Will You Be Driving a Cadillac in 2018?
Set to take effect on January 1, 2018, a non-deductible excise tax of 40%, calculated on a monthly basis, will be imposed on “applicable employer-sponsored coverage” that exceeds certain pre-determined threshold amounts. Currently, these threshold amounts are $10,200 for single coverage and $27,500 for “other than single” coverage. Any costs of coverage in excess of these amounts will be subject to the 40% excise tax. These threshold amounts will be indexed for inflation.
The purpose of the Tax is to provide funding for the ACA to expand health coverage, reduce healthcare expenditures by employers and employees and to reduce the tax preferred treatment of employer provided coverage.
The Tax will be imposed on coverage providers which is defined in IRC §4980I(c)(2) as:
- the health insurance issuer, in the case of applicable coverage under a group health plan that provides health insurance coverage;
- the employer, in the case of applicable coverage under an arrangement in which the employer makes contributions described in IRC §106(b) or §106(d); and
- the person that administers the plan benefits, in the case of any other applicable coverage.
The Tax is calculated by including the aggregate cost of coverage, including employer and employee contributions, and will be based on each employee’s total cost of coverage which exceeds the dollar threshold amounts outlined above. Under current rules prescribed by the Internal Revenue Service (“IRS”) the calculation of the cost of coverage will be done similar to the rules for calculating the COBRA premium.
IRS ISSUED GUIDANCE
To date the IRS has issued two notices addressing various issues related to the Tax.
IRS Notice 2015-16
IRS Notice 2015-16 “describes potential approaches with regard to a number of issues under IRC §4980I”. The issues addressed in this notice relate to the:
- Definition of applicable coverage;
- Determination the costs of applicable employer-sponsored coverage; and
- Application of the annual statutory dollar limit to the cost of applicable coverage.
According to the IRS Notice 2015-16, IRC §4980I(d)(1)(A) provides that applicable coverage means “with respect to any employee, coverage under any group health plan made available to the employee by an employer which is excludable from the employee’s gross income under section 106, or would be so excludable if it were employer-provided coverage (within the meaning of such section 106).”
In addition, under IRC §5000(b)(1), “[t]he term ‘group health plan’ means a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families.”
This Notice also details the types of coverage that are included and excluded from applicable coverage.
IRS Notice 2015-52
IRS Notice 2015-52 was issued subsequent to IRS Notice 2015-16 and continues to add regulatory guidance regarding the Tax. This Notice supplements IRS Notice 2015-16 and addresses the following additional issues:
- Identification of the taxpayers that will be liable for the Tax;
- Employer aggregation rules;
- Allocation of the Tax amongst applicable taxpayers; and
- Payment of the tax.
This Notice also addresses issues regarding the cost of applicable coverage not originally addressed in IRS Notice 2015-16.
IRS Notice 2015-52 and IRC §4980I(c)(1) provide that the coverage provider is liable for the Tax. In an insured group health plan the health insurance issuer is deemed to be the coverage provider. For health savings accounts (“HSAs”) and Archer Medical Savings Accounts (“MSAs”) the employer is considered the coverage provider. The person that administers the plan benefits is the coverage provider in all other instances of applicable coverage.
IRC §4980(f)(9) provides that employers are treated as a single employer under IRC §414(b), (c), (m) or (o). In addition, the Notice outlines methods for allocating the contributions made to plans in determining the amount of the tax. IRC §4980I also provides for increases in the dollar thresholds will be made based on the age and gender of an employer’s employees.
NOTICE AND PAYMENT OF THE TAX
Employers will be required to calculate the Tax and notify the Secretary and each coverage provider of the amount of the tax. Currently, the IRS has not yet determined which form employers will need to use to report the information and the time and manner in which this information will be required to be reported. It is anticipated that the form that will be required will be a Form 720, Quarterly Federal Excise Tax Return, however, that will be determined by the IRS at a future date.
There have been several proposals to repeal the Tax both in the House and Senate. Earlier in 2015 two bills to repeal the Tax were introduced by U.S Representatives Joe Courtney (D-Connecticut) and Frank Guinta (R-New Hampshire). These bills currently have more than 220 co-sponsors.
Recently, the Middle Class Health Benefits Tax Repeal Act was introduced by Senators Dean Heller (R-Nevada) and Martin Heinrich (D-New Mexico) to repeal the Tax. This bill has 14 co-sponsors.
Most recently, The American Worker Health Care Tax Relief Act of 2015 was introduced on September 24th by Senator Sherrod Brown (D-Ohio) to again attempt to repeal the Tax. This bill has nine co-sponsors.
Following the receipt and review of comments received from taxpayers with respect to IRS Notice 2015-16 and Notice 2015-52, the IRS expects to publish proposed regulations. The proposed regulations will provide further opportunity for comment, including the opportunity for comments related to the issues addressed in the two Notices already issued.
The Joint Committee on Taxation currently estimates that revenue to be generated from the Cadillac between 2018 and 2025 will be $87 billion. This is significantly less than original Joint Committee projections when the ACA first introduced the Tax. A recent report from the Kaiser Family Foundation estimates that 26% of employers are expected to have at least one plan subject to the Tax; however, this could increase significantly to 2023 to approximately 42% of all employers.
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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.