The IRS issued its second notice (Notice 2015-52) on the Cadillac tax (the 40% excise tax under IRC §4980I). The new guidance, issued July 30, 2015, explains possible approaches the IRS is considering for administering the Cadillac tax and supplements prior IRS guidance (Notice 2015-16) by addressing issues such as:
- Who will be liable to pay the excise tax
- How the tax will be allocated among the applicable taxpayers
- How the tax will be paid
- Who is the employer (employer aggregation)
The notice also addresses additional issues regarding the cost of applicable coverage that were not addressed in Notice 2015-16.
Treasury and IRS invite comments on these issues and any other issues under IRC §4980I, and intend to issue proposed regulations after considering the comments received. Public comments must be submitted no later than October 1, 2015, and should reference Notice 2015-52.
As of January 1, 2018, if the aggregate cost of applicable employer-sponsored coverage (applicable coverage) provided to an employee exceeds a statutory dollar limit (dollar limit), which is adjusted annually, the excess benefit is subject to a 40 percent non-deductible Excise Tax under IRC §4980I.
Prior IRS guidance (Notice 2015-16) was issued February 23, 2015, and addressed issues primarily relating to (1) the definition of applicable coverage, (2) the determination of the cost of applicable coverage, and (3) the application of the dollar limit to the cost of applicable coverage to determine any excess benefit subject to the excise tax.
In some of the key areas noted above, Notice 2015-52 explains the various approaches the IRS is considering and requests comments, but does not define a specific approach. Some highlights of the Notice are summarized below.
Who will be liable to pay the excise tax?
Each “coverage provider” must pay the tax on its share of the excess benefit for the applicable tax period. The applicable tax period will be the calendar year, even if the plan year is not. The liable coverage provider varies depending on the type of plan:
- Insured plan – the issuer (carrier) is the coverage provider and must pay the tax
- H.S.A. and Archer MSA – the employer who contributes to the account must pay the tax
- Other applicable coverage (self-insured plans) – “the person that administers the plan benefits” must pay the tax. Since this term is not defined anywhere is the ACA or other laws or regulations, the agencies are considering two approaches and request comments on whether this should be the third-party administrator (TPA) that pays claims or the entity that has ultimate responsibility for plan administration, which is usually the employer.
Regardless of who pays the Excise Tax, it is not a deductible expense.
How the tax will be allocated among the applicable taxpayers
IRC §4980I provides that each coverage provider’s applicable share of the total tax on an employee’s excess benefit will be the same percentage as: a) the cost of applicable coverage provided to that employee by that provider during the taxable period, over b) the total cost of all applicable coverage provided to that employee by all coverage providers during that period. For example, if the cost of insured medical coverage is 80% of the total cost of applicable coverage for employee A during a taxable year, and if the total excise tax on all applicable coverage is $200, then the insurer’s share of the excise tax is $160 (80% x $200).
An issue is likely to arise, however, if the insurer keeps the cost of its coverage below the tax threshold, and then the employer offers other applicable coverage that pushes the total cost over the threshold. The insurer is likely to take the position that it should not be liable for the tax. The guidance does not note this situation in particular, but does say that “it is expected that, if a person other than the employer is the coverage provider liable for the excise tax, that person may pass through all or part of the amount of the excise tax to the employer in some instances.” The guidance addresses several issues related to this. For example, the guidance notes that any pass-through of liability (e.g., if the tax amount is listed separately as an administrative expense) should not be included in COBRA rates or in the determination of whether the cost of coverage exceeds the tax threshold amount.
How the tax will be paid
At the end of each calendar year, the employer must calculate if any tax applies for each employee and must notify each coverage provider (and the IRS) of the excise tax amount each provider owes on its applicable share of the excess benefits with respect to each employee. Each coverage provider is then liable to pay the total excise tax it owes.
IRS and Treasury are considering designating IRS Form 720 (the Quarterly Federal Excise Tax Return) as the means to pay the tax. If so, a particular quarter of the calendar year would be designated as the time for payment. (For example, the PCORI fee is paid using the Form 720 for the second quarter.)
Who is the employer (employer aggregation)
Related employers would be aggregated and treated as a single employer. The agencies invite comments on the practical challenges presented by this as applied to the 40% excise tax. For example:
- What applicable coverage is made available by an “employer”?
- How are the “employer’s” employees taken into account for the age and gender and high-risk professions adjustments?
- Who is the “employer” responsible for calculating and reporting the excess benefit?
- Who is the “employer” who is liable for any penalty for failure to properly calculate the tax imposed under § 4980I.
The cost of coverage is to be determined using rules similar to those used to determine COBRA premiums. The agencies anticipate potential timing issues for many plans, and Notice 2015-52 explains these and requests comments on the IRS proposed approaches and safe harbors.
- For self-insured plans the actual cost of coverage may not be determined until after the end of the run-out period during which employees may submit claims for reimbursement.
- Insured experience-rated plans may have similar issues, and in some cases may resolve these by providing a premium discount for the next coverage period (which would artificially skew the “cost” for each of the periods).
- Timing issues also may arise for account-based plans such as HSAs, MSAs, and FSAs because employer and employee contributions may vary for each month, and the determination of whether there is an excess benefit is made on a monthly basis. IRS is considering an approach that would allocate total employer and employee contributions ratably to each calendar month of the year, regardless of when the contributions were actually made.
- Employees enrolled in health FSAs may be allowed to carry forward salary reduction amounts in their FSAs from one year to the next. To avoid double counting in determining the cost of coverage for each year, the IRS proposes a safe harbor under which the amount of an employee’s salary reduction for the year would be included in the cost of applicable coverage for that year, regardless of whether any amount was carried over to the next year.