The IRS Issues Notice on Cadillac tax

November 13, 2015
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Introducing the Cadillac tax

On July 31, the IRS and the Treasury issued Notice 2015-52 that explained all the potential issues and approaches of the proposed Cadillac tax regulations, according to the National Law Review. The Cadillac tax requires compliance from employers and thus, Notice 2015-52 calls for business owners to begin planning for the health care tax implications.

The statute is referred to as the Cadillac tax because it is designed to impact employer-sponsored rich or premium health plans for executives and senior managers in addition to super-rich health benefits for employees.

The new Cadillac tax

The Cadillac tax, Sec. 4980I, will impose a 40 percent nondeductible excise tax on the aggregate cost of employer-sponsored health coverage that exceeds a statutory dollar limit. Effective 2018, the Cadillac tax will raise the dollar limits for self-only coverage to $10,200 and $27,500 for family coverage as part of the Affordable Care Act.

The taxes can be assumed by employer

The employer is the coverage provider for health savings accounts and Archer medical savings accounts. Following the end of each calendar year, excise taxes will be imposed on the employer if the cost of applicable coverage for an employee exceeds the dollar limit in any month. It is then the responsibility of the employer to calculate the excise tax that applies to each employee, and contact the coverage provider as well as the IRS. Further, the employer will calculate the amount of tax reimbursement they will owe to the coverage provider.

The significance of the tax

One the main issues related to the monthly calculations of the tax is that myriad arrangements can significantly raise the benefits limits as these costs may not be known till the end of the coverage year. According to a 2014 Towers Watson & Co. study, the tax will hit half of all employers in 2018 and more than 82 percent by 2023. 

However, another main issue for insurers and employers is that the Cadillac tax may result in double taxation. Under the statute, insurers are required to pay the excise tax, but employers then reimburse insurers for the tax amount. This income is then treated as income for the insurer, which means it is subject to taxation for a second time.

According to Notice 2015-52, the IRS has not decided how the tax will be collected.