On February 23, the Internal Revenue Service (IRS) issued Notice 2015-16 (Notice), which describes several possible approaches for implementing the excise tax on high-cost employer-sponsored health care plans (also known as the “Cadillac Plan Tax”) under section 4980I of the Internal Revenue Code of 1986, as amended (Code).1 

The Notice offers insight into the view the IRS has of the statute and how this view will influence its approach to future rulemaking. It proposes answers to several implementation questions regarding Code section 4980I that remained unanswered following the enactment of PPACA but are necessary for employers to calculate potential liability under Code section 4980I, including:

  • Which benefit plans or programs are included in the definition of “applicable coverage”;
  • How the cost of applicable coverage will be determined; and
  • How the statutory dollar limits (and related statutory adjustments) will be applied.

The Notice launches a deliberate rulemaking process with respect to Code section 4980I that will be similar to the iterative approach taken to develop guidance regarding the Code section 4980H employer shared responsibility rules. In the Notice 2015-16, the IRS said it intends to issue another notice later this year that will address procedural issues under Code section 4980I. The Notice further says that public comments received regarding both notices are expected to “inform proposed regulations that will be issued in the future for further public notice and comment.”

Part I of this Legal Alert contains a brief overview of the Notice, which highlights certain key information and identifies steps that employers should consider taking at this stage of the regulatory process. Part II consists of a more detailed summary of the proposed approaches outlined by IRS in the Notice.

Part I. Brief Overview of Notice 2015-16

Notice Highlights

While the Notice does not generally represent guidance on the excise tax, it outlines positions the IRS currently expects to take in proposed regulations and invites comments on a number of important issues relating to the implementation of Code section 4980I. For example:

  • The Notice indicates that health reimbursement accounts (HRAs) and executive physical programs will likely be considered applicable employer-sponsored coverage under Code section 4980I.
  • Coverage offered through on-site medical clinics that offer only de minimis health coverage is likely to be excluded for purposes of Code section 4980I; self-insured limited scope dental and vision benefits and employee assistance plans (EAPs) may also be excluded.
  • Employer and employee pre-tax contributions to health savings accounts (HSAs) and medical savings accounts (Archer MSAs) are expected to be treated as applicable coverage included in Code section 4980I calculations as costs of coverage, but employee after-tax contributions to these arrangements will, most likely, be excluded.
  • In accordance with the statute, the cost of a particular benefit package will be determined using the average cost of the benefit package for similarly situated employees who are enrolled at the same benefit tier (self-only or non-self-only) applying the COBRA rules for determining applicable premiums. However, for purposes of this calculation, the IRS is considering allowing employers to separate, or disaggregate, similarly situated employees who differ by certain job-related criteria or other specified standards, such as location or active status.
  • The IRS will look to COBRA’s existing applicable premium rules for valuing the cost of employer-sponsored coverage, but will likely amend and clarify those rules for purposes of applying them to Code section 4908I. Any changes may also be incorporated in the COBRA applicable premium rules.
  • The Notice outlines several possible approaches for calculation of the cost of coverage for HRAs and seeks comments on the potential approaches, as well as whether allowing the use of alternative methods would be useful or would create needless complexity.

The Notice offers interested stakeholders an opportunity to shape the implementation process for the excise tax by inviting public comments on more than 30 issues and proposed approaches under Code section 4980I. Public comments on Notice 2015-16 are requested by May 15, 2015.

What Employers Should Do Now

  • Review your existing excise tax assumptions. Because the Notice does not provide definitive guidance on the excise tax, employers cannot rely on it for determining their excise tax liability. However, employers that have already conducted a preliminary excise tax analysis based on their pre-Notice interpretation of Code section 4980I should consider whether their current assumptions would need to be adjusted if the IRS issues guidance consistent with the approaches outlined in the Notice. This is particularly true for employers that did not anticipate that employee pre-tax HSA contributions would be treated as applicable employer-sponsored coverage or those who may benefit from certain rules regarding permissive disaggregation of similarly situated employees based on job-related criteria.
  • Consider commenting on the Notice. The IRS has asked for comments on a number of important issues that will impact a broad range of employers and plans. The invitation to comment on these issues offers employers an opportunity to influence the rules regarding specific issues that may be important to their particular benefit programs or philosophy.
  • Monitor future requests for information. The next notice regarding Code section 4980I is expected to address important procedural issues, such as how to calculate the amount of the excise tax and the employer’s role in coordinating amounts payable from various coverage providers (i.e., insurers and third-party administrators). Since these issues could also impact current assumptions regarding an employer’s excise tax exposure, employers should closely monitor future requests for public comment from the IRS.

Part II. Detailed Summary of Notice 2015-16  


The excise tax on high-cost health insurance under Code section 4980I was established under section 9001 of PPACA as a revenue-raising provision. Beginning in 2018, the statute imposes a 40% excise tax on insurers, employers and plan administrators if the cost of applicable employer-sponsored coverage exceeds a threshold amount. For this purpose “applicable employer-sponsored coverage” includes coverage for a former employee, surviving spouse, or any other primary insured individual. The 40% excise tax is imposed on the excess of the aggregate cost of coverage above certain annual dollar limits. For 2018, the threshold limits are $10,200 for self-only coverage and $27,500 for all other coverage, subject to certain adjustments outlined in the statute. These threshold amounts are adjusted in the first two years of implementation (2018 and 2019) to reflect the actual growth in the cost of coverage between the date of enactment (2010) and 2018. In subsequent years, threshold amounts will be indexed to CPI-U. Excise tax amounts are payable by the “coverage provider.” In the case of insured coverage, the coverage provider is the issuer; in the case of HSAs and MSAs, it is the employer; and for all other plans and programs (including self-insured health plans), it is the plan administrator. However, employers are expected to bear the cost of the tax in virtually all cases, with insurers and plan administrators passing on the cost to employers.

What’s In – Benefit Plans Included in the Definition of Applicable Coverage

If a benefit plan or program meets the definition of applicable employer-sponsored coverage, the cost of the coverage must be included when determining a coverage provider’s excise tax liability under Code section 4980I. The statute generally defines “applicable employer-sponsored coverage” (or “applicable coverage”) as employee coverage under any group health plan made available to the employee by an employer, if the coverage is excludable from the employee’s gross income under Code section 106. Applicable employer-sponsored coverage is subject to Code section 4980I regardless of whether the employer or the employee pays for the coverage, generally, even if the employee pays with after-tax dollars.

In addition to fully-insured and self-insured group health plans, Code section 4980I provides that the following types of health coverage are treated as applicable coverage:

Click here to view table.

As noted above, the Notice says that executive physical programs and HRAs are generally expected to be treated as applicable coverage under Code section 4980I.

What’s Out – Benefit Plans Excluded From the Definition of Applicable Coverage

If a benefit plan or program is excluded from the definition of applicable employer-sponsored coverage, the cost of the coverage is not considered when determining a coverage provider’s excise tax liability. The statute states, and the Notice clarifies, that the following types of coverage are not treated as applicable coverage:

Click here to view table.

In addition, the Notice states that governmental plans that primarily cover members of the military and their families are excluded.

The IRS seeks comment on the exclusion of the following types of coverage:

  • On-site medical clinics that offer only de minimis medical care to employees;
  • Self-insured limited scope dental and vision coverage that qualifies as an excepted benefit pursuant to the recently issued regulations under Code section 9831 (this exclusion was not clear under the statutory language);
  • EAPs that qualify as an excepted benefit pursuant to the recently issued regulations under Code section 9831; and
  • Employee after-tax contributions to HSAs or Archer MSAs, which are not excludable under Code section 106.

Determining the Cost of Coverage

The cost of applicable coverage for an employee for a month is measured against the applicable dollar limit for that month (1/12 of the annual dollar limit). To the extent that the cost of applicable coverage exceeds the dollar limit, the excise tax is due on the excess amount. Under Code section 4980I, rules similar to the rules used for determining the cost of COBRA continuation coverage are to be used to determine the cost of applicable employer-sponsored coverage. Under COBRA, coverage cost is calculated by determining the cost for similarly situated non-COBRA beneficiaries.

Code section 4980I also contains certain baseline rules that are to be used when applying the COBRA cost rules for purposes of the excise tax:

  • To the extent that the cost of coverage is impacted by costs associated with Code section 4980I excise tax liability, those costs are not taken into account when determining the cost of coverage (presumably, to avoid double payment of the excise tax).
  • The cost of self-only and other-than-self-only coverage must be calculated separately.
  • Pre- and post-65 retirees may be treated as similarly situated.
  • The cost of coverage under a health FSA includes both salary reduction contributions and employer contributions.
  • The cost of coverage under an HSA or an Archer MSA includes both salary reduction contributions and employer contributions.

Given the statutory language, the IRS is considering (and requesting comments regarding) the following approaches for determining the cost of coverage:

  • Aggregating all employees who are enrolled in self-only coverage in a particular benefit package (such as an HMO or a PPO or a high option and a low option), and determining the self-only cost of coverage by averaging the cost to employees in that group, then following the same process for employees with other-than-self-only coverage in the same benefit package to determine cost. Plans would not be required to further separate employees with other-than-self-only coverage based on the number of individuals covered (i.e., employee plus 1, family, etc.).
  • Allowing (but not requiring) plans to identify similarly situated groups based on employment-related criteria, or on standards specified by the IRS, such as job location, active status, or the number of individuals covered under the plan in addition to the employee. This approach may be beneficial to employers with benefit costs that differ by geographic location, for example, since the cost for a benefit package in a high-cost area could be disaggregated, reducing the likelihood that the excise tax will be triggered for a broad group of employees.
  • Valuing the cost of coverage under an HRA based on amounts made newly available each year, or on the total amount spent each year divided by the number of covered employees.
  • Allowing self-insured plans to use either of the two COBRA-permissible methods (actuarial basis or past-cost basis) to value benefits. These rules may be applied to Code section 4980I with certain changes, such as requiring the plan to use the selected valuation method for five years (except in certain circumstances), applying certain standards (such as prescribed factors) to actuarial determinations, and identifying costs (including claims, cost of stop-loss and administrative expenses) that can be taken into account under the past cost method. 

The Notice suggests that the approaches described above for purposes of the Code section 4980I rules may be used to update COBRA rules as well; employers should keep this in mind when considering comments on the calculation of the cost of coverage. In addition, the Notice requests comments on any alternative approaches to determining the cost of coverage that might be consistent with the statute.

Applying the Threshold Dollar Limits

The IRS is also considering, and requesting public comment regarding, how to apply the threshold dollar limits under Code section 4980I when an employee simultaneously has one type of coverage that is self-only coverage (such as comprehensive major medical) and another type of coverage that is other-than-self-only coverage (such as an HRA). Under one proposed approach, the applicable dollar limit for an employee would depend on whether the employee’s primary/major medical coverage is self-only coverage or other-than-self-only coverage. For this purpose, an employee’s primary/major medical coverage would be the type of coverage (self-only or other-than-self-only) that accounts for the majority of the aggregate cost of applicable coverage. If self-only coverage and other-than-self-only coverage make up equal amounts of the aggregate cost of applicable coverage, the other-than-self-only dollar limit would apply to the employee. An alternative approach proposed in the Notice would apply a composite dollar limit determined by prorating the dollar limits for each employee according to the ratio of the cost of the self-only coverage and the cost of the other-than-self-only coverage provided to the employee.
Finally, the Notice also invites comments on the application of the statutory provisions that provide for adjustment to the threshold dollar limits for qualified retirees, high-risk professionals, and employers with a workforce that has unique age or gender characteristics. The IRS appears particularly interested in understanding how plans and employers gather employee data that would properly classify employees for purposes of the adjustments.

Comments Requested

As noted above, the Notice sets forth possible approaches the IRS expects to include in future proposed regulations, with the IRS seeking comments on over 30 specific issues in the Notice and reiterating that the proposed regulations will also be subject to comment. The Notice concludes with an invitation to submit comments on any other issues under Code section 4980I. Thus, the Notice reflects that the Service’s process for developing guidance on the Cadillac Plan Tax will be much like its process for implementing rules on the employer shared responsibility provisions, with multiple proposals in notices and proposed regulations and opportunities for stakeholders to provide comments at each step.