On Monday, February 23, 2015, the IRS issued Notice 2015-16, which describes potential approaches to the following issues relating to the Internal Revenue Code Section 4980I “Cadillac Tax”:
- Which coverage is subject to the tax
- How to determine the cost of that coverage
- The statutory dollar threshold above which the tax will apply
The IRS has requested comments on these potential approaches (as well as any other aspects of the Cadillac Tax) and intends to consider those comments before issuing proposed regulations.
This Update provides highlights of Notice 2015-16.
Beginning in 2018, Code Section 4980I imposes a nondeductible excise tax equal to 40 percent of the excess, if any, of the aggregate cost of the “applicable coverage” of an employee for a month over the applicable dollar limit for the month.
Applicable Coverage Subject to the Tax
Code Section 4980I provides that “applicable coverage” generally includes any non-taxable employer-provided group health plan made available to an employee. Certain exclusions are listed in the statute.
The notice clarifies that the Cadillac Tax will be calculated based on the “applicable coverage” in which an employee is actually enrolled. The notice also proposes the following with respect to identifying “applicable coverage”:
- HSAs. Employer contributions and employee pre-tax salary reduction contributions to HSAs would be included, but employee after-tax contributions to HSAs would not be included.
- On-Site Medical Clinics. On-site medical clinics would be included unless they offer only de minimis medical care to employees.
- The IRS has requested comments on how to determine whether medical care is de minimis and how to determine the cost of on-site clinic coverage.
- Stand-Alone Dental/Vision. Both insured and self-insured stand-alone dental and vision benefits would be excluded.
- EAPs. Employee assistance programs that qualify as HIPAA excepted benefits would be excluded.
- Executive Physicals. Executive physical programs would be included.
- HRAs. HRAs would be included.
Determining the Cost of Applicable Coverage
Code Section 4980I provides that the cost of applicable coverage should be determined under rules similar to those used to determine COBRA premiums.
The notice proposes the following:
- Cost Applicable to Similarly Situated Employees. The cost of applicable coverage for an employee would be based on the average cost of that type of applicable coverage for that employee and all “similarly situated” employees.
- Definition of Similarly Situated. Similarly situated employees would be those employees who are enrolled in the same benefit package and tier (self-only or other-than-self-only).
- The IRS is considering allowing employers to use the same cost for other-than-self-only coverage, regardless of how many individuals are enrolled. For example, the cost for the employee + 1 tier of a coverage option would be the same as the cost for the family tier of that coverage option.
- The IRS is also considering whether an employer could create additional groups of similarly situated employees by disaggregating further based on specified or general criteria.
- COBRA Calculation Methods. An employer could choose to calculate the cost of a self-insured option by using one of the methods available for calculating self-insured COBRA premiums (i.e., the actuarial basis method or the past cost method). The notice proposes some approaches for clarifying how to calculate the cost under each method.
- Cost of an HRA. The cost of a health reimbursement arrangement might be determined (i) based on the amounts made newly available to a participant each year or (ii) by adding together all claims and administrative expenses attributable to HRAs for a particular period and dividing that sum by the number of employees covered for that period.
The IRS has also requested comments on whether the cost of coverage should be determined in another manner, for example, by reference to the cost of similar coverage available through a Health Insurance Marketplace.
Statutory Dollar Threshold
Code Section 4980I provides that the tax will apply only to the extent the aggregate cost of applicable coverage exceeds the statutory dollar limit. One annual limit ($10,200, adjusted as described in Code Section 4980I) applies to self-only coverage and a separate annual limit ($27,500, adjusted as described in Code Section 4980I) applies to all other tiers of coverage (“other-than-self-only-coverage”).
The IRS recognizes that an employee may be enrolled both in self-only coverage (e.g., self-insured medical plan) and other-than-self-only-coverage (e.g., HRA). The IRS might decide that the applicable limit for such an employee is the one applicable to the type of coverage that makes up the majority of the cost.
For example, if the employee is enrolled in self-only coverage with an aggregate cost of $3,000 and other-than-self-only-coverage with an aggregate cost of $9,000, the other-than-self-only-coverage limit would apply.
Alternatively, the IRS might decide that the limit should be prorated.
In the example above, the limit would be equal to 25% ($3,000/($3,000 + $9,000)) of the self-only coverage dollar limit and 75% ($9,000)/($3,000 + $9,000) of the other-than-self-only coverage dollar limit.
Assessment and Payment of the Tax
Code Section 4980I requires an employer to calculate the applicable Cadillac Tax and to communicate the applicable payment amount to any other person liable to pay the tax.
Health insurance issuers are required to pay the tax attributable to insured health coverage, employers are required to pay the tax attributable to HSA or Archer MSA coverage, and the person administering the plan is required to pay the tax attributable to any other coverage.
Notice 2015-16 does not address the calculation or payment of the Cadillac Tax. The IRS anticipates that it will provide a similar notice with proposed approaches to these procedural issues before issuing proposed regulations.
Impact on Calculation of COBRA Premiums
Because the cost of applicable coverage is determined under rules similar to those used for determining COBRA premiums, the IRS will likely issue COBRA guidance to harmonize the COBRA premium calculation rules with the Cadillac Tax rules.
Impact on W-2 Reporting
Although the Cadillac Tax and the W-2 reporting rules generally apply to the same types of health coverage, the IRS does not intend to apply previously-issued W-2 reporting guidance to the Cadillac Tax. However, the IRS may modify the W-2 reporting rules consistent with future Cadillac Tax guidance.