Effective 2018, Section 4980I of the IRC — the so-called “Cadillac Tax,” which was added to the IRC by the ACA — will impose a 40% nondeductible excise tax on the aggregate cost of applicable employer-sponsored health coverage that exceeds an annually-adjusted statutory dollar limit. For 2018, the dollar limits are $10,200 for self-only coverage and $27,500 for other than self-only coverage, subject to any potential upward adjustment based on age and gender characteristics of an employee population or other applicable adjustment factors. The cost of coverage that exceeds the dollar limit is referred to as the “excess benefit.”
On July 31, 2015, IRS and Treasury issued Notice 2015-52, describing, and inviting comment concerning, potential approaches to Section 4980I issues for anticipated incorporation into proposed regulations. Notice 2015-52 supplements Notice 2015-16, which was issued earlier in 2015 and which described potential implementation approaches to other and related Cadillac Tax issues.
Public comments concerning Notice 2015-52 must be submitted to the IRS by October 1, 2015.
Notice 2015-52 highlights include:
Who pays the tax?
The coverage provider is liable for the tax. Who is the coverage provider? That depends on the type of plan at issue: with an insured plan, it’s the insurer; with an HSA or Archer MSA, it’s the employer; and for all other applicable coverage, it’s “the person who administers the plan benefits” — a term that is not defined in the ACA or elsewhere. IRS and Treasury are considering defining “the person who administers the plan benefits” as the person responsible for the day-to-day administration of the plan (processing claims, etc.) — generally, the third party administrator of a self-insured plan — or, in the alternative, as the person that has ultimate authority or responsibility for administration of plan benefits (eligibility determinations, etc.) — which is determined based on the terms of the plan document and is typically the employer.
At the end of each calendar year, the employer will calculate the tax that applies for each employee. Then, the employer will notify each coverage provider and the IRS concerning the amount of excise tax the coverage provider owes on its share of the excess benefit. Each coverage provider will then pay its portion of the excise tax.
IRS and Treasury are considering the designation of a particular quarter of the calendar year as the time for payment of the excise tax.
Who’s the employer?
Related employers will be aggregated and treated as a single employer, consistent with IRC Section 414 provisions. This creates special issues regarding how to identifying: the applicable coverage; the employees to be taken into account for age, gender and high-risk profession adjustments to the applicable dollar limits; the employer responsible of calculating and reporting the excess benefit; and the employer liable for any penalty for improper calculation of the tax.
How is the Cost of Applicable Coverage Determined?
The cost of applicable coverage is determined using rules similar to those that apply in calculating COBRA premiums. Many plans, however, may face timing issues when calculating the cost of applicable coverage: self-insured plans may need to wait for the expiration of a run-out period before the actual cost of coverage can be determined and experience-rated insured plans may need to reflect subsequent period premium discounts back to the original coverage period. With regard to account-based plans with employee contributions that can fluctuate from month to month — such as HSAs, MSAs and FSAs — a safe harbor is being considered under which total annual employee contributions would be allocated on a pro-rata basis over the plan year, without regard to when the contributions are actually made. Safe harbor treatment is also being considered for FSAs with carry-forward salary features: employee annual salary reductions would be included in the cost of applicable coverage only in the year the salary reductions occur, without regard to any carry-forward that happens.
To the extent a coverage provider — other than an employer — incurs liability for the excise tax and passes through some or all of that liability to the employer, the reimbursement from the employer is taxable income to the coverage provider. It is anticipated that any reimbursement of the excise tax — and reimbursement of any associated income tax — could be excluded from the cost of applicable coverage only if separately billed.
Employer takeaways: The Cadillac Tax is highly complex and employers will play a key role in compliance. Although repeal is always possible, employers should start preliminary planning for their role in administering the tax.