The IRS is continuing its “think out loud” approach to rule making for the Cadillac tax, and you’re invited to talk back. In a recent notice (IRS Notice 2015-52), the agency revealed a few more hints about how it plans to implement the excise tax on high-cost health plans, often referred to as the “Cadillac tax.”
Quick Review of the Cadillac Tax
For taxable years starting in 2018, the Affordable Care Act (ACA) will impose 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 limit/threshold. For 2018, the law provides baseline thresholds of $10,200 per employee for self-only (single) coverage and $27,500 per employee for any coverage other than self-only, including family coverage. For multiemployer plans, the threshold will be $27,500 per employee for both self-only coverage and other than self-only coverage (family coverage).
IRS Notice 2015-52 is a followup to an earlier notice (IRS Notice 2015-16, issued in February 2015) in which the IRS discussed and sought input on possible approaches to the definition of applicable coverage, the calculation of the cost of applicable coverage and the dollar limit. (See our earlier blog post on IRS Notice 2015-16). The new notice proposes approaches for:
- Determining who is responsible for paying the tax
- Addressing the challenges of employer aggregation
- Calculating the cost of applicable coverage
- Age and gender adjustments to the dollar limits
- Notice and payment of the tax.
Who Pays the Tax?
Internal Revenue Code (IRC) Section 4980I says the Cadillac tax amount for each employee is calculated by the employer (except in the case of multiemployer plans where the plan sponsor of the multiemployer plan does the calculation). Section 4980I also says the “coverage provider” is liable for paying the tax. The identity of the coverage provider depends on the type of coverage.
- If the coverage is an insured group health plan, the health insurance issuer pays.
- If the coverage is a health savings account (HSA) or an Archer medical savings account (MSA), the employer pays.
- For all other types of applicable coverage, the “person that administers the plan benefits” pays.
The “person that administers the plan benefits” is not defined in ACA, ERISA or the IRC, so the IRS is suggesting two possible definitions:
- The person/entity responsible for performing the day-to-day functions that constitute the administration of plan benefits, including activities such as processing claims, responding to inquiries or providing the technology for benefits information. If the plan is self-funded, this implies the payment would be made by the third-party administrator (TPA), unless the plan is self-administered.
- The person/entity that has the ultimate authority or responsibility for the administration of benefits, including the final decisions on eligibility determinations, claims administration and arrangements with service providers, even if that person/entity does not handle the daily routine administrative functions. This person/entity would be identified in the plan documents.
The IRS wants feedback on these two approaches, in general, and how these approaches could be applied to multiemployer plans.
Practical Challenges of Employer Aggregation
For the purposes of the Cadillac tax, all employers in a controlled group are treated as a single employer. The IRS is asking for input on the challenges of calculating and reporting the excise tax for aggregated employers.
Calculating the Cost of Applicable Coverage
The IRS anticipates the taxable period for the Cadillac tax will be the calendar year for all taxpayers. An employer must calculate the tax for each employee soon enough after the end of the taxable year to allow the coverage providers to pay the tax in a reasonably timely manner. The notice also discusses the possible tax ramifications and solutions if the health insurance issuer or a TPA pays the excise tax, then charges and receives that amount from the employer. The amount received from the employer would result in taxable income for the TPA or health insurance issuer. The IRS also presents an approach for calculating the cost of coverage for account plans such as flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), HSAs and Archer MSAs. It suggests allocating the contributions to these plans on a pro-rata basis. In addition, the notice addresses some of the complications with FSAs, such as carryover amounts and nonelective flex credits.
Age and Gender Adjustments to the Dollar Limits
The annual thresholds/limits for the Cadillac tax can be increased if the age and gender makeup of an employer’s workforce would result in higher premium costs when compared with a national average. The IRS is considering using a table in the Current Population Survey to determine the age and gender distribution of the national workforce and would require an employer to use the first day of the plan year as a snapshot date for determining the composition of its workforce. The IRS also anticipates formulating and publishing adjustment tables to facilitate and simplify the calculation of the age and gender adjustment.
Notice and Payment of the Tax
An employer must calculate the Cadillac tax amounts and then notify the Department of the Treasury/IRS and each coverage provider. The IRS is open to suggestions on how and when that information could best be provided to the various coverage providers and the IRS. As for the annual payment of the Cadillac tax, the IRS suggests having coverage providers use Form 720 for this purpose.
Speak Now …
Do you have an opinion about how the Cadillac tax should be implemented? If so, take advantage of a window of opportunity (from now until October 1, 2015) to express your thoughts to the IRS. The Cadillac tax implementation rules are in their formative stages. Although the IRS has issued two notices, you cannot rely on them for guidance. You can, however, submit comments now before the rules are proposed. Once the rules are proposed, there will likely be another public comment period before the final rules are released.
Kelli Kolsrud, CEBS
Director, Information Services and Publications at the International Foundation