Posted on August 19, 2015
The Affordable Care Act (ACA) imposes a forty percent (40%) tax on the amount by which the cost of the insurance benefit exceeds an applicable dollar limit. This is referred to as the “Cadillac tax” and is effective for tax years beginning after 2017.
The applicable dollar limits are currently $10,200 for individual coverage and $27,500 for family coverage. Although employers are currently focusing on the manner in which they will comply with the 1094-C and 1095-C reporting and employee disclosure requirements in 2016 for benefits provided during the 2015 calendar year, the Internal Revenue Service (IRS) is requesting comments regarding the interpretation and implementation of the Cadillac tax.
In March 2015, the IRS issued Notice 2015-16 regarding the definition of applicable coverage, the manner in which the cost of applicable coverage would be determined and the determination of the excess subject to the forty percent (40%) excise tax. On July 30, 2015, the IRS issued Notice 2015-52, inviting comments on certain issues relevant to the implementation of the Cadillac tax.
Following is a discussion of some of the topics and possible resolutions being considered by the IRS.
In the case of an insured group health plan, the health insurer is the coverage provider responsible for the tax. With respect to a health savings account, the employer is the coverage provider responsible for the tax. For other coverage, the ACA provides that the coverage provider is “the person that administers the benefits” but this term is not defined elsewhere in the Internal Revenue Code nor in the ACA. The IRS is considering two (2) alternative approaches to identifying “the person that administers the benefits”. Under the first approach, the third party administrator performing day-to-day plan functions such as receiving and processing benefit claims would be liable for the tax. However, this approach would have to reconcile the manner in which multiple parties function as administrator [e.g. pharmacy claims administered by one party, and health claims administered separately]. Alternatively, the IRS is considering assigning responsibility to the party identified in the plan document. In most instances, this would be the employer, and employers should anticipate that third party administrators will seek to avoid this liability by express provision in the plan document or ancillary service agreements.
The taxable period to determine the tax is the calendar year. Notwithstanding that the employer’s plan may operate on a fiscal year, the reporting for the Cadillac tax will be based on the calendar year. The IRS is seeking comments on the manner and timing of the reporting. The IRS has identified issues that will be faced by employers. These include the manner in which the cost will be determined in plans in which employees may run off claims after the end of the calendar year [e.g. flexible spending accounts, health reimbursement arrangements].
The ACA requires the employer to calculate the amount of the excess benefit subject to the Cadillac tax and notify the IRS and each applicable coverage provider of their respective share of the excess. Although the tax applies on a monthly basis, the IRS is considering a quarterly filing of Form 720 Quarterly Federal Excise Tax Return as the vehicle to pay the Cadillac tax. Presumably, one calendar quarter would be selected for reporting and payment.
Even though 2018 may seem a long way off, employers should:
For additional information, please contact David M. Mosier by phone at (814) 459-2800 or via email at firstname.lastname@example.org.
David M. Mosier is a Shareholder at Knox McLaughlin Gornall & Sennett, P.C.’s Erie office.