Yesterday, the Internal Revenue Service issued preliminary but much-anticipated guidance on the so-called Cadillac tax imposed by the Affordable Care Act (ACA). The new notice offers very few concrete answers to employer questions about how the tax is to be calculated. Mostly, the IRS identifies issues that may be the subject of future proposed regulations, suggests some possible approaches that the regulations might take in dealing with those issues, and asks for comments. The IRS has used this approach with certain ACA requirements in the past, with the preview often serving as a strong indication of how more formal guidance will address issues in the future. The guidance addresses three main subjects under the Cadillac tax:

  • The types of coverage subject to the tax
  • The method for determining the cost of that coverage
  • The dollar limit at which the tax begins to apply

Other concerns raised by the Cadillac tax may be the subject of future guidance. Significantly, the new notice does not address any delay in the effective date of the tax, which is scheduled to go into effect for taxable years beginning after December 31, 2017.


The ACA added section 4980I to the Internal Revenue Code, which imposes on insurers (for insured health plans) and employers/administrators (for self-funded plans) an annual excise tax equal to 40 percent of any “excess benefit” the plan provides to any employee, former employee, or surviving spouse. An excess benefit exists when the applicable cost of coverage exceeds the applicable dollar limit. The applicable dollar limits for 2018 are $10,200 for self-only coverage and $27,500 for other coverage (e.g., employee plus one, or family coverage), subject to a variety of adjustments to account for changes in the cost of health care.

Employers are starting to analyze whether their high-end coverage options are likely to create excess benefits that will be subject to the Cadillac tax in 2018, and are taking steps now to moderate the impact of any future coverage reductions. In particular, employers in the midst of negotiating long-term collective bargaining agreements that will run through 2018 are struggling with how they will respond if a health plan coverage option triggers the tax.

The New Notice

The new IRS guidance offers few answers, but does preview the types of issues that likely will be covered in future proposed regulations. It addresses a number of questions pertaining to the types of coverage that will be subject to the Cadillac tax, including:

  • Certain health savings account (HSA) contributions will be counted in the applicable cost of coverage. The IRS suggests that employer and pre-tax employee contributions to HSAs will be counted, while after-tax employee contributions will be excluded.
  • The cost of on-site medical clinics that provide substantial services will generally be counted; the IRS will likely provide an exclusion for clinics that offer limited services for first aid and perhaps for certain other services, such as flu shots.
  • The cost of insured stand-alone dental and vision plans will be excluded; the IRS is considering extending the exclusion to similar self-funded arrangements and to employee assistance plans (EAPs) that qualify as excepted benefits for other ACA issues.

The calculation of cost will generally follow the rules applicable to COBRA premiums. The COBRA rules leave some gaps, which the IRS may seek to fill for purposes of the Cadillac tax. In some cases, the new rules may be considered for application to COBRA as well. For example:

  • It is expected that the cost of coverage will be determined based on the coverage in which the employee is actually enrolled, as opposed to coverage that is merely offered. Thus, the cost of a “high” option will not be attributed to an employee who actually chooses the “low” option. The cost for employees in self-only coverage will differ from the cost for employees in other tiers of coverage, but the rule may not require a further breakdown of cost based on the number of dependents. The IRS is considering various ways in which employers may opt to classify employees as similarly situated for purposes of determining cost.
  • The IRS is weighing certain rules that it may impose on how employers determine cost for self-funded plans. COBRA generally requires an employer to look at the actuarial cost or to base the COBRA premium on past cost. The IRS is evaluating issues that include the period for making determinations, the cost components that need to be considered, and the frequency with which employers may switch from one method to the other.
  • The notice identifies different methods for calculating the applicable cost of coverage for health reimbursement arrangements (HRAs) and contemplates the prospect of selecting a single method.

The IRS is also considering issues that apply to the value of the applicable dollar limits. These issues include how to address adjustments to the dollar limits (based on qualified retirement status, high risk professions, or age and gender) and situations where an employee has a mix of single-employee coverage and coverage that includes dependents.


Although the new notice does not provide guidance that employers may rely on, employers may draw upon it to understand the issues and general direction that the IRS is contemplating. For employers who wish to submit formal comments to the guidance, the deadline is May 15, 2015.

As the federal health care reform effort gained steam, Ballard Spahr attorneys established the Health Care Reform Initiative to monitor and analyze legislative developments. With federal health care reform now a reality, our attorneys are assisting health care entities and employers in understanding the relevant changes and planning for the future. They also have launched the Health Care Reform Dashboard, an online resource center for news and analysis on developments under the Affordable Care Act.

If you have questions about reporting requirements under the Affordable Care Act, contact Brian M. Pinheiro at 215.864.8511 or, Edward I. Leeds at 215.864.8419 or, Brian D. Pedrow at 215.864.8108 or, Daniel V. Johns at 215.864.8107 or, or any other member of our Employee Benefits and Executive Compensation or Labor and Employment Groups.