In Notice 2015-52, the Internal Revenue Service (IRS) continues the process of developing regulatory guidance regarding the excise tax on high cost employer-sponsored health coverage (the so-called Cadillac tax) under the Affordable Care Act (ACA). The Cadillac tax applies to taxable years beginning after December 31, 2017. Under this provision (Section 4980I of the Internal Revenue Code), if the aggregate cost of applicable employer-sponsored coverage provided to an employee exceeds a statutory dollar limit, which is adjusted annually, the excess benefit is subject to a 40 percent excise tax.
On February 23, 2015, the Department of the Treasury and the IRS issued Notice 2015-16, which described potential approaches regarding a number of issues that may be incorporated into future regulations. Notice 2015-16 addressed issues primarily relating to the definition of applicable coverage, the determination of the cost of applicable coverage, and the application of the dollar limit to the cost of applicable coverage to determine any excess benefit subject to the excise tax. Treasury and IRS invited comments on the issues addressed in that notice and on any other issues.
Notice 2015-52 is intended to supplement Notice 2015-16 by addressing additional issues, including the identification of the taxpayers who may be liable for the excise tax, employer aggregation, the allocation of the tax among the applicable taxpayers, and the payment of the applicable tax. This notice also addresses further issues regarding the cost of applicable coverage that were not addressed in Notice 2015-16. Notice 2015-52 invites comments on these issues and any other issues related to the Cadillac tax. After considering the comments on both notices, Treasury and IRS intend to issue proposed regulations. 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 coverage provider is liable for the Cadillac tax. The identity of the coverage provider depends on the type of coverage provided. Under the statute, in the case of applicable coverage provided under an insured group health plan, the coverage provider is the insurer. With respect to coverage such as a Health Savings Act (HSA), the coverage provider is the employer. For all other applicable coverage, the coverage provider is “the person that administers the plan benefits.”
Treasury and IRS are considering two alternative approaches to determining the identity of the person that administers the plan benefits. Under one approach, the entity that administers the plan benefits would be the entity responsible for performing the day-to-day functions that constitute the administration of plan benefits. Under the second approach the entity that administers the plan benefits would be the entity that has the ultimate authority or responsibility under the plan.
The ACA provides that all employers treated as a single employer under the controlled group rules are treated as a single employer. Notice 2015-52 invites comments on the practical challenges presented by the application of those aggregation rules.
Notice 2015-16 invited comments on potential approaches to determining the cost of applicable coverage. Notice 2015-52 now invites further comments on any issues raised by the anticipated need to determine the cost of applicable coverage for a taxable period reasonably soon after the end of that taxable period.
It is expected that, if an entity other than the employer is the coverage provider liable for the excise tax, that entity may pass through all or part of the amount of the excise tax to the employer. If the coverage provider does pass through the excise tax and receives reimbursement for the tax, Notice 2015-52 says the excise tax reimbursement will be additional taxable income to the coverage provider. Because the ACA provides that the excise tax is not deductible, the coverage provider will experience an increase in taxable income by reason of the receipt of the excise tax reimbursement. As a result, it is anticipated that the amount the coverage provider passes through to the employer may include not only the excise tax reimbursement, but also an amount to account for the additional income tax the coverage provider will incur.
Treasury and IRS are considering an approach under which contributions to account-based plans would be allocated on a pro-rata basis over the period to which the contribution relates, regardless of the timing of the contributions during the period. For example, if an employer contributes an amount to an HSA for an employee for a plan year, that contribution would be allocated ratably to each calendar month of the plan year, regardless of when the employer actually contributes the amount to the HSA. Similarly, if an employee elects to contribute to a health flexible spending account (FSA) for a plan year, the employee’s total contributions would be allocated ratably to each calendar month of the plan year, even though the entire amount contributed for the plan year would be available to reimburse qualified medical expenses on the first day of the plan year. Comments are requested on this approach as well as alternative approaches.
Under the ACA, the cost of applicable coverage of an FSA for any plan year would be the greater of the amount of an employee’s salary reduction or the total reimbursements under the FSA. Treasury and IRS are considering providing a safe harbor under which the cost of applicable coverage for a plan year would be the amount of an employee’s salary reduction without regard to carry-over amounts.
To address situations in which non-elective flex credits are available under a cafeteria plan that includes an FSA, Treasury and IRS are considering a variation on the safe harbor that would allow an FSA with non-elective flex credits to be valued under the safe harbor described in the preceding paragraph in certain situations.
In the case of reimbursements paid to a highly-compensated individual under a self-funded plan that discriminates in favor of highly compensated individuals, § 105(h) provides that the “excess reimbursement” is taxable. Even though this amount is already taxed to the individual, Notice 2015-52 indicates that Treasury and the IRS believe the excess reimbursement is also subject to the Cadillac tax.
One of the adjustments to the Cadillac tax is an increase in the dollar limits based on the age and gender characteristics of all employees of an employer. Treasury and IRS are considering a requirement that an employer use the first day of the plan year as a snapshot date for determining the composition of its employee population.
Employers are encouraged to submit comments. Public comments should be submitted no later than October 1, 2015. Comments should include a reference to Notice 2015-52. Send submissions to CC:PA:LPD:PR (Notice 2015-52), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be sent electronically, via the following e-mail address: Notice.firstname.lastname@example.org. Please include “Notice 2015-52” in the subject line of any electronic communication. All material submitted will be available for public inspection and copying.
Many groups are also lobbying Congress to repeal or modify the Cadillac tax. Employers should project their current costs to determine if they will be subject to the Cadillac tax in 2018. If so, they may want to start phasing in plan design modifications in 2016 and 2017, rather than needing to make drastic cuts in 2018.