Initial Guidance on the Cadillac Tax Released by IRS (Benefit Minute)
The Internal Revenue Service has issued IRS Notice 2015-16 which is intended to initiate the process of developing regulatory guidance on the excise tax for high cost employer-sponsored coverage (the Cadillac tax). The Notice provides potential approaches to certain issues related to the excise tax and asks for comments on these potential approaches. The items addressed in the Notice include the types of coverage subject to the excise tax, possible methods to determine of the cost of coverage subject to the excise tax, and to apply the dollar limits. Additional issues will be addressed in a subsequent notice before proposed regulations are issued. The Cadillac tax applies to taxable years beginning after December 31, 2017.
The Cadillac tax is a 40% non-deductible excise tax on the cost of employer-sponsored health coverage that exceeds the limits set forth in the Affordable Care Act. The statutory limits are $10,200 for employee-only coverage and $27,500 for other than employee-only coverage. However, the ACA provides for certain adjustments that may increase these limits in specific circumstances. This includes higher dollar limits for retiree coverage and for individuals who participate in a plan where the majority of covered employees are engaged in a high risk profession or employed to repair or install electrical or telecommunication lines. The excise tax will be paid by the health insurer in the case of fully-insured coverage and by the person that administers the plan in the case of any other coverage.
The excise tax is calculated on the cost of applicable coverage, which is defined as coverage under any group health plan made available to the employee by an employer which is excludable from the employee’s gross income. The following types of coverage are included:
- Fully insured and self-insured group health plans, including retiree coverage;
- Multiemployer plans;
- Health reimbursement arrangements (HRAs);
- Employer contributions to Health Savings Accounts (HSAs), including salary reduction contributions;
- Health FSAs, including salary reduction contributions;
- Coverage for specified disease or illness and hospital indemnity and other fixed indemnity insurance if the premium is not paid with after-tax dollars; and
- Executive physical programs
Coverage that is excluded from the excise tax calculation includes:
- Fully insured dental and vision coverage;
- Accident or disability income insurance;
- Long-term care coverage;
- After-tax HSA contributions; and
- Coverage for specified disease or illness and hospital indemnity and other fixed indemnity insurance if the premium is paid with after-tax dollars.
In the Notice, the IRS stated that additional guidance will be provided with the circumstances under which self-insured dental and vision coverage, on-site medical clinics and employee assistance programs may be excluded from the excise tax calculation.
Determining the Cost of Coverage
For purposes of the excise tax calculation, the cost of applicable coverage is determined under rules similar to those that apply for determining COBRA premiums. The Notice identifies and lists potential approaches for several specific issues that may arise in computing the cost of applicable coverage, including:
- Identifying similarly situated individuals;
- Methods self-insured plans may use to determine the applicable premium; and
- Possible methods that may be used to determine the applicable premium for HRAs.
The IRS and the Department of Treasury are inviting comments on the approaches described in the Notice, as well as comments about other possible methods to calculate the cost of applicable coverage, such as by reference to the cost of similar coverage available in the Marketplace.
Implication for Plan Sponsors
It is anticipated that a substantial number of employer-sponsored plans will be subject to the Cadillac tax, either in 2018 or shortly thereafter. Official guidance on the application of the 40% excise tax is critical to employers who are already developing strategies to mitigate its financial impact. Even though Notice 2015-16 does not provide any definitive answers to the issues surrounding the excise tax, it does identify some of these issues and provides plan sponsors an indication of the direction the IRS may go with future guidance.