paying the Cadillac tax.

As described in that post, while the Cadillac tax is imposed on “coverage providers” (either the insurance company for insured arrangements or the employer or third party administrators for self-insured arrangements), it is expected that the insurance companies and third party administrators would modify their contracts to provide for the employer to reimburse them for the Cadillac tax liability. See Notice 2015-52 (July 30, 2015).

In situations where a party is obligated to reimburse another party for a nondeductible expense, most reimbursement agreements require the reimbursing party to pay an additional amount equal to the taxes attributable to the nondeductible expense (often referred to as a “Tax Gross-up). Notice 2015-52 provides guidance as to various approaches for Cadillac Tax Gross-ups. By making the Cadillac tax deductible, the 2016 Appropriations Act eliminates the need for Tax Gross-ups. This will reduce the ultimate cost of the Cadillac tax on employers.

III.   Requires the Controller General to study age and gender benchmarks for adjustments to the “statutory dollar limit.”

As noted in the above-cited prior post, if the aggregate cost of “applicable employer-sponsored coverage” provided to an employee exceeds a “statutory dollar limit” (revised annually), the excess is subject to a 40% excise tax. In a subsequent post (“Health Coverage Includable in ‘Cadillac Tax’ Calculation”), I reviewed the types of coverage included in “applicable employer sponsored coverage”. Likewise, a future post will contain a more detailed review of the factors involved in the “statutory dollar limit.”

Generally, the Cadillac tax statute provides that the “statutory dollar limit” is either $10,200 (for self only coverage in 2018) or $27,500 (for other than self only coverage in 2018) multiplied by the “health cost adjustment percentage”.

An age or gender adjustment is one of the adjustments included in the “health cost adjustment percentage”. The Cadillac tax statute provides that no age or gender downward adjustment can accrue (that is, there can be no decreases in the dollar limits based on age and gender).

Basically, the age and gender adjustment increases the above-referenced dollar limit (utilizing the premium cost of the Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefit Plan [FEHBP Standard Option]) based on the differences in the age and gender characteristics of employer’s workforce versus the national workforce. In Notice 2015-52, the Internal Revenue Service proposed two approaches to the age and gender adjustments (one based on the FEHBP Standard Option and one based on national claims data) and requested comments on age and gender adjustment approaches.

The 2016 Appropriations Act directs the Controller General of the United States, in consultation with the National Association of Insurance Commissioners to report (within 18 months of December 18, 2015) to the Senate Finance Committee and the House Ways and Means Committee as to the suitability of the FEHBP Standard Option as the appropriate benchmark for age and gender adjustments for Cadillac tax calculations and make recommendations regarding any more suitable benchmarks for such age and gender adjustments.

The age and gender adjustment to the statutory dollar limits is a very technical issue. Employers will benefit from this reasoned analysis of the best approach for increasing the statutory dollar limit to reflect the additional medical costs attributable to the age and gender of such covered employees.

In summary, the 2016 Appropriations Act contains pro-employer provisions relating to the Cadillac tax statute by delaying the effective date two years, making the Cadillac tax deductible, and requiring the Controller General to study whether an item used in calculating the Cadillac tax is appropriate.

About the Author

Jonathan H. Nason
Jon is a tax lawyer who advises employers on the design, implementation and administration of employee benefit plans, including ERISA and HIPAA compliance.