By Kurt R. Anderson, Esq., Daniel V. Johns, Esq., Edward I. Leeds, Esq., and Brian M.
LLP, Philadelphia, PA
The IRS has issued Notice 2015-52 addressing issues relating to
future rules governing the calculation and payment of the so-called
"Cadillac tax" under the Affordable Care Act. Beginning in 2018, the
ACA will impose a 40% nondeductible excise tax on the value of group health coverage
that exceeds a baseline amount of $10,200 for self-only coverage and $27,500
for family coverage (regardless of family size).
The new guidance supplements Notice 2015-16, which also described
certain complicated issues and possible approaches that the IRS is considering
as it prepares regulations interpreting and implementing the Cadillac tax. The
new guidance discusses:
responsible for paying the Cadillac tax. The tax is to be paid by insurers for
fully insured plans and employers for certain account-based plans, such as
health savings accounts (HSAs), flexible savings accounts (FSAs), and health
reimbursement accounts (HRAs). For other types of group health coverage, the
ACA imposes the burden on "the person that administers the plan
benefits." In interpreting this provision, the IRS is considering two
alternatives—imposing payment responsibility on the day-to-day administrator
(most likely a third-party administrator) or imposing the responsibility on the
person that "has the ultimate authority or responsibility" to make
"final decisions on administrative matters" (most likely an employer,
committee, or board of trustees).
need for practical guidance relating to how the burdens for determining,
reporting, and paying the Cadillac tax are allocated and appropriate
information transferred. The statute requires employers to calculate the amount
of the tax payable by each of its coverage providers and notify the party
responsible as well as the IRS.
time and manner in which the tax will be paid. The statute is silent on this
subject, and the IRS is considering the use of Form 720, Quarterly Federal
Excise Tax Return, for payment of the tax. Although that form is filed
quarterly, the IRS will likely designate one quarter each year for payment of
the Cadillac tax.
fact that insurers and others that pay the Cadillac tax will likely seek
reimbursement for the amount of the tax from the employers and other plan
sponsors with whom they contract. Because those who pay the tax cannot claim a
deduction for the Cadillac tax and because they will be taxed on reimbursements
that they receive for payment of the tax, they may also seek to be grossed-up
for the taxes they pay on reimbursements. The calculation of the gross-up can
be complex because reimbursements for the Cadillac tax paid are taxable, and
reimbursements for tax paid on those reimbursements are taxable, etc. The IRS is considering how to address these
situations and, in particular, the extent to which any gross-up can be excluded
from the cost of coverage subject to the Cadillac tax.
Possible approaches for determining the
applicable cost of coverage under account-based arrangements such as HSAs,
FSAs, and HRAs. The IRS may propose certain safe harbors. For example, it may
allow employers to allocate the amount that an employee or employer contributes
to one of these accounts in the course of a year to each month on a pro-rata
basis, making for an even allocation for all months, regardless of when the
contributions are actually made. The IRS is also considering guidance,
including safe harbors, on valuing coverage when employers provide their
employees with flex credits, or when unused amounts in an account can carry
over to the following year.
permitted increase in the baseline dollar limits for plans that cover employee
populations with higher-than-average costs based on age and gender. The notice
suggests that the regulations may allow employers to take a snapshot of their
demographics as of the first day of the year. The adjustment would require plan
sponsors to examine the size of their populations in different age brackets
broken down by gender and to apply cost factors that the IRS publishes based on
those different brackets. It is expected that separate adjustments would apply
for single and family coverage.
Notice 2015-52 reflects the complexity of the challenge faced by the
IRS in implementing the Cadillac tax, and the potential challenges that lie
ahead for both employers and coverage providers. Although actual guidance has
not yet been issued, employers should begin now to think about ways to reduce
their exposure to the Cadillac tax. Employers may need to keep in mind that the
impact of the Cadillac tax is expected to grow over time. Even though the
baseline dollar limits under the Cadillac tax are indexed for inflation, the
indexing is not likely to keep pace with medical inflation.
As the federal health care reform effort gained steam, Ballard Spahr
attorneys established the Health Care Reform Initiative to monitor and analyze
legislative developments. With federal health care reform now a reality, our
attorneys are assisting health care entities and employers in understanding the
relevant changes and planning for the future. They also have launched the
Health Care Reform Dashboard, an online resource center for news and analysis
on developments under the Affordable Care Act.
For more information, in the Tax Management Portfolios, see
Cowart, 389 T.M., Medical Plans — COBRA, HIPAA, HRAs, HSAs and Disability, and in Tax Practice Series, see ¶5920, Health
& Disability Plans.
Copyright © 2015 by Ballard Spahr LLP.