IRS Issues Second Notice on Cadillac Tax Implementation
IRS Issues Second Notice on Cadillac Tax Implementation
IRS Notice 2015-52 (July 30, 2015)
Available at http://www.irs.gov/pub/irs-drop/n-15-52.pdf
Visit the Health Care Reform Community on Checkpoint to join the discussion on this development (for Checkpoint subscribers to EBIA’s Health Care Reform manual).
The IRS has issued Notice 2015-52 addressing the 40% excise tax on high-cost employer-sponsored health coverage under Code § 4980I (the so-called “Cadillac tax”), set to take effect in 2018. Supplementing Notice 2015-16, issued in February 2015 (see our article), the new notice describes additional proposals regarding the cost of applicable coverage, particularly with respect to account-based arrangements, as well as other issues. Here are highlights:
- Allocation of annual contributions to account-based plans. Certain health savings accounts (HSAs), health flexible spending arrangements (health FSAs), and health reimbursement arrangements (HRAs) are considered applicable coverage under Code § 4980I. The IRS is considering an approach under which contributions to these account-based plans would be allocated on a pro rata basis over the period to which the contribution relates (generally, the plan year) regardless of the timing of the contributions during the period. For example, if an employer contributes a lump-sum amount to an HRA at the beginning of the year, that contribution would be allocated ratably to each calendar month of the plan year. Comments are requested on this and alternative approaches.
- Health FSAs with employer flex credits. Code § 4980I provides that the cost of applicable coverage of a health FSA for any plan year is the greater of the employee’s salary reduction amount or the total reimbursements under the health FSA. If an employer contributes nonelective flex credits to the health FSA, the cost of applicable coverage would be the amount of the employee’s salary reduction, plus the amount of the flex credit that is actually used for reimbursements. To avoid double counting when health FSA amounts are carried over to a subsequent plan year, the IRS is considering a safe harbor under which carryovers are disregarded for purposes of the cost of applicable coverage. For plans with nonelective flex credits, use of the safe harbor would be limited.
- Determination period. The IRS anticipates that the determination period for the excise tax will be the calendar year for all employers, and that employers will be required to determine the cost of applicable coverage sufficiently soon after the end of the year to allow coverage providers to timely pay any tax due. The IRS acknowledges that potential timing issues will be different depending on the type of plan. For example, self-insured plans will not be able to determine the cost of coverage for the year until all claims have been submitted, and health FSAs will have to wait until the end of any applicable run-out period. Insured plans will also need to consider payments or premium discounts attributable to experience ratings, and these may not occur until the next coverage period. Comments are requested on these timing issues, including how employers currently factor in experience-related payments or discounts for purposes of determining the COBRA applicable premium.
- Reimbursement of excise and income taxes. If the coverage provider responsible for paying an excise tax is an entity other than the employer (i.e., an insurer or TPA), it will likely pass the amount of the tax back to the employer through increased service fees—which will mean additional taxable income for the coverage provider. Because the excise tax is nondeductible for the coverage provider, it will likely pass through not only the amount of the excise tax, but also the amount of the additional income tax that the coverage provider will incur because of the excise tax reimbursement. Code § 4980I provides that any portion of the cost of coverage attributable to the excise tax itself is excluded in determining the amount of the excise tax. The IRS is considering whether amounts reimbursed for additional income tax may also be excluded from the cost of coverage. Comments are requested on administrable methods for excluding income tax reimbursements and on the appropriate tax rate to use. The IRS anticipates that coverage providers will be permitted to exclude the amount of excise tax or income tax reimbursement only if it is separately billed and identified as attributable to the cost of the excise tax.
- Amounts taxable under Code § 105(h). Excess reimbursements under a discriminatory self-insured health plan are includible in a highly compensated individual’s gross income. Prior guidance on Form W-2 health coverage reporting (see our article) specified that excess reimbursements are not included in the reportable cost of coverage. However, according to the Notice, the IRS anticipates that the prior guidance—along with related forms and instructions— will be modified in the future to make excess reimbursements subject to reporting. (Employers should continue to follow prior guidance until it is formally changed.) Similarly, the IRS states that excess reimbursements should be included in the cost of applicable coverage for purposes of Code § 4980I.
- Persons liable for the tax. For coverage other than insured plans or HSAs (e.g., self-insured plans and health FSAs), the coverage provider liable for the excise tax is “the person that administers the plan benefits.” Since this term is not defined in the statute, the Notice suggests two alternative approaches for determining who is liable. Under the first approach, the person (or entity) responsible for performing the day-to-day functions of plan administration (such as processing claims, responding to inquiries, or providing a technology platform for benefits administration) would be liable. In most cases, this would be a third-party administrator (TPA). Under the second approach, the person (or entity) that has ultimate decisionmaking authority over matters of plan administration (such as eligibility determinations, claims administration, and arrangements with service providers) would be liable. In most cases this would be the employer. Comments are requested on the feasibility of each approach.
- Notice and payment of the tax. Code § 4980I requires employers to calculate the amount of the excess benefit subject to the tax and to notify the IRS and each coverage provider of the provider’s share. Comments are requested on the time and manner in which the information must be provided. The IRS is considering designating a particular quarterly filing of Form 720, Quarterly Federal Excise Tax Return, for paying the taxes. [EBIA Comment: This procedure is already in use for the payment of PCOR fees imposed on insurers and plan sponsors of self-insured plans.]
- Age and gender adjustments to dollar limit. Code § 4980I provides per-employee dollar limits for 2018, but those limits may increase based on the age and gender characteristics of an employer’s employees compared to the national workforce. Comments are requested on how to determine age and gender characteristics of the national workforce, how to formulate adjustment tables to simplify an employer’s calculation of the adjustment, and a proposal to allow employers to use the first day of the plan year as a snapshot date for determining the composition of the employee population.
EBIA Comment: The Notice also invites comments on the practical challenges of Code § 4980I’s employer aggregation requirement (under which all employers in a controlled group and affiliated service group are treated as a single employer), but without revealing any of the agency’s thinking on the issues raised. While the Cadillac tax is conceptually simple, the two notices reflect the complexity of its implementation. After considering public comments on both notices, the IRS intends to issue proposed regulations—interested parties should study Notice 2015-52 carefully and consider submitting comments by October 1. While the Notice specifies that it does not provide guidance upon which taxpayers may rely, it touches on numerous issues and provides valuable insight into the approaches under consideration. For more information, see EBIA’s Health Care Reform manual at Sections XXX (“Tax on High-Cost Health Coverage”) and XXXVI.B(“W-2 Reporting: Cost of Employer-Sponsored Health Coverage”). See also EBIA’s Consumer-Driven Health Care manual at Section V.D (“Summary of Effects of Health Care Reform on Account-Based Plans” ) and EBIA’s Cafeteria Plans manual at Section XVII.J.2 (“Tax on High-Cost Health Coverage”). You may also be interested in our upcoming web seminar “Cadillac Tax Round Two: IRS Notice 2015-52 Addresses More Issues” (live on September 16).
Contributing Editors: EBIA Staff.