Section 49801 of the Internal Revenue Code was added to the Code by the Patient Protection and Affordable Care Act, otherwise known as “the ACA” or “Obamacare”. Section 49801 provides that if the aggregate cost of “applicable employer-sponsored [health care] coverage” exceeds a specified dollar limit, the excess is subject to a 40% excess tax. That tax, which goes into effect for taxable years after December 31, 2017, is commonly known as the “Cadillac Tax”. Recently, in Notice 2015-16, the IRS provided some indication as how the Cadillac Tax will be administered.
The annual per-employee dollar limits for the 2018 administration of the Cadillac tax are $10,200 for employee-only coverage and $27,500 per employee for “other-than-self-only coverage”. Thus, the law makes no distinction between “family coverage” or “dependents’ coverage” and “employee plus-one” coverage. Any health care coverage that covers more than the employee only is subject to the higher dollar limit. The employee-only and other than self-only limits are subject to cost-of-living adjustments for tax years 2018 and after.
If an excise tax is incurred, the law provides that the entity that is required to pay the tax is the “health insurance issuer” in the case of applicable coverage provided under an insured plan, “the employer” if the applicable coverage consists of coverage under which the employer makes contributions to an HSA or Archer MSA, or the “person that administers the plan” in the case of other applicable coverage. The law further provides that the Cadillac tax is not deductible for federal tax purposes.
The law provides that the cost of applicable coverage for Cadillac tax purposes is “determined under rules similar to the rules” under COBRA. Employers are required to report the aggregate cost of applicable coverage in Box 12 of Form W-2, using Code DD.
“Applicable coverage” generally 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”. Coverage that otherwise meets the definition of applicable coverage is applicable coverage regardless of whether the employer pays for the coverage or the employee pays for the coverage with after-tax dollars. Coverages encompassed by the definition of applicable coverage include flexible spending accounts (FSAs), health savings accounts (HSAs) and governmental plans, including group health plans maintained for civilian employees by the government of the State of Illinois or any unit of local government in Illinois. Excluded from the definition are such insurance coverages as coverage for accident or disability income, liability insurance, workers’ compensation, automobile medical payment insurance, and long-term care insurance. Stand-alone dental and vision coverages are also excluded.
With respect to HSAs, Notice 2015-16 says that “Treasury and IRS anticipate that future proposed regulations will provide that (1) employer contributions to HSAs and Archer MSAs, including salary reduction contributions to HSAs, are included in applicable coverage, and (2) employee after-tax contributions to HSAs and Archer MSAs are excluded from applicable coverage”. Employer flex contributions to FSAs are also included, but employee salary reduction contributions are not included.
Notice 2015-16 asks for comment on a number of issues that have not been determined with respect to determining the aggregate cost of applicable coverage, which in turn will determine the dollar ceiling for the application of the Cadillac tax. Since the cost of applicable coverage is to be determined under rules that are similar to those used under COBRA, Treasury and the IRS are considering potential approaches that deal with the definition of “similarly situated individuals”, including aggregation and disaggregation options; methods by which self-insured plans can compute the COBRA applicable premium; the treatment of Health Reimbursement Accounts (HRAs), some of which may include a range of benefits that otherwise would not be included in the definition of “applicable coverage”; and the application of the dollar limit to employees with both self-only and other-than-self-only applicable coverage (such as an employee that has employee-only health insurance coverage but an HRA that covers the employee and his family).
Treasury and the IRS also are considering the various adjustments to dollar limits that apply under the law. These include: (1) adjustments for qualified retirees; (2) adjustments for high-risk professions (including police officers, firefighters, and paramedics); and (3) age and gender adjustments.
Finally, Treasury and the IRS are prepared to consider the possibility of other methods of determining the cost of applicable coverage, such as by using the cost of substantially similar coverage in the Health Insurance Marketplace. We are awaiting final regulations on these issues.
So far, Treasury and the IRS have taken the Cadillac out of the garage for inspection and servicing. But the final regulations will have to be issued before the Cadillac can take to the road.