IRS Sets Out Approaches To Excise Tax On “Cadillac Plans”

The IRS has issued a notice describing potential approaches for several issues with respect to the excise tax on high-cost employer-sponsored health coverage under Code Sec. 4980I that may be incorporated in future proposed regulations. The issues address the following concerns: (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. Comments are invited on the issues addressed in this notice and on any other issues under Code Sec. 4980I.

Background. Code Sec. 4980I is the “Cadillac Tax” provision of the Patient Protection and Affordable Care Act (ACA), and it is effective for tax years beginning after December 31, 2017. It imposes a 40-percent excise tax on any “excess benefit” provided to an employee. An excess benefit is the excess, if any, of the aggregate cost of the applicable coverage of the employee for the month over the applicable dollar limit for the employee for the month. This tax was opposed by organized labor in addition to the usual business opponents, and back in 2009 when the ACA was passed, it was thought it would be an early casualty of any serious follow up legislation. As yet, there has been no serious follow-up legislation, and so the tax is still scheduled to go into effect for tax years beginning in 2018.

Applicable coverage. The IRS anticipates that future proposed regulations would provide that: (1) employer contributions to HSAs and Archer MSAs, including salary reduction contributions to HSAs, are included in applicable coverage, but (2) employee after-tax contributions to HSAs and Archer MSAs would be excluded. Also excluded would be on-site medical clinics that offer only de minimis medical care to employees, and self-insured limited scope dental and vision coverage that qualifies as an excepted benefit. The IRS is considering whether to propose that employee assistance plans that qualify as an excepted benefit would also be excluded from applicable coverage.

Determining the cost of applicable coverage. The cost of applicable coverage is to be determined under rules similar to the rules that determine the COBRA applicable premium. A number of issues arise in computing the COBRA applicable premium on which specific guidance has not been provided, including how to determine which non-COBRA beneficiaries are similarly situated, the specific methods self-insured plans may use to determine the COBRA applicable premium, and how to determine the COBRA applicable premium for HRAs.

The COBRA applicable premium is based on the cost of coverage for similarly situated non-COBRA beneficiaries. COBRA regulations define such beneficiaries as the covered employees, spouses of covered employees, or dependent children of covered employees who are receiving coverage for a reason other than COBRA, and who are most similarly situated to the situation of the qualified beneficiary immediately before the qualifying event. The IRS anticipates that a similar standard will apply for Code Sec. 4980I, and that the cost of applicable coverage for an employee will be based on the average cost of that type of applicable coverage for that employee and all similarly situated employees. Under this potential approach, each group of similarly situated employees would be determined by starting with all employees covered by a particular benefit package provided by the employer, then subdividing that group based on mandatory disaggregation rules, and allowing further subdivision of the group based on permissive disaggregation rules.

There are two COBRA methods for self-insured plans to compute the COBRA applicable premium: the actuarial basis method and the past cost method. A plan must use the actuarial basis method unless the plan administrator elects to use the past cost method and the plan is eligible to use that method. The IRS anticipates that these two methods will apply for purposes of determining the cost of applicable coverage for self-insured plans.

The IRS anticipates that future guidance will provide that an HRA is applicable coverage. The IRS is considering various methods that future guidance might permit for use in determining the cost of applicable coverage under an HRA, including determining the cost of applicable coverage under an HRA based on the amounts made newly available to a participant each year. This potential approach would not take into account carry-over amounts or amounts made newly available before 2018 (except potentially amounts made available for non-calendar plan years beginning in 2017 and ending in 2018). This approach might provide employers with greater certainty as to the cost of applicable coverage under an HRA from year to year.

Applicable dollar limit. Code Sec. 4980I(b)(3) provides two annual dollar limits: one for an employee with self-only coverage and one for an employee with other-than-self-only coverage. In general, the prorated annual limitation that applies for any month is determined based on whether self-only or other-than-self-only coverage is provided to the employee by the employer as of the beginning of the month. An employee may simultaneously have coverage to which the self-only dollar limit applies and coverage to which the other-than-self-only dollar limit applies. For example, an employee may have self-only major medical coverage and supplemental coverage (such as an HRA) that covers the employee and the employee’s family.

The IRS is considering an approach to clarify the application of the dollar limit when an employee simultaneously has one type of coverage that is self-only coverage and another type of coverage that is other-than-self-only coverage. Under this approach, the applicable dollar limit for an employee would depend on whether the employee’s primary coverage/major medical coverage is self-only coverage or other-than-self-only coverage. An alternative approach would apply a composite dollar limit determined by prorating the dollar limits for each employee according to the ratio of the cost of the self-only coverage and the cost of the other-than-self-only coverage provided to the employee.

SOURCE: IRS Notice 2015-16, I.R.B. 2015-10 on March 9, 2015.

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