IRS issues second notice on ‘Cadillac tax’ on high-cost employer-sponsored health coverage

Tax Hot Topics: 'Cadillac tax’ on high-cost employer-sponsored health coverageEmployer-sponsored health plans that exceed certain cost thresholds will be subject to a 40% excise tax under Section 4980I, starting for taxable years beginning after Dec. 31, 2017.

This tax under the Affordable Care Act (ACA) is commonly referred to as the “Cadillac tax.” The thresholds for the first year the tax is in effect will be $10,200 for self-only coverage and $27,500 for all other coverage. The thresholds will be indexed for inflation in subsequent years. Earlier in 2015, the IRS issued Notice 2015-16 to provide a preview of what future guidance might include and to request comments from taxpayers on a host of issues related to the tax, including 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.

The IRS recently issued Notice 2015-52 to supplement Notice 2015-16 and to further its effort to develop regulatory guidance regarding the Cadillac tax. Notice 2015-52 addresses the following matters:

  • Further issues regarding the cost of applicable coverage that were not addressed in Notice 2015-16
  • Identifying the taxpayer who may be liable for the excise tax, including identifying the administrator of self-insured arrangements
  • Allocation of the tax among the applicable taxpayers
  • Identifying how the excise tax will be paid, including the possible use of Form 720.

Notice 2015-52 also addresses situations where the cost of the excise tax is passed on to another person. For example, if an insurer must pay the excise tax on a high-cost health plan, the insurer may pass on that cost to the employer by requiring the employer to reimburse the insurer. The notice proposes that when a party passes on the cost of the excise tax to the plan, the cost of the excise tax is not treated as a cost of the plan for purposes of calculating the excise tax due on the plan. The notice points out that any payment by an employer to another party for the excise tax will be taxable to the party who receives the reimbursement, but the party is not allowed a deduction for the excise tax.  

The Cadillac tax is one of the most unpopular provisions of the ACA. Congress is likely to attempt to repeal the tax before it goes into effect in 2018, but repeal is far from certain. Employers should plan now to manage the cost of plans to avoid as much as possible the imposition of this significant tax.      

Eddie Adkins
+1 202 521 1565

Jeffrey Martin
+1 202 521 1526

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