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High cost employer-sponsored health coverage excise tax frequently asked questions

April 11, 2014

Under Section 9001 of the PPACA, health insurance issuers and sponsors of self-funded group health plans will be assessed an excise tax on any benefits provided to employees that exceed a pre-determined threshold.  The excise tax is imposed beginning in 2018.

What is the ‘Cadillac’ tax?  Is it the same as the excise tax or something different?

They are the same.  The pubic oftentimes refers to the excise tax as the “Cadillac” tax but the law refers to “excise” tax. 

How much is the excise tax?

The amount of the excise tax is 40 percent of the amount considered to be an “excess benefit.”

What is the definition of “excess benefit”?

An excess benefit is the cost of coverage for health benefits that is more than the annual limit of $10,200 for self-only coverage and $27,500 for self and spouse or family coverage.  The annual limit is subject to adjustment for health costs, age and gender and cost-of-living adjustments.

The "COBRA equivalent" will be used to determine the cost of coverage for self-funded plans -- in other words, what would the employer charge individuals on COBRA. The exact rules for determining the COBRA rate and how the tax will be paid are still to be determined.

Do any exceptions apply?

The annual limits described above are increased by $1,650 in the case of self-only coverage and $3,450 in the case of self and spouse or family coverage for retirees not entitled to Medicare benefits and individuals engaged in high-risk professions.

Who is responsible for paying the excise tax?

The plan sponsor is responsible for paying the excise tax for self-funded coverage. The IRS is expected to issue guidance for the administration of this excise tax including the method and timing for payment. 

How are Health Reimbursement Accounts (HRAs) impacted by the annual dollar limit requirements and the waiver process?

HRAs that are integrated with other health coverage are not impacted by the annual dollar limit requirements so long as the other coverage meets the requirements.

Interim guidance was also issued with regard to HRAs, with respect to the waiver process.  HRAs that were in effect prior to Sept. 23, 2011, are exempt from the waiver requirement and are permitted to continue annual dollar limits provided that the plan comply with any record retention and the annual notice requirements, described above.

Subsequent guidance released by the Departments has clarified that in order to comply with the annual dollar limit requirements the HRA must be "integrated" with other coverage as part of a group health plan.