United States

Congress repeals the ACA's Cadillac tax on employer health plans

Tax repealed prior to its 2022 effective date

TAX ALERT  | 

On Dec. 19, 2019, Congress passed the Further Consolidated Appropriations Act of 2020, which funds the federal government and contains various tax provisions. Among other tax changes, the Act repeals the excise tax on high-cost health plans, commonly known as the Cadillac tax, effective for tax years beginning after Dec. 31, 2019.

Background

The Cadillac tax was created under the Affordable Care Act (ACA) in 2010, and was set to apply to health plans starting in 2018. In 2015, the implementation of the tax was delayed from 2018 to 2020. The tax was delayed again in 2018 from 2020 to 2022. 

The Cadillac tax was added to the ACA as a means to raise revenue to fund other provisions of the ACA and to discourage the use of high-cost health plans. It imposed a 40% excise tax on the cost of employee health coverage that exceeded certain annual thresholds: $10,200 for individual coverage and $27,500 for family coverage (adjustable for inflation and other factors). 

The employer was responsible for calculating the cost of the health coverage; however, the employer was not always the party responsible for paying the tax. For self-insured plans, the tax was payable by either the employer or the plan administrator. For fully-insured plans, the tax was payable by the insurance company. The penalty was payable annually and was non-deductible.

Repeal

Over the years, there has been a growing sentiment within Congress to repeal the Cadillac tax, and the delays of the effective date from 2018 to 2022 were steps toward that goal. Now the tax will not go into effect given its repeal.

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