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The Cadillac Tax

Under Section 9001 of the ACA, health insurance issuers and sponsors of self-funded group health plans will be charged an excise tax on any benefits provided to employees that exceed a pre-determined threshold.  The excise tax, which has been commonly referred to as the “Cadillac tax,” will be imposed beginning in 2018.

What is the tax?
A 40 percent excise tax will be imposed on health insurance plans that exceed an annual premium of $10,200 for individual coverage and $27,500 for family coverage (indexed to inflation). The 40 percent tax will be calculated from the premium price for that year. This provision is intended to force companies to choose less expensive plans.

The threshold amounts will be increased for inflation beginning in 2020, and may be adjusted upwards if health care costs rise more than expected prior to implementation of the tax in 2018. The thresholds are also adjusted upwards for retired individuals age 55 and older who are not eligible for Medicare, for employees engaged in high-risk professions, and for firms that may have higher health care costs because of the age or gender of their workers.

Who will be affected?
The tax will be levied on insurers and self-insured employers, not directly on employees.

When does the tax begin?
The tax will take effect on and after January 1, 2018.

Who is responsible for paying the tax?
In the case of a fully insured group whose plan exceeds the threshold, the insurance company issuing the plan would be responsible for the tax. For self-funded groups, the plan administrator (employer) would be responsible for the tax. The IRS is expected to issue guidance for the administration of this tax.