The Internal Revenue Service (IRS) and Treasury Department have issued Notice 2015-16 to invite comments on approaches for certain aspects of the “Cadillac tax”. Although proposed or final regulations have not yet been issued on the tax, there are several unanswered questions that many in the benefits industry are calling for more guidance on.
The Affordable Care Act (ACA), starting with tax year 2018, will begin imposing a 40% excise tax on high-cost group health care plans. Known as the “Cadillac tax” this tax was created to encourage employers to select lower-cost health plans for their employees. The tax is placed on an employee’s “excess benefit” which is the amount that the employee’s employer-sponsored health coverage exceeds one of the two annual applicable dollar limits.
Dollar limits for 2018 are as follows:
• $10,200 per employee for self-only coverage
• $27,500 per employee for other-than-self-only coverage
Provisions are made for various adjustments to increase the applicable dollar limits in certain circumstances which include:
- Health Cost Adjustment Percentage: applied to the baseline dollar limits for 2018 to determine the applicable dollar limits for that year.
- Cost-Of-Living Adjustment: will be applied to determine the applicable dollar limits for taxable years after 2018.
- Age and Gender Adjustment: an additional amount is added to the dollar limits for an individual who is a qualified retiree or who participates in a plan sponsored by an employer with the majority of whose employees covered by the plan are engaged in a high-risk profession or employed to repair or install electrical or telecommunication lines.
The Cadillac tax applies to the cost of “applicable employer-sponsored coverage” which is coverage under any group health plan that is made available to the employee by the employer that is excludable from the employee’s gross income. The term “employee” includes any former employee, surviving spouse, or other primary insured individual. Other types of applicable coverage include: health FSAs, HSAs, Governmental plans, coverage for on-site medical clinics, retiree coverage, multiemployer plans and coverage only for a specified disease or illness and hospital indemnity or other fixed indemnity insurance provided that the payment for the coverage or insurance is excluded from gross income or a deduction allowed under Section 162(I).
The following coverages are commonly excluded from applicable coverage: accident or disability income insurance; liability insurance, including supplements to and general and automobile liability insurance; workers compensation; automobile medical payment insurance; coverage under which benefits for medical care are secondary or incidental to other insurance benefits; long term care; fully insured dental and vision plans; coverage only for a specified disease or illness and hospital indemnity or other fixed indemnity insurance (if the payment for the coverage or insurance is not excluded from gross income or a deduction under Section 162(I), the deduction is not allowed).
Notice 2015-16 is the first step in the formal process that will ultimately lead to regulations. The Treasury and IRS are inviting comments on these potential approaches, including any possible administrative difficulties in applying them, as well as any other approaches that might address this issue. After comments on the notice are reviewed, proposed regulations will then be issued.
Although the 2018 effective date of the Cadillac tax seems far away it’s not too early to start evaluating plan designs over the long term and to be aware of benefits that will, or won’t be captured by the Cadillac tax.
Experts like Paypro are navigating the difficult legal landscape every single day, and can provide trusted guidance and insights that keep organizations like yours compliant and focused on what they do best. To learn more on how we can help with Benefits Solutions and other requirements of the Affordable Care Act please contact us or request a consultation with one of our Benefits Specialists.