Employers, Shift into First Gear: IRS Makes Next Move Toward “Cadillac” Tax Rules
Labor & Employment Law Alert 08/24/15 John L. Barlament, Amy A. Ciepluch
On July 30, the IRS released its second publication on the so-called "Cadillac" tax, a nondeductible 40 percent excise tax on high-cost health coverage that is scheduled to take effect in 2018. In a prior alert, we discussed the first IRS publication (the "First Notice") on the tax. The new IRS Notice 2015-52 (the "Second Notice") supplements the First Notice by addressing additional issues, including the identification of companies that may be liable for the tax, employer aggregation, allocation of the tax when multiple employers are aggregated, and the payment of the tax. In addition, the Second Notice further addresses how to determine the cost of coverage subject to the tax. Finally, the IRS announced that its next step will be to issue proposed regulations.
The Affordable Care Act ("ACA") added Internal Revenue Code Section 4980I. Under Code Section 4980I, beginning January 1, 2018, employers will be subject to a nondeductible 40 percent excise tax on health coverage in excess of certain annual dollar limits (although the cost of coverage and any applicable Cadillac tax are determined on a monthly basis). These annual dollar limits vary depending on whether the coverage involved is for an employee or retiree, and for single or family coverage. For active employees, the annual dollar limit for single coverage is $10,200 and for coverage other than single (e.g., employee plus one, employee plus children, family, referred to herein as "self-plus coverage") is $27,500. There are some exceptions and adjustments based on job classification, age, and other criteria.
Key Provisions in the Notice
Liability for the Tax
Liability for the Cadillac tax falls on the "coverage provider." For coverage under a Health Savings Account, the coverage provider is the employer. For all other coverage, the coverage provider is "the person that administers the plan benefits." Who is that person? According to the IRS, there are two possible approaches:
- First, it could be the person responsible for performing the day-to-day functions that constitute the administration of plan benefits. This would include activities usually performed by a third party administrator ("TPA"), such as receiving and processing benefits claims, responding to inquiries, or providing a technology platform for benefits information. In theory an employer could conduct these activities itself, but the IRS anticipates this would be rare. Under thisapproach, the IRS also anticipates that the insurer or TPA will have to recognize taxable income to the extent the plan sponsor reimburses the insurer or TPA for the Cadillac tax. Presumably a TPA may choose to "pass along" this extra cost to employers. So both employers and TPAs are likely to be unhappy with this proposal.
- The other person who could be liable for the payment is the person who has the ultimate authority or responsibility under the plan or arrangement with respect to the administration of the plan benefits (including final decisions on administrative matters), regardless of whether that person routinely exercises that authority or responsibility. The IRS anticipates that the identity of this person would be identifiable based on the terms of the plan documents and often would not be the person who performs the day-to-day routine administrative functions under the plan. We think that under the second approach, the employer of a self-funded, single employer plan would be liable for the Cadillac tax.
The IRS has requested comments on these approaches, and we anticipate that the IRS will receive an earful (or inbox-full) of comments on whether a TPA or employer should be liable for the Cadillac tax.
Cost of Applicable Coverage
A substantial portion of the Notice is devoted to discussing options for determining the cost of coverage for Cadillac tax calculation purposes. The cost of coverage will be determined on a calendar year basis, and the IRS recognizes that cost may not be immediately available following the close of the year. Accordingly, the IRS has invited comments on issues raised by the need to determine the cost of coverage for a year reasonably soon after the close of the year, as well as on how any experience rating or other adjustments that take place after the close of the year should be taken into account.
The Notice also indicates that while the Cadillac tax itself should not be included in determining the cost of coverage, if the insurer or TPA has to recognize taxable reimbursement income as described under approach No. 1 in determining liability for the tax, that taxable income may need to be taken into account in determining the cost of coverage. The IRS has invited further comment on this topic.
Finally, the Notice sets forth possible approaches for including contributions to HSAs, FSAs and HRAs in the cost of coverage. The Notice suggests a leaning toward allocating contributions pro rata to the monthly cost of coverage, regardless of when during the year the contributions actually occur. The Notice also describes possible approaches to taking employer "flex credits" and FSA carryovers into account and invites comments on options for including the various account-based contributions in the cost of coverage.
Age and Gender Adjustments
Code Section 4980I provides that the general annual dollar limit for single coverage is $10,200, and $27,500 for self-plus coverage or multiemployer plan coverage. The statute provided that these annual dollar limits may be adjusted by certain factors, including age and gender adjustments if the age and gender characteristics of an employer's workforce are different from those of the national workforce. More specifically, the annual dollar limit will be increased (never decreased) if the hypothetical cost of covering the employer's employees under the Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefit Plan would exceed the cost of covering the national workforce under the same option.
The Second Notice notes that the actual cost of health coverage differs based on age and gender because, on average, older individuals have higher health costs than younger individuals, and younger women have higher health costs than younger men. Thus, the Second Notice indicates that it will be necessary to consider the distribution of men and women in different age groups.
The Second Notice proposes the following:
- The age and gender distribution of the national workforce will be determined using a Current Population Survey published by the Bureau of Labor Statistics.
- The age and gender characteristics of a particular employer's population will be utilized by determining the age and gender of each employee as of the first day of the plan year.
- The IRS will create adjustment tables for employers to use to determine age and gender adjustments.
Notification of Liability for Cadillac Tax
An employer liable for the Cadillac must calculate the amount subject to the Cadillac tax and notify the IRS and each "coverage provider" of the amount. The Second Notice does not make any specific proposals with respect to this notification requirement, but requests comments on the administrative issues raised by the notice requirement and how calculation errors might be handled.
Payment of the Cadillac Tax
The Second Notice proposed that Form 720, Quarterly Federal Excise Tax Return, be used for paying the Cadillac tax. Although Form 720 is filed quarterly, the IRS proposes that Form 720 for just one quarter of the year would be used to pay the Cadillac tax. This approach is similar to the approach currently used for payment of the Patient-Centered Outcomes Research Institute fees and so should be familiar to many employers.
- Employers can use the First and Second Notices to "guesstimate" the cost of coverage for employees and their potential excise tax liability, though many issues still remain unresolved.
- If the IRS chooses the approach that makes TPAs liable for the Cadillac tax, employers most likely will be required to renegotiate their service agreements and pay significantly increased administrative fees.
- Employers should analyze how offering HSAs, FSAs, and HRAs may impact their potential excise tax liability and whether continuing to offer those benefits will be viable.
If you have any questions regarding these rules, please contact John Barlament at (414) email@example.com, Amy Ciepluch at (414) firstname.lastname@example.org, Sarah Fowles at (414) email@example.com, or your local Quarles & Brady attorney.