The Cadillac Tax, which is effective beginning in 2018, is a nondeductible 40% excise tax on the annual value of employer sponsored health coverage that exceeds annual statutory dollar limits. Notice 2015-16 outlines potential approaches for determining the Cadillac Tax that could be incorporated into future regulations, including:

• Applicable Coverage. “Applicable coverage” i.e., (the types of coverage subject to the tax) will likely include:
  • Employer contributions to fully insured or self-insured medical coverage;
  • Employee pre-tax and after-tax contributions to fully-insured or self-insured medical coverage;
  • Employer contributions to a health flexible spending account (FSA) or health savings account (HSA);
  • Employee pre-tax contributions to a health FSA, HSA, specified disease or illness coverage, hospital indemnity or other fixed indemnity coverage;
  • Executive physical plans;
  • Contributions to, and reimbursements from, a health reimbursement account (HRA);
  • On-site medical clinics (except as described below); and
  • Retiree coverage.

It is anticipated that stand-alone dental and vision coverage (whether self-insured or fully-insured) and on-site medical clinics that offer only de minimis medical care will be excluded from applicable coverage. The IRS is also considering excluding Employee Assistance Programs (EAPs) from the definition.

• Cost of Applicable Coverage. The cost of applicable coverage will generally be determined under rules similar to the rules for determining the cost of COBRA continuation coverage. The notice outlines proposed approaches for determining which individuals are similarly situated for purposes of determining the cost of coverage, the specific methods self-insured plans may use to determine the applicable COBRA premium, and how to determine the COBRA premium for HRAs.

• Annual Statutory Dollar Limits. The Cadillac Tax provides two annual dollar limits, (i) one for an employee with self-only coverage, and (ii) one for an employee with other-than-self-only coverage. However, there may be instances in which an employee simultaneously has one type of coverage that is self-only coverage and another type of coverage that covers others. As outlined in the notice, the applicable dollar limit in these instances would depend on whether the type of coverage that accounts for the majority of the aggregate cost is self-only. For example, if an employee has applicable coverage with an aggregate cost of $12,000, $3,000 of which is self-only and $9,000 of which is not, the other-than-self-only limit would apply to the full $12,000.

• Request for Comments. Comments on the issues addressed in the notice and on any other issues related to the Cadillac Tax may be submitted to the IRS by May 15, 2015. The IRS intends to issue another notice inviting comments on certain additional issues not addressed in Notice 2015-16.