T he Patient Protection and Affordable Care Act (ACA; P.L. 111-148 , as amended) includes a 40% excise tax on high-cost employer-sponsored health insurance coverage, often referred to as the Cadillac tax . The 40% excise tax is assessed on the aggregate cost of employer-sponsored health coverage that exceeds a dollar limit. If a tax is owed, it is levied on the entity providing the coverage (e.g., the health insurance issuer or the employer). Under the ACA, the excise tax was to go into effect in 2018; however, the Consolidated Appropriations Act of 2016 (CAA of 2016; P.L. 114-113 ) delays implementation until 2020. The excise tax is included in the ACA to raise revenue to offset the cost of other ACA provisions (e.g., the financial subsidies available through the health insurance exchanges). The most current publicly available cost estimate from the Congressional Budget Office (CBO) indicates that the excise tax was expected to increase federal revenues by $87 billion between 2016 and 2025, based on 2018 implementation. The excise tax also is expected to limit the tax advantages for employer-sponsored health coverage. Many economists contend that the tax advantages lead to an overconsumption of coverage and health care services. This report provides an overview of the excise tax. The report includes cost estimates for the excise tax and explores the excise tax's relationship with the tax advantages for employer-sponsored health coverage. The information in this report is based on statute and two notices issued by the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS). Notice 2015-16 was issued February 17, 2015, and the comment period for the notice closed May 15, 2015. Notice 2015-52 was issued July 30, 2015. The comment period for the notice closed October 1, 2015. As of the date of this report, regulations related to the excise tax have not been promulgated. Many employers offer health insurance plans and other health-related benefits (e.g., health care flexible spending accounts, or FSAs). These benefits are one part of an employee's total compensation. Often employers pay for part or all of these benefits. To illustrate, 57% of employers offered health insurance plans to their employees in 2015, and on average employers covered 82% of the premiums for single coverage and 71% of the premiums for family coverage. Beginning in 2020, a 40% excise tax is to be assessed on the aggregate cost of an employee's applicable coverage that exceeds a dollar limit during a taxable period. Unlike some other ACA provisions, assessment of the excise tax is not dependent on an employer's characteristics (e.g., number of workers); assessment is dependent on whether the aggregate cost of an employee's applicable coverage exceeds a dollar limit. The entity responsible for paying the excise tax to the IRS is the coverage provider. The terms applicable coverage, dollar limit, and coverage provider are defined and described in more detail below. The excise tax is assessed on the amount by which the aggregate cost of an employee's applicable coverage exceeds a dollar limit. The amount is called the excess benefit . Determining the excess benefit requires knowing which types of coverage are considered applicable coverage and how the cost of such coverage is calculated. For example, consider an employee who has an employer-sponsored health plan, a separate vision-only plan, and a health care flexible spending account (FSA). To determine the excess benefit, if any, of the employee's coverage, it is necessary to know whether any of the coverage is considered applicable coverage and the methods for determining the cost of such coverage. Applicable coverage is defined as coverage under any group health plan made available to the employee by an employer which is excludable from the employee's gross income under section 106 [of the IRC], or would be so excludable if it were employer-provided coverage (within the meaning of such section 106). Coverage that is excluded from an employee's gross income under Section 106 of the IRC includes, but is not limited to, employers' contributions to health insurance premiums, Archer Medical Savings Accounts (MSAs), and health savings accounts (HSAs). Additionally, three arrangements are identified in the statute as applicable coverage: (1) the employee-paid portion of health insurance coverage (i.e., an employee's contribution to premiums); (2) a self-employed individual's health insurance coverage for which a deduction is allowable under Section 162(l) of the IRC; and (3) coverage under a group health plan for civilian employees of federal, state, or local governments. See Table 1 for a list of what is considered applicable coverage based on the statute and Notice 2015-16. Certain arrangements are excluded from the definition of applicable coverage ( Table 2 ). Arrangements not considered applicable coverage are not included in the calculation for determining the aggregate cost of applicable coverage. The cost of applicable coverage is to be determined under rules "similar to" the rules in Section 4980B(f)(4) of the IRC. These rules currently apply under Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA; P.L. 99-272 ). Under COBRA, an employer with 20 or more employees that provided health insurance benefits must provide qualified employees and their families the option of continuing their coverage under the employer's group health insurance plan in certain cases where the employee's coverage otherwise would end (e.g., the employee is terminated). For COBRA purposes, the rules in Section 4980B(f)(4) of the IRC are used to determine the cost of the premium for the health insurance plan in which the former employee can continue. As of the date of this report, information is not available about how the rules in Section 4980B(f)(4) of the IRC will be applied in the context of the excise tax. In Notice 2015-16, Treasury and IRS describe potential approaches they are considering for applying the COBRA rules to determine the cost of applicable coverage. The statute also includes specific calculation rules for determining the cost of applicable coverage: Any portion of the cost of applicable coverage that is attributable to the excise tax will not be taken into account. The cost of applicable coverage will be calculated separately for single coverage and non-single coverage (e.g., family coverage). In the case of applicable coverage provided to retired employees, the plan can choose to treat a retired employee who is under the age of 65 and a retired employee aged 65 or older as similarly situated beneficiaries. With respect to a health care FSA, the cost of applicable coverage is the greater of an employee's salary reduction election or the total reimbursements under the FSA. With respect to Archer MSAs, the cost of applicable coverage is equal to an employer's contributions to the Archer MSA. With respect to HSAs, the cost of applicable coverage is equal to an employer's contributions, including salary reduction contributions, to the HSA. If the cost of applicable coverage is not determined on a monthly basis, the cost of the coverage will be allocated to months on a basis prescribed by the Secretary of the Treasury. The excise tax is assessed on the excess benefit—the portion of an employee's applicable coverage that exceeds a dollar limit. Under the ACA, the dollar limits for 2018 were to be $10,200 for single coverage and $27,500 for non-single coverage (e.g., family coverage), as adjusted by the health cost adjustment percentage. For 2019, the limits were to be the 2018 limits adjusted by the Consumer Price Index for all Urban Consumers (CPI-U), plus 1%. For 2020 and beyond, the limits were to be the previous year's limits adjusted by the CPI-U. The CAA of 2016, which delayed implementation of the excise tax until 2020, did not change the 2018 dollar limits or modify how the 2018 dollar limits were to be adjusted. The Department of the Treasury has not yet issued the 2020 limits, but the Congressional Research Service estimates they will be about $10,800 for single coverage and $29,100 for non-single coverage. The dollar limits also could be subject to two different adjustments, which are described below. The CAA of 2016 did not modify these adjustments. For some employers, the dollar limits for each year could be increased based on their employees' demographic characteristics. The adjustment could occur if the age and gender characteristics of all employees of an employer are significantly different from the age and gender characteristics of the national workforce. The adjustment uses the BCBS Standard plan offered through the FEHB program. The cost of the BCBS Standard plan is determined based on the age and gender characteristics of the employer's workforce and on the age and gender characteristics of the national workforce. The amount the dollar limits could be increased is equal to the excess cost of the BCBS Standard plan adjusted for the employer's workforce as compared to the BCBS Standard plan adjusted for the national workforce. The limits also may be adjusted for (1) individuals who are qualified retirees and (2) individuals who participate in an employer-sponsored plan that has a majority of its enrollees engaged in a high-risk profession or "employed to repair or install electrical or telecommunications lines." For purposes of this adjustment, qualified retirees are retired individuals aged 55 and older who do not qualify for Medicare.