Ever since the government passed the Affordable Care Act (ACA) or “Obamacare”, one keeps hearing about different proposed health plans and penalties for non-compliance. Until the ‘Cadillac Tax’ became the point of discussion, it was all about “individual mandate/shared responsibility”. It is believed that the “Cadillac tax” could impact at least one in four US employers in 2018, once it becomes a regulation; and over 40% of employers within the following decade.

Due to the significant interest shown by readers in the individual mandate, the tax analysts at AG Tax have prepared an overview of the ‘Cadillac Tax”, which could be useful for individuals dependent on health plans, such as a Health Savings Accounts (HSA), or Flex Spending Accounts (FSA).

What is ‘Cadillac Tax’ or High Cost Employer-Sponsored Health Coverage Excise?

A “Cadillac” plan is any unusually expensive health insurance plan.  And the ‘Cadillac Tax’ refers to the tax on such plans under Affordable Care Act (Obamacare).   The Cadillac Tax or high-employer-sponsored health coverage excise tax is a 40% non-deductible tax, applicable from tax year 2018 onward, on any employer-sponsored health coverage plans that provide high-cost benefits or excess coverage to the insured in the US.

How would this ‘excess benefit’ be determined?

In the case of employer-provided group coverage, an employee would be considered to have ‘excess benefit’ if the total cost (contributions made by employer and employee) of their coverage exceeds one-twelfth of the “annual limitation” for the calendar year, which would be determined on a monthly basis.

The annual limitation for 2018 is currently set at $10,200 for individual coverage, and $27,500 for family coverage (adjusted for inflation). However this could vary depending upon profession, age, and gender. For example, coverage provided by law enforcement employer would have a higher threshold limit, since it is a high-risk profession.

Who would be subject to Cadillac Tax?

As per the Internal Revenue Service (IRS), anyone who is participating in pre-tax government or private health coverage/group health plans; i.e. pre-tax health coverage provided by employers to their employees, whether it is fully employer-paid or co-paid, is covered. Even self-employed individuals having such coverage would be subject to the Cadillac tax.

The health insurance provider/issuer is liable for paying this tax, while the employer is responsible for the tax applicable to employer-sponsored plans; it is possible that a health care coverage administrator could be held liable for this tax payment.

Purpose of The Cadillac Tax

Due to the tax break provided to currently existing health care spending plans, many employers and individual taxpayers opted for these plans leading to inflated costs for these health coverages. Therefore, to reduce the excess spending by employers and employees on these plans, and limit the tax-preferred treatment of health-care provided by employers, the government introduced this excise tax.

The revenue generated from this tax is also expected to help fund the expansion of health coverage under the Patient Protection and Affordable Care Act (PPACA).

Note that not all types of plans are subject to the Cadillac tax. Plans specifically not subject to this tax include but are not limited to: accidental insurance, disability income insurance policy, automobile medical insurance payment, long-term care insurance, hospital indemnity insurance, workers compensation insurance, and more.

Conclusion

Although the forms and instructions have yet to be finalized and disclosed, it is clear that the Cadillac excise tax payments would not be tax deductible; and once the tax is applicable, the highly popular FSAs & HSAs could possibly come to an end with the tax breaks being capped, and companies trying their best to avoid this 40% excise tax.

Nonetheless, the government expects the revenue generated from this tax ($87 billion approximately within a decade) would help fund the expansion of health insurance coverage to more Americans through subsidies and expanded Medicaid benefits as outlined in the Affordable Care Act/Obamacare.

AG TAX LLP Can Help

If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of US and Canadian tax laws as well as cross-border compliance.

Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.

We can assist with:

  • Canadian Personal and corporate tax returns
  • Cross Border Taxation and Business Planning
  • US Personal and Corporate Taxation
  • Disclosure of Foreign Assets and other information filings
  • Retirement planning
  • Estate Planning, Inheritance tax advice

To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:

  • 416-238-5920 (Greater Toronto Area, ON)
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Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.