The Affordable Care Act’s excise tax on high cost employer-sponsored health plans (known as the “Cadillac tax”) won’t take effect until January 2018, but employers of all sizes need to begin preparing for the possibility that their health plans may incur the costly 40% tax. While final regulations have yet to be provided, the IRS released a couple of notices that address some of the issues relating to the Cadillac tax - most recently, Notice 2015-52. Relevant details to note:
Applicable coverage: The Cadillac tax will apply to coverage provided under any group health plan made available to the employee that is excludable from the employee’s gross income, regardless of whether the employer or the employee pays for the coverage. Furthermore, the term “employee” includes any former employee or other primary insured individual. Included are Health FSAs, HSAs, retiree coverage, and multiemployer plans. Certain types of coverage are excluded, such as separate, stand-alone dental and vision policies.
Determination of cost and the dollar limit: At the end of the calendar year, employers will be responsible for calculating any excess benefit amounts subject to the excise tax. Employers will need to determine for each employee whether and by how much the total cost of coverage exceeds the established thresholds. For 2018, the threshold amount for individual coverage is $10,200, and is $27,500 for family coverage. The calculation will be determined based on the coverage the employee was actually enrolled in. Any amount in excess of the established thresholds will be taxed at a rate of 40%.
Taxpayers who may be liable: The law provides that the “coverage provider” is liable for any applicable excise tax. For insured group plans, the coverage provider is the health insurance carrier. For all other types of coverage, the coverage provider is the plan administrator – likely the employer. Related employers, such as those under common ownership, would be aggregated and treated as a single employer. In instances where the insurance carrier is the liable taxpayer, the cost will likely be passed on to the employer.
Payment of the tax: Employers are responsible for calculating the amount of the excess benefit subject to the tax and for notifying each affected coverage provider. Each liable coverage provider is then responsible for making the appropriate payment to the IRS. Any tax paid will not be deductible for federal tax purposes. However, the form and method of the payment remains under consideration. The IRS may designate the filing of Form 720, a Quarterly Federal Excise Tax Return, as the appropriate method for the annual payment of the tax.
The IRS will be reviewing comments from the public through October 1, 2015 to formulate proposed regulations.