The Internal Revenue Service (IRS) has published Notice 2015-16, which is intended to initiate and inform the process of developing regulatory guidance regarding the excise tax on high cost employer-sponsored health coverage under, commonly called the Cadillac tax. Section 4980I was added to the Internal Revenue Code by the Affordable Care Act (ACA) and applies to taxable years beginning after December 31, 2017. Under this provision, if the aggregate cost of applicable employer-sponsored coverage provided to an employee exceeds a statutory dollar limit, which is revised annually, the excess is subject to a 40% excise tax.
This notice describes potential approaches with regard to a number of issues under § 4980I, which could be incorporated in future proposed regulations, and invites comments on these potential approaches. The issues addressed in this notice primarily relate to (1) the definition of applicable coverage, (2) the determination of the cost of applicable coverage, and (3) the application of the annual statutory dollar limit to the cost of applicable coverage. The Department of the Treasury (Treasury) and the IRS invite comments on the issues addressed in this notice and on any other issues under § 4980I.
Treasury and IRS say they anticipate issuing another notice, before the publication of proposed regulations, describing and inviting comments on potential approaches to a number of issues not addressed in this notice, including procedural issues. After considering the comments on both notices, Treasury and IRS anticipate publishing proposed regulations under § 4980I. The proposed regulations will provide further opportunity for comment, including an opportunity to comment on the issues addressed in the preceding notices.
The ACA provides that the cost of applicable coverage for the Cadillac tax is determined under rules similar to the rules for determining applicable premium for COBRA continuation coverage. The ACA also prescribe special rules for determining the cost of applicable coverage for retirees, health flexible spending arrangements (health FSAs), Archer medical savings accounts (Archer MSAs), and health savings accounts (HSAs).
The ACA provides for two annual applicable dollar limits — one for an employee with self-only coverage and one for an employee with other-than-self-only coverage. The ACA specifies per-employee dollar limits for 2018 ($10,200 per employee for self-only coverage and $27,500 per employee for other-than-self-only coverage) but further provides for various adjustments to increase the dollar limits in certain circumstances. The ACA provides that a health cost adjustment percentage will be applied to the baseline dollar limits for 2018 to determine the applicable dollar limits for that year. The ACA also provides that a cost-of-living adjustment will be applied to determine the applicable dollar limits for taxable years after 2018. In addition, the ACA provides that the dollar limits are increased by an age and gender adjustment, if applicable for an employer. The ACA provides that an additional amount is added to the dollar limits for an individual who is a qualified retiree or who participates in a plan sponsored by an employer the majority of whose employees covered by the plan are engaged in a high-risk profession or employed to repair or install electrical or telecommunication lines.
Types of Coverage Included in Applicable Coverage:
- Health FSAs;
- Archer MSAs (but certain contributions by individuals are not included);
- HSAs (but after-tax contributions by individuals are not included);
- Governmental plans for civilian employees;
- Coverage for on-site medical clinics (but clinics that provide only de minimis medical care are excluded);
- Retiree coverage;
- Multiemployer plans; and
- Coverage only for a specified disease or illness and hospital indemnity or other fixed indemnity insurance, under certain circumstances.
Types of Coverage Excluded from Applicable Coverage:
(1) Coverage, whether through insurance or otherwise, that includes:
(a) coverage only for accident, or disability income insurance, or any combination thereof;
(b) coverage issued as a supplement to liability insurance;
(c) liability insurance, including general liability insurance and automobile liability insurance;
(d) workers’ compensation or similar insurance;
(e) automobile medical payment insurance;
(f) credit-only insurance; and
(g) other insurance coverage, as specified in regulations, similar to the coverage listed above and under which benefits for medical care are secondary or incidental to other insurance benefits;
(2) Coverage, whether through insurance or otherwise, for long-term care;
(3) Dental and vision policies; the IRS says it is considering excluding all limited scope dental and vision benefits that qualify as excepted benefits (insured and self-funded); and
(4) Coverage only for a specified disease or illness and hospital indemnity or other fixed indemnity insurance, under certain circumstances.
Treasury and IRS are considering whether to propose that employee assistance programs that qualify as an excepted benefit pursuant to the recently issued regulations on excepted benefits would be excluded from applicable coverage for purposes of the Cadillac tax. Comments are requested on any reasons why Treasury and IRS should not implement this approach.
Public comments should be submitted no later than May 15, 2015. Comments should include a reference to Notice 2015-16. Send submissions to CC:PA:LPD:PR (Notice 2015-16), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2015-16), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20044, or sent electronically, via the following e-mail address: Notice.firstname.lastname@example.org.
Please include “Notice 2015-16” in the subject line of any electronic communication. All material submitted will be available for public inspection and copying.