IRS Notice 2015-16 Guidance on “Cadillac Tax”March 9, 2015
Initial comments from the IRS regarding the Affordable Care Act’s high cost plan (“Cadillac”) tax have been issued.
Section 4980I of the ACA includes a provision for a 40% excise tax to be imposed on employer-sponsored group health coverage that exceeds certain thresholds based on single and family coverage, starting in 2018. The theory behind this tax is that higher cost medical plans provide richer benefits that increase consumer spending on healthcare and therefore drive up costs. Presumably, if health plans are required to pay the tax, there will be increased efforts to reduce benefits and ultimately hold down spending. The IRS expects to generate revenue not only from the tax, but through the reduction in tax-advantaged health coverage offered by employers. The tax affects all size employer plans and all funding types.
Since the law was passed, there has been much speculation but IRS has not addressed this provision until now. On February 23rd, the IRS issued Notice 2015-16 starting the discussion and requesting comments by May 15, 2015. After the IRS reviews comments generated from this Notice, it will issue the next notice on more aspects of the provision.
Why is this Notice important now?
Since the ACA was passed in 2010, employers have been concerned about how and when to handle this impending new tax. However, the specifics of how the tax will be calculated and collected have still not been determined. This Notice is the first of several that are expected from the IRS in order to collaborate with the public in creating workable procedures.
Notice 2015-16 specifically addresses and requests comments on procedures regarding the following areas of concern:
- Definition of Applicable Coverage subject to the tax
- Determination of Cost of Applicable Coverage
- Applicable Dollar Limit
What benefits will be included under the definition of Applicable Coverage?
The excise tax is to be charged based 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 under section 106”.
A “group health plan” is generally any employer plan that provides health care to employees. Besides medical insurance benefits, it also includes any employer-provided health coverage that is excluded from income, including health FSAs, HRA funding, HSA contributions, on-site medical clinics (providing more than de minimus care), retiree coverage, and specified disease, illness, or hospital indemnity coverage (if the premium is excluded from gross income).
The Notice specifically states that the term Applicable Coverage excludes: accident only or disability income, liability, supplemental liability, workers’ compensation, automobile medical, credit-only, other insurance coverage where medical care is secondary or incidental, long-term care, stand-alone dental or vision, government maintained plans primarily for military and their families, and specified disease, illness, or hospital indemnity coverage (if the premium is not excluded from gross income).
Does the Cost of Applicable Coverage include employer and employee contributions?
Yes. Any group health plan benefit that is excluded from the employee’s taxable income is included. Adjusting the employer versus employee share of the health insurance premiums, FSA elections, or HSA contributions will not affect the total Cost of Applicable Coverage.
How will the Cost of Applicable Coverage be determined?
In general, the aggregate Cost of Applicable Coverage for all lines of coverage are included and compared to the Applicable Dollar Limit. Per the Notice, the Cost will be determined based on rules similar to COBRA. For insured coverage, the billed premium may be used, but there is a question of whether the premium would be reduced to account for ACA imposed taxes and other built-in costs. For self-insured medical coverage, health FSAs, HRA funding, and HSA contributions, there are multiple ways being considered in order to calculate the cost.
What is the Applicable Dollar Limit before the excise tax applies?
There are two annual baseline limits, which are tied to the Blue Cross/Blue Shield Federal Employees Health Benefits Plan. For single employee coverage, the baseline is $10,200 annually, which is $850 per month. For employees covering one or more family members, the baseline is $27,500 annually, which is $2,292 per month. The first year, 2018, will be subject to a “health cost adjustment percentage” applied to increase the baseline right from the start, and an annual cost-of-living adjustment will apply each year thereafter.
Will the Applicable Dollar Limit be adjusted for different groups?
There are several other adjustments that potentially increase the baseline limits for qualified retirees, age and gender, and high-risk professionals or employees who “repair or install electrical or telecommunication lines”. The age and gender adjustment is an area that the IRS is specifically seeking comments. The adjustment would occur if the overall or average age and gender of the employer’s workforce cause their premium to be higher than the standard for the national workforce. The IRS is looking at developing safe harbors that would provide an appropriate rule for making these type adjustments.
There are no proposed adjustments for employers with above average claims experience due to high cost claimants or overall utilization.
Who is responsible for paying any owed excise tax?
The answer is complex. Section 4980I provides that the party that “shall pay” is (1) the health insurance carrier for insured coverage, (2) the employer for employer-sponsored HSA contributions, and (3) the plan administrator (usually the employer) for other coverage, such as health FSA contributions, HRA funding, and other self-insured medical plans. With this set up, if an employer has insured medical coverage and also sponsors an HSA, FSA, HRA, or a combination, then both the insurance carrier and the employer are each responsible for paying a portion of the tax.
Who is responsible for calculating the Cost of Applicable Coverage and if it has reached the Applicable Dollar Limit?
This question requires additional guidance. Currently, regardless of who is required to pay the tax, the employer is responsible for calculating the amount of benefit subject to the excise tax and then notifying the insurance carrier or plan administrator as well as the IRS. Therefore, even if the benefits are insured and the insurance carrier is responsible for paying the whole tax, it is the employer’s responsibility to figure out what amounts are subject to the tax and to notify the insurer of the amount. If the employer is also responsible for paying part of the tax, then the employer is responsible for calculating what portion will be paid by the insurance carrier and what portion will be paid by the employer.
What should employers be doing now?
This Notice leaves many unanswered questions and does not ease employer concerns. All employer-sponsored health plans are affected by the requirement to calculate the tax, and many tax-advantaged benefit programs may have to be reduced in 2018 to avoid the new excise tax, should this ACA provision remain in effect.
At this time, employers can evaluate current health coverage costs compared to the published baseline limits, but it will be difficult to include FSA, HRA, HSA components, and age or gender adjustments until detailed guidance is issued.
Keller is submitting both policy and procedural comments to the IRS. Employers can also submit comments to Notice.firstname.lastname@example.org. Comments should be submitted no later than May 15, 2015 and include “Notice 2015-16” in the subject line. We will continue to follow the IRS guidance, as released, and keep you updated.