ACA Cadillac Tax Takes Shape . . . “One Piece at a Time”

Wayne Kemp wrote a great old song for Johnny Cash called “One Piece at a Time.” In it, Johnny sings of slowly piecing together his very own Cadillac using parts pilfered from his Detroit employer over a period of decades. The end product is an eye-catcher, but it’s not pretty. The Affordable Care Act’s Cadillac tax is in the process of being built . . . How will it turn out?

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What we know so far about the Cadillac tax:

As of April 2015, the Internal Revenue Service (IRS) has not issued formal guidance on the Cadillac tax, officially called the “Excise Tax on High Cost Employer-Sponsored Health Coverage” under Section 4890I of the Internal Revenue Code. However, IRS Notice 2015-16 provides preliminary information and asks for public comments on various approaches the IRS will consider before proposing regulations.

We know that starting in 2018, employers, health insurers and/or plan sponsors will be levied a 40% excise tax on any excess group health benefit provided to an employee, former employee, surviving spouse or other primary insured individual. The excess benefit is the amount, if any, by which the cost of an employee’s applicable employer-sponsored health coverage exceeds the annual limitation or threshold.

Applicable coverage includes:

  • Coverage, whether insured or self-funded, under any employer-sponsored group health plan that is excludable from the employee’s gross income under Code section 106
  • Both the employer’s and employee’s contributions to the cost of health care, whether or not the employee’s contributions are made with pretax or after-tax dollars

Specific types of coverage included in applicable coverage:

  • Health FSAs
  • Governmental plans (public employee plans)
  • Multiemployer plans
  • Retiree coverage
  • Coverage for only a specified disease or illness and hospital indemnity or other fixed indemnity insurance, if the payment for the coverage is excluded from gross income or a deduction is allowed

Specific types of coverage excluded from applicable coverage:

  • Coverage for only accident or disability income insurance or a combination of both
  • Coverage issued as a supplement to liability insurance
  • Liability insurance, including general and auto liability insurance
  • Automobile medical payment insurance
  • Workers’ compensation or similar insurance
  • Credit-only insurance
  • Other insurance coverage, as specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits
  • Long-term care coverage, whether through insurance or otherwise
  • Insured dental or vision plans: any standalone coverage under a separate policy, certificate or contract of insurance
  • Coverage for only a specified disease or illness and hospital indemnity or other fixed indemnity insurance, if the payment for the coverage is not excluded from gross income or a deduction is not allowed for it

What we don’t know about applicable coverage:

Much remains uncertain about what is included in or excluded from applicable employer-sponsored health coverage. Following are areas that are still murky: 

  • HSAs and Archer MSAs: Employee pretax contributions are included; under future regulations, employer contributions are likely to be included, and employee after-tax contributions are likely to be excluded
  • HRAs: Future guidance is expected to include HRAs in the definition of applicable coverage.
  • On-site medical clinics: These clinics are currently included, but IRS anticipates proposed regulations will not include the cost of on-site medical clinics offering only de minimis medical care to employees, such as first aid.
  • Executive physical programs: Future guidance is expected to include these as applicable coverage.
  • Self-funded dental or vision plans: IRS is considering proposing regulations that would exclude self-funded standalone plans from applicable coverage.
  • Military Coverage: It is implied that coverage provided under a plan maintained primarily for members of the military and their families by the federal government or a state government is excluded.
  • EAPs: IRS might propose that employee assistance programs (EAPs) meeting certain criteria would be excluded from applicable coverage.

Do you have an opinion on how the IRS should resolve the open issues regarding this tax? (Besides scrapping the whole thing, that is.) If you’d like to submit a comment, send it to the IRS by May 15, 2015, at Notice.comments@irscounsel.treas.gov, putting “Notice 2015-16” in the subject line.

Then wait for more guidance and comment periods to follow. The Cadillac tax will get built . . . and hopefully it will turn out better than that mismatched Cadillac Johnny put together “one piece at a time.”

Resources: 

IRS Notice 2015-16 – Excise Tax on High Cost Employer-Sponsored Health Coverage

Internal Revenue Code Section 4980I

 

Have you checked out the ACA University virtual learning center? Make it your source for comprehensive, interactive and continually updated resource to help you react quickly to Affordable Care Act regulations.

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