IRS Releases Preliminary Guidance on “Cadillac Plan” Tax under ACA
The IRS released Notice 2015-16, which represents the first piece of guidance issued by a regulatory agency on the excise tax on high cost employer-sponsored health coverage, colloquially known as the “Cadillac plan” tax. The Cadillac tax was a key, and particularly controversial, provision in the Affordable Care Act. The Cadillac tax, which is found in Internal Revenue Code Section 4980I, imposes on plan sponsors and insurers an excise tax of 40 percent of the “excess” total cost, i.e. amounts exceeding a statutory dollar limit set by the IRS, of employer-sponsored coverage. Although insurers of fully insured plans are responsible for paying the tax, the cost of the tax will almost certainly be passed on to plan sponsors of fully insured plans. The tax will be assessed beginning January 1, 2018.
As provided in Code Section 4980I, the Cadillac tax applies to any group health coverage that is excludable from the employee’s gross income pursuant to Code Section 106; the tax also applies to health coverage provided to retirees. Both employer- and employee-paid amounts count towards the Cadillac tax limit. The new guidance lists several types of coverage whose costs are counted for Cadillac tax purposes, including Health Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), multiemployer plan coverage, and on-site medical clinics that provide more than de minimis first aid. The guidance also states that the IRS expects to issue future guidance providing that the costs of executive physical programs and Health Reimbursement Accounts (HRAs) count towards the Cadillac tax limit.
Similarly, the guidance also lists several types of benefits that are not subject to the Cadillac tax, such as coverage provided under a separate insurance policy or contract that is not excludable from an employee’s gross income. The guidance seeks comments on the treatment of on-site medical clinics that provide more than de minimis first aid (and would therefore be subject to the Cadillac tax), and on whether to exclude limited scope dental and vision benefits from the tax.
Code Section 4980I contains sparse guidance on how the cost of coverage is to be calculated for Cadillac tax purposes; the statute merely states that the cost shall be determined under an approach “similar” to the rules used to calculate COBRA coverage premiums. The new guidance invites comments on potential approaches for determining coverage costs. Under the approach proposed in the guidance, an employer could calculate coverage costs by initially aggregating “each group of similarly situated employees” electing the same benefit package offered by the employer, then subdividing each group of employees pursuant to mandatory disaggregation rules (based on self-only coverage and coverage other than self-only), and further subdividing based on other permissive disaggregation rules. For self-insured plans, the guidance proposes the same two cost calculation methods for Cadillac tax purposes that are currently used for COBRA premium purposes (actuarial basis method and past cost method), and invites comments on both. In addition, the guidance also invites comments on cost calculation approaches other than those used for COBRA that would be consistent with Code Section 4980I.
The current statutory dollar limits provided in Code Section 4980I for 2018 are $10,200 for self-only coverage, and $27,500 for coverage other than self-only. These dollar limits are subject to health cost adjustments for subsequent years, age and gender, qualified retirees, and high-risk professions. The guidance also invites comments on such dollar limit adjustments.