On July 30, the IRS released Notice 2015-52, addressing one of the most unpopular provisions of the Affordable Care Act (ACA): the 40 percent excise tax on high-cost health insurance plans. The so-called “Cadillac tax,” set to take effect in 2018, will initially apply to plans that cost more than $10,200 for self-only coverage and $27,500 for family coverage, and the threshold will be adjusted annually for inflation. The notice invites comments on the tax with a particular focus on questions about who will pay the tax, when the tax will be paid and how the tax will be calculated.
Who will pay the tax? According to Code Section 4980I, the “coverage provider” will pay the tax, but the definition of “coverage provider” may vary depending on the type of insurance plan. The IRS is seeking comments on whether the third party administrator (which performs day-to-day administrative functions) or the named plan administrator (which has final authority on administrative questions) should be liable for the tax for self-insured plans. Insurance carriers and employers (if contributing to Health Savings Accounts) would be responsible for the tax as well. The IRS has not yet determined how the tax will be administered for multi-employer plans and controlled groups of corporations.
How will the tax amount be calculated? The IRS is contemplating placing the responsibility for the calculation on the shoulders of the employer. The employer would calculate how much the cost of each covered individual’s coverage exceeded the threshold, then notify other coverage providers of each entity’s share of the tax. The IRS is seeking comments about how to accommodate self-insured plans, which may not be able to determine the total cost of coverage until all claims are processed, and thus might need a claims run-out period in order to accurately calculate tax liability.
Will the tax amount be tweaked? The IRS might allow some leeway for employers whose workforce is unusually unbalanced by age or gender by increasing the coverage cost threshold on a case-by-case basis. Employers in high-risk industries might also be subject to a threshold increase. The IRS stated that adjustment tables are being developed to help employers determine how much of an adjustment may be made.
How will the tax be paid? The tax may be tacked on to Form 720 (the Quarterly Federal Excise Tax Return). Like another ACA provision, the Patient-Centered Outcomes Research Institute (PCORI) fee, the Cadillac tax would be paid once a year instead of quarterly. Unlike the PCORI fee, which will be phased out in late 2019, the Cadillac tax does not have an expiration date. Plan sponsors that use third-party providers to complete the Form 720 may wish to discuss administration of the Cadillac tax with their vendors.
Comments will be open until October 1, 2015. The IRS is expected to release a proposed rule regarding the Cadillac tax in 2016.