IRS Offers Guidance on Tax on ‘Cadillac’ Health Plans

The Internal Revenue Service has issued guidance on the potential approaches it may take in the future on proposed regulations for the excise tax on high-cost employer-sponsored health coverage in the Affordable Care Act.


The excise tax on so-called “Cadillac” health plans is scheduled to take effect in 2018 and would impose a 40 percent tax on employers who pay for overly generous and expensive health coverage in an effort to encourage them to offer more cost-effective health plans in which employees and executives share more of the costs.


Notice 2015-16 discusses Section 4980I of the Tax Code, which was added by the Affordable Care Act and applies to taxable years beginning after Dec. 31, 2017. Under this provision, if the aggregate cost of “applicable employer-sponsored coverage” provided to an employee exceeds a statutory dollar limit, which is revised annually, the excess is subject to a 40 percent excise tax.


The notice describes potential approaches with regard to a number of issues under Section 4980I, which could be incorporated in future proposed regulations, and invites comments on these potential approaches.


The issues addressed in the notice mainly relate to the definition of applicable coverage, the determination of the cost of applicable coverage, and the application of the annual statutory dollar limit to the cost of applicable coverage.


The Treasury Department and the IRS are asking for comments on the issues addressed in the notice and on any other issues under Section 4980I. They expect to release another notice before the publication of the proposed regulations, describing and inviting comments on potential approaches to a number of other issues, including procedural issues relating to the calculation and assessment of the excise tax.