The Affordable Care Act (“ACA”) added section 4980I to the Internal Revenue Code (“Code”). Code section 4980I applies to tax years after December 31, 2017, and provides a tax on high cost employer-sponsored health coverage – if the aggregate cost of employer-sponsored coverage (referred to as “applicable coverage”) provided to an employee exceeds a statutory dollar limit, the excess is subject to a 40% nondeductible excise tax. Employers, health insurers and plan sponsors are potentially liable for the tax, which is popularly known as the Cadillac Tax.

In Notice 2015-16, IRS and Treasury describe numerous approaches being considered for Code section 4980I proposed regulations — many of which are based on analogous COBRA rules — and have invited public comment.  An overview of the main Code section 4980I approaches follows.

Definition of Applicable Coverage

Included Coverage:

 Generally, applicable coverage is coverage — whether paid for by the employer or the employee — under any group health plan made available by an employer to an employee, former employee, surviving spouse or other primary insured individual that is excludible from the employee’s gross income under Code section 106. Applicable coverage includes retiree coverage, health flexible spending accounts (“FSAs”), civilian governmental plans, multiemployer plans and coverage provided through on-site medical clinics.

Treasury and IRS anticipate that future proposed regulations will include as applicable coverage executive physical programs, Health Reimbursement Arrangements (“HRAs”) and employer contributions to Health Savings Accounts (“HSAs”) and Archer Medical Savings Accounts (“Archer MSAs”).

Excluded Coverage:

Applicable coverage excludes excepted benefits — i.e., benefits that are generally exempt from the requirements of the ACA and the Health Insurance Portability and Accountability Act (“HIPAA”) — including: accident-only coverage, disability income insurance, general liability insurance, auto liability insurance, supplemental liability insurance, workers compensation coverage, automobile medical payment insurance and credit only insurance. Applicable coverage also excludes long term care coverage, separate insured coverage for treatment of the mouth or eye, and specific disease or illness coverage and hospital indemnity insurance paid for with after-tax dollars.

 Treasury and IRS anticipate that future proposed regulations will also exclude as applicable coverage employee after tax contributions to HSAs and Archer MSAs as well as coverage provided through on-site medical clinics that is limited to de minimus medical care — such as first aid.

Treasury and IRS seek comment on the treatment of on-site medical clinics and, specifically, on-site medical clinics that provide services in addition to, or in lieu of, first aid; on any reason why self-insured limited scope dental and vision coverage that qualifies as an excepted benefit should not be excluded from applicable coverage; and on any reason employee assistance plans that qualify as excepted benefits should not be excluded from applicable coverage.

Determination of Cost of Applicable Coverage:


Under Code section 4980I, the cost of applicable coverage is generally determined in accordance with rules similar to the rules that apply in determining COBRA applicable premiums — which are based on the average cost of providing coverage under a plan to similarly situated non-COBRA beneficiaries. The cost of applicable coverage must be determined before the start of a 12-month determination period. In addition, plans and employers must operate in good faith compliance with a reasonable interpretation of statutory requirements.

Average Cost for All Similarly Situated Employees:

Treasury and IRS anticipate that, for any type of applicable coverage in which the employee is enrolled, the cost of the applicable coverage will be based on the average cost of the applicable coverage for the employee and all similarly situated employees.

Determining Similarly Situated Employees – Considered Potential Approach:

For purposes of calculating average cost, Treasury and IRS are considering, and seek comment concerning, a potential approach whereby similarly situated employees would be determined by: (a) aggregating employees based on the benefits package in which they are enrolled; (b) subdividing each group based on mandatory disaggregation rules; and (c) allowing further subdivision of each group based on permissive disaggregation rules.

Aggregation by Benefits Package:

First, all employees enrolled in a particular employer-provided benefits package will be aggregated into groups based on the benefits package in which they enroll (i.e., high option enrollees grouped together, standard option enrollees grouped together, etc.)

Mandatory Disaggregation by Type of Coverage:

Second, each benefits package aggregation group will be disaggregated based on the type of coverage the employee has enrolled in — i.e., self-only coverage or other-than-self-only coverage (such as self plus spouse coverage, family coverage, etc.).

Important note: There is no statutory requirement to further disaggregate the other-than-self-only coverage groups based on the number of family members actually enrolled in the coverage. Thus, there is no requirement that the applicable cost for employee plus spouse coverage be determined separately from the cost of employee plus family coverage — even though the actual cost of such coverage may vary. Accordingly, Treasury and IRS are considering allowing employers to treat all employees enrolled in the same benefits package with any type of other-than-self-only coverage as similarly situated in determining the cost of applicable coverage for that group.

Permissive Disaggregation by Traditional Group Insurance Market Distinctions:

Treasure and IRS are considering whether permissive disaggregation should be allowed based a broad standard — such as bona fide employment-related criteria, which might include specified job categories or collective bargaining status — or based on more specific standards — such as a list of categories, which might include current employees and former employees, bona fide geographic distinctions, or the number of family members enrolled in other-than-self-only coverage.

Permitted Methods for Self-Insured Plans:

Treasury and IRS anticipate that the two methods self-insured plans may use to calculate COBRA applicable premiums — the actuarial basis method and the past cost method — will also apply to self-funded plans for purposes of determining the cost of applicable coverage under Code section 4980I.

Actuarial Basis Method:

Under the actuarial basis method — which must be used unless the plan is eligible for, and elects, the past cost method — the cost of applicable coverage is equal to a reasonable estimate of the cost of providing coverage to similarly situated beneficiaries determined on an actuarial basis and accounting for factors prescribed by Treasury and IRS — none of which have as of yet been issued.

Treasury and IRS are considering, and invite comment concerning, whether to propose a broad standard pursuant to which an estimate of cost would be an estimate of actual cost, rather than an estimate of the minimum or maximum exposure the plan could experience during the 12-month determination period.

Past Cost Method: 

Measurement Period:

Under the past cost method — which may be elected if there has not been a significant change in coverage under, or employees covered by, the plan during the preceding 12-month measurement period — the cost of coverage equals the cost to the plan for similarly situated beneficiaries for the same period occurring during the preceding 12-month determination period, subject to a statutory adjustment factor.

Treasury and IRS are considering, and request comment concerning, whether to issue guidance providing that the 12-month measurement period may be any 12-month period ending not more than 13 months before the current determination period — and that any such 12-month measurement period would have to be applied consistently.

Costs Taken Into Account:

Treasury and IRS are considering, and request comment concerning, anticipated proposed regulations concerning the costs to be included in past cost method calculations. Potentially included costs include: (a) claims — either incurred or submitted –; (b) stop-loss or reimbursement policy premiums; (c) administrative expenses; and (d) the employer’s reasonable overhead expenses allocable to health plan administration.

Changing Between Methods:

Treasury and IRS are considering, and seek comment concerning whether to adopt, a rule generally requiring a self-insured plan to use a chosen valuation method for a period of five years — subject to an exception for coverage periods during which there has been a significant change in coverage under, or employees covered by, the plan, in which case the plan might be required to use the actuarial basis for two years — to prevent the possibility of abuse posed by switching between actuarial basis and past cost methods.


Treasury and IRS anticipate, and invite comments concerning the specifics around, future guidance providing that HRAs are applicable coverage and providing approaches for determining the cost of applicable coverage under an HRA and for the treatment of HRA benefits that do not qualify as applicable coverage.

Determination Period:

Treasury and IRS are contemplating, and invite comments concerning whether, the method for calculating the cost of applicable coverage should occur in advance of a 12-month determination period. Thus, a self-insured calendar year plan would elect the actuarial basis method or the cost method prior to the beginning of the calendar year. Generally, using an advance election would enable plan sponsors to know the Code section 4980I liability at the beginning of the tax year.

Additional Rules:

 There are additional rules for calculating the cost of applicable coverage for Code section 4980I purposes. Specifically, the cost of applicable coverage: (a) may not include the cost of the Code section 4980I tax imposed on the coverage; (b) must be calculated separately for self-only coverage and other-than-self-only coverage; (c) with regard to retiree coverage, may include pre-age 65 and post-age 65 retirees as similarly situated beneficiaries; (d) with regard to FSAs, includes employer flex contributions; (e) with regard to HSAs and Archer MSAs, consists of employer contributions including salary reductions; and (f) must be determined on a monthly basis.

 Application of Annual Statutory Dollar Limit to Cost of Applicable Coverage :


Code section 4980I provides an annual dollar limit for employees with self-only coverage and an annual dollar limit for employees with other-than-self-only coverage. Generally, employees are treated as having other-than-self-only coverage if the employee and at least one other family member are enrolled in employer-provided minimum essential coverage — i.e., group health coverage other than excepted benefits.

Potential Approaches for Employees with Both Types of Coverage:

Treasury and IRS note that it is possible for an employee to have both self-only and over-than-self-only coverage — for example, an employee with self-only major medical coverage and family HRA coverage.

Treasury and IRS are considering, and ask for comment concerning, two potential approaches in the event the employee has both types of coverage. Under the first potential approach, the employee’s most expensive coverage will determine the dollar limit applicable to the aggregate cost of all of the employee’s coverage.

Example: An employee has self-only coverage that costs $5,000 and other-than-self-only coverage that costs $15,000. The other-than-self-only coverage limit would apply to the entire $20,000.

 If the cost of the employee’s self-only coverage and other-than-self-only coverage are equal, the other-than-self-only coverage limit would apply.

Under the second approach, the respective dollar limits would be prorated based on the cost of the employee’s self-only coverage and other-than-self-only coverage.

Example: An employee has self-only coverage that costs $5,000 and other-than-self-only coverage that costs $15,000. The dollar limit would be a composite of 25% ($5,000/($5,000 + $15,000)) of the self-only coverage dollar limit and 75% ($5,000/($5,000 + $15,000)) of the other-than-self-only limit.

Dollar Limit Adjustment:

 Currently, for 2018 the self-only coverage dollar limit is $10,200 and the other-than-self-only coverage dollar limit is $27,500. These dollar limits will be subject to a “health cost adjustment percentage” — which is determined with reference to, inter alia, the per-employee cost of Federal Employees Health Benefit Plan coverage — to determine the actual dollar limits for 2018. For years after 2018, a cost-of-living adjustment will apply.

Treasury and IRS expect to include in the proposed regulations, and invite comment concerning, rules regarding the dollar limit adjustments. Treasury and IRS also invite comment concerning: adjustments for retirees who are at least 55 and are not entitled to/eligible to enroll in Medicare, adjustments for high risk professions and age and gender adjustments. Finally, Treasury and IRS invite comment on possible alternative methods for determining the cost of applicable coverage, including reference to similar coverage available elsewhere — such as Exchange coverage.


Comments concerning the potential approaches described in Notice 2015-16 may be submitted at and should include “Notice 2015-16” in the subject line.

IRS and Treasury anticipate issuing an additional notice in advance of the publication of proposed regulations under Code section 4980I. The anticipated additional notice will describe and invite comments on issues not addressed in Notice 2015-16, including issues related to calculation and assessment of the Cadillac Tax.

Key Take Away:

There are many details for Treasury and IRS to finalize around the Cadillac Tax. Employers, health insurers and plan sponsors should continue to carefully monitor ACA developments.