Read More

IRS Issues Cadillac Tax Updates: Coverages, Dollar Amounts And More

The IRS has recently released Notice 2015-16 addressing regulatory compliance with the proposed 2018 Cadillac Tax, or excise tax. The Cadillac Tax is a 40% excise tax on certain employer sponsored coverage which exceeds a statutory dollar limit. The purpose of the tax is to help reduce health care costs and usage by having employers provide benefits plans that encourage cost sharing by employees.

The IRS notice addresses three major items:

    1. Coverages subject to the Cadillac Tax
    2. Determination of the cost of those applicable coverages
    3. The annual statutory dollar limit
      1. The IRS defines in this notice the employer sponsored group coverages subject to the Cadillac Tax. Those include:
      • Health Flexible Savings Accounts (FSAs)
      • Archer Medical Savings Accounts (MSAs)
      • Health Savings Accounts (HSAs)
      • Government sponsored plans
      • On-site medical clinics
      • Retiree coverage
      • Health coverage (medical, prescription drug and behavioral care)

Coverages defined as not subject to the Cadillac Tax include:

      • Accident only or disability only coverage
      • Worker’s compensation or similar insurance
      • General liability and automobile medical payment insurance
      • Credit only insurance
      • Coverage under a separate policy, certificate, or contract of insurance which provides benefits substantially all of which are for the treatment of the mouth or eye (further guidance will be provided which may exempt all limited scope dental and vision benefits)
      • Coverage for a specified disease or illness and hospital indemnity or other fixed indemnity insurance if the payment is not excluded from gross income
      1. Determination of Cost for the Applicable Coverages

The IRS will impose a 40% excise tax on the excess of the aggregate cost over of the applicable dollar limit. The determination of the aggregate costs will include using rules similar to calculating COBRA premiums. However, the IRS has left some gaps in specifics of how to calculate COBRA premiums, such as:

      • Determination of non-COBRA beneficiaries that are similarly situated
      • Specific instructions on how to calculate COBRA premiums for self-insured groups
      • Calculating COBRA premiums for HRAs

The notice does provide several potential approaches for determining the cost of coverage, and addresses some of the gaps in calculating COBRA premiums as mentioned above. One clarification made in the notice was that the Cadillac Tax would not be included in the cost of coverage. Other clarifications include calculation rules for:

      • Separate costs for self-only and other-than-self-only coverage
      • Retirees
      • Health FSAs
      • HSAs and Archer MSAs
      • Monthly costs
      1. The Applicable Annual Statutory Dollar Amount

The IRS has identified the baseline per-employee dollar limits for 2018. Those are: $10,200 for self-only coverage, and $27,500 for other-than-self coverage. These baselines may be adjusted using several methodologies proposed in the notice, along with adjustments for qualified retirees and high-risk professions (law enforcement, fire protection activities, first responders, emergency medical technicians, paramedics, longshoreman, construction, mining, agriculture, forestry and fishing services). In addition, age and gender adjustments will be allowed.

Alternative approaches to these adjustments are being requested by the IRS and the Treasury Dept. Further notice(s) will be forthcoming inviting public comments to additional issues not addressed in this notice. The IRS is asking that public comment to this notice be submitted no later than May 15, 2015. The IRS notice is accessible here: view the notice

More information will be forthcoming and further guidance will be issued. Stay tuned.