IRS issues notice on excise tax on high-cost, employer-sponsored health coverage

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The IRS has issued a notice previewing future guidance and seeking comments from the public on the Section 4980I excise tax for employer-sponsored health plans that exceed certain cost thresholds.

The 40% excise tax, which is commonly called the “Cadillac tax,” is effective for tax years beginning after Dec. 31, 2017. 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.

Notice 2015-16 doesn’t provide official guidance, but rather previews possible future guidance and requests comments from taxpayers on a host of issues related to the tax. Among the issues addressed are what types of health plans are subject to the tax and how the coverage cost is determined.

Based on the statute, the notice indicates whether certain plans or arrangements are subject to the tax. The following are examples of plans subject to the tax:

  • Health plans for active employees
  • Multi-employer plan coverage
  • Retiree coverage
  • Executive physicals
  • Health care flexible spending arrangements, including pretax salary deferral contributions
  • Employer contributions to health savings accounts (HSAs), including pretax salary deferral contributions

The following plans aren’t subject to the tax:
  • Stand-alone dental and vision plans
  • Long-term care insurance
  • Automobile medical payment insurance
Both employer and employee contributions count toward coverage costs. Those costs will be determined using rules similar to those for determining Consolidated Omnibus Budget Reconciliation Act rates. The notice explains in detail how coverage costs might be determined under future guidance.

For insured plans, the insurance company will be liable for the tax. For employer contributions to an HSA, the employer is liable for the tax. For all other plans, the party that administers the plan is liable, such as in insurance company that administers a self-insured plan. The employer is responsible for calculating the tax and notifying the responsible parties. The tax is expected to be passed on to employers and employees in the form of higher premiums. Importantly, though, the cost of the plan that can be attributed to the tax itself isn’t treated as a cost of the plan for purposes of calculating the excise tax.

The Cadillac tax is one of the most unpopular provisions of the Affordable Care Act (ACA). Congress is likely to attempt to repeal the tax before it goes into effect in 2018, but as with other attempts to repeal parts of the ACA, the Obama administration is expected to strongly oppose it. Employers should plan now to manage the cost of plans to avoid the imposition of this significant tax.      

Eddie Adkins
+1 202 521 1565

Jeffrey Martin
+1 202 521 1526

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