Recently, the IRS issued Notice 2015-52 requesting additional input on the yet-to-be-proposed Cadillac Tax rules. For those unaware, the Cadillac Tax imposes a 40%, non-deductible excise tax on the cost of health coverage that is over a certain threshold. This deceptively simple description does not begin to uncover the myriad of potential issues, such as…
Who pays the tax?
Well, the “coverage provider” pays the tax. For insured plans, that’s easy: it’s the insurer. For HSAs or Archer MSAs, it’s the employer. But what about a self-funded plan? The statute says it’s the “person that administers the plan benefits.” That phrase is undefined in the statute or really anywhere else.
The IRS is looking at two possible approaches for defining this term. One is to look at a self-funded plan’s third party administrator/ASO provider. That sounds easy, until you remember that many plans have carved out pharmacy benefit management with a separate provider or have otherwise divided up the administration. Regardless, this tax is still getting passed back through to employers anyway.
The second approach is looking at the person with ultimate authority for the plan administration (the relatively pithy ERISA name for this person is the “plan administrator”). Of course, sometimes the plan administrator is a committee of people and not really an individual or entity. (I guess they could divide the tax among them?) The IRS also says that it assumes this person could be easily identified from plan documents. If the IRS takes this approach, it will be important to ensure that the plan administrator is adequately (and correctly) identified in applicable plan documents.
Who’s the employer?
For purposes of the Cadillac Tax, the usual controlled group rules apply. Meaning that many parent-subsidiary companies and even companies with common owners are treated as one employer for purposes of the tax. The IRS notes that this presents some challenges in the Cadillac Tax arena.
For example, the thresholds that apply for purposes of the tax may be adjusted based on age and gender or for certain high-risk professions. Well, a conglomerate with several companies may have some companies in those high-risk professions, and others that are not. Or what about the employer who is responsible for the tax? Is that each company separately (like the “play or pay” mandate) or the group as a whole?
And what do you mean by “cost”?
The IRS did say that they anticipate that cost will be determined on a calendar year basis for all taxpayers, so at least that’s one question that’s (sort of) answered.
Note that employers (yes, employers) are required to determine the cost of the coverage, regardless of who the provider is. The IRS does recognize that some time will be needed to process run-out claims after the end of the year for the employer to be able to calculate the cost of coverage. However, the timing of the tax may influence how long of a run out period a plan is able to have.
Further, coverage providers are going to pass this tax back through, as we all know. The tax itself is not deductible, so they are likely to pass through a gross-up amount as well. In the notice, the IRS states that it currently thinks the excise tax reimbursement will be excluded from the cost of coverage. That way, the tax reimbursement doesn’t create a pyramiding effect, causing the tax to increase. However, the gross-up may not be excluded because the IRS views it as not easy to administer. (Translation: we can’t audit everyone to make sure they aren’t cheating.) Of course, not excluding the gross-up will create a pyramiding effect which will increase the Cadillac tax. The IRS does propose a couple of ways the gross-up may be excluded in the Notice.
Note that the cost is actually determined on a monthly basis. So what does this mean for FSAs, HRAs, or HSAs that receive a bulk contribution from the employer at the beginning of the year? Or what if employees vary their contributions during the year? The IRS is considering applying contributions to those accounts ratably over the year to help smooth out the application of the tax. Additionally, for FSAs, the IRS is proposing to exclude any unused employer flex credits that are forfeited at the end of the year. As with other plans, however, this rule may limit run-out periods for health FSAs, depending on when the tax is paid.
Additionally, the IRS is proposing to treat the full amount of employee FSA contributions as the cost of coverage during a year, but only if the employer does not contribute to the FSA. This would mean that if amounts were carried over from a prior year, they would not be included in the cost of coverage. There is also a proposed alternative safe harbor where the employer does contribute to the FSA.
The IRS also anticipates that discriminatory payments under a self-funded health plan would also be included in the tax.
And the rest…
In the notice, the IRS proposed several alternatives for the age and gender adjustments to the Cadillac tax thresholds.
As noted above, employers are required to calculate the tax and then notify the coverage provider and the IRS of the tax. The IRS requested comments on how this might work. The IRS is also suggesting that the tax will be reported and paid on Form 720, which is the quarterly federal excise tax return.
By now, you might be getting the impression that the IRS has not spent enough time thinking about the tax up to this point. The problem is that the statute, like so much of the ACA, does not fit neatly in the real world. The IRS, to its credit, is trying to be realistic as it crams a square peg down a round exhaust pipe, and this results in many uncomfortable questions. Comments in how best to cram are being accepted by the IRS until October 1, 2015.