Another Notice and Request for Comments on the Cadillac Tax
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1 Another Notice and Request for Comments on the Cadillac Tax On July 30, the Department of the Treasury and Internal Revenue Service (IRS) issued Notice This is the second Notice asking for stakeholder input on the Affordable Care Act s (ACA s) tax on high cost coverage (the Cadillac Tax). Around five months ago IRS issued Notice , requesting comments on virtually every aspect of the Cadillac Tax. As discussed below, Notice has a much narrower scope but addresses critical issues including how the cost of coverage is determined, how the tax is allocated among providers of different benefit options, and potential approaches to the age and gender adjustment. IRS will issue proposed regulations after reviewing comments on both Notices. Cadillac Tax Overview The Cadillac Tax is scheduled to take effect for the 2018 tax year. It will impose a 40% nondeductible excise tax on applicable employer-sponsored coverage with an aggregate value that exceeds $10,200 for self-only coverage and $27,500 for any coverage other than self-only coverage. A cost-of-living adjustment will apply for taxable years after 2018 and thresholds may be increased for employers if the age and gender characteristics of their workforce differ from the national workforce. (See Alert for a detailed discussion of other variations to Cadillac Tax thresholds.) Under existing guidance applicable employer-sponsored coverage primarily includes: Group health plans providing major medical benefits to active employees and retirees. Employer contributions to Health Reimbursement Arrangements (HRAs). Employer contributions and employee salary reductions to Health Flexible Spending Accounts (H-FSAs). Employer contributions and employee salary reductions to Health Savings Accounts (HSAs). Who is Liable for the Cadillac Tax The ACA provides that the coverage provider is liable for the Cadillac Tax. For an insured group health plan, the coverage provider is the health insurance issuer. With respect to coverage under an HSA, the coverage provider is the employer. For all other applicable coverage, including self-funded major medical plans, HRAs, and H-FSAs, the coverage provider is the person that administers the plan benefits. This unusual phrase made it unclear which entity has Cadillac Tax liability for these plans.
2 Notice describes two possible approaches to define the person that administers the plan benefits. Under one approach, the person that administers the plan would be the person responsible for performing the day-to-day plan functions, typically a Third Party Administrator (TPA). The second approach imposes responsibility on the person that has the ultimate responsibility for administration of the plan benefits, typically the Plan Administrator as defined under ERISA, which is generally the employer. Although employers, who are the Plan Administrator under ERISA may not welcome additional direct financial liability, placing liability with TPAs may raise complicated issues when TPAs pass that cost back through to the employer. Passing the Cadillac Tax Back Through to the Employer If a coverage provider other than the employer has Cadillac Tax liability, everyone expects the coverage provider to pass that cost back through to the employer. If the coverage provider does pass the cost through, the reimbursement paid by the employer will be additional taxable income to coverage providers. As a result, it is anticipated that the amount the coverage provider passes back through will include not only the Cadillac Tax amount, but also an amount to offset any additional income tax the coverage provider ultimately pays (the income tax reimbursement). When the income tax reimbursement is paid by the employer, the coverage provider will have still another source of additional taxable income. Although the amount of the Cadillac Tax does not count towards the aggregate value of applicable employer-sponsored coverage, IRS is still considering whether the additional income tax reimbursement amount should count or be excluded. If IRS concludes that the income tax reimbursement can be excluded, Notice provides that the amount of the income tax reimbursement would probably be determined using a formula commonly used to calculate tax gross-ups. However, IRS is considering whether the formula should reflect the coverage provider s actual marginal tax rate or use a standard marginal tax rate. Lastly, if the income tax reimbursement can be excluded, it would need to be separately billed form any other costs and from the line item reflecting the Cadillac Tax amount. Timing Issues in Calculating the Cadillac Tax To calculate the Cadillac Tax, an employer must determine whether the cost of applicable coverage provided to an employee during any month of the tax year exceeds the dollar limit. Then the employer has to allocate the tax among coverage providers. Each coverage provider s share of the Cadillac Tax is based the on the value of the coverage they provided relative to the total aggregate value of employer sponsored coverage. Then the employer will notify IRS and the coverage provider(s) of the amount of the excess benefit. The tax is then paid by the coverage provider(s). IRS is considering using the Form 720 Quarterly Federal
3 Excise Tax Return as the appropriate method for the payment of the tax and is requesting comment on the form and time at which other information must be provided. Employers will generally need to determine the cost of applicable coverage provided during a taxable year during or shortly after the end of the year so that coverage providers can timely pay the tax. Although this will not present many logistical issues, Notice requests comment on situations where an employer may need additional time to compute the cost of applicable coverage and allocate the tax among coverage providers. The situations identified in the Notices include where a H-FSA with employer contributions has a claims run out period. In such cases the aggregate value of the coverage is the amount of the salary reduction election plus the value of any claims reimbursed in excess of the salary reduction election amount. Thus, actual claims reimbursements during a run out (or possibly a grace period) could delay when the calculation can be made. IRS is also considering an approach where contributions to account-based plans would be allocated on a pro-rata basis over the plan year, regardless of the timing of the contributions. Under this approach, if an employer contributes an amount to an HSA for a plan year, that contribution would be allocated ratably to each calendar month, regardless of when the employer actually makes the contribution. Similarly, if an employee elects to contribute to a H- FSA, the employee s total contributions would be allocated ratably to each calendar month of the plan year, even though the entire amount is available to reimburse qualified medical expenses on the first day of the plan year. Lastly, the Notice requests comments on how to handle experience-rated arrangements that provide rebates or credits after the end of a coverage period or provide a premium discount for the next coverage period. IRS is specifically requesting information on how these rebates or credits are treated when determining COBRA premiums. H-FSAs with Carryovers and/or Flex Credits As discussed above, in situations where an employer contributes to a H-FSA, the aggregate value of the coverage is the amount of the salary reduction election plus the value of any claims reimbursed in excess of the salary reduction election amount. This approach to determining the cost or value of the coverage would capture any employer flex credits allocated to the H-FSA. However, this approach has the potential for double counting H-FSA dollars if an employer has implemented the new $500 carryover. To avoid potential double counting for plans that have a carryover and no employer funding or flex credits, IRS proposes that the cost of applicable coverage for the plan year would be the
4 amount of an employee s salary reduction without regard to carry-over amounts. Unused amounts that are carried forward would be taken into account when initially funded by salary reduction but disregarded when used to reimburse expenses in a later year. For plans with flex credits, IRS is considering treating a H-FSA as funded solely by salary reductions if the amount elected by the employee for the H-FSA does not exceed the $2,550 limit (indexed) on salary reductions. For example, if an employee with a $1,000 employer flex credit salary reduces by an additional $5,000 and allocates $2,550 to the FSA, the FSA would be treated as funded solely by salary reduction. As a result, the cost of applicable coverage would be $2,550. Under this approach, the salary reduction taken into account would be counted only in the year an amount was elected and disregarded in later years if carried over. Notice requests comments on the allocation of FSA amounts between flex credits and salary reduction when the total H-FSA election exceeds the $2,550 maximum salary reduction amount. Age and Gender Adjustments The Cadillac Tax provides baseline dollar limits for 2018 but also provides various adjustments that may increase these amounts. The age and gender adjustment is designed to balance Cadillac Tax liability where identical benefit plans have different costs due to the age and gender of a workforce. The age and gender adjustment increases the dollar limit by an amount equal to the excess of the premium cost of the Blue Cross/Blue Shield standard benefit option under the Federal Employees Health Benefits Plan (FEHBP standard option) if priced for the age and gender characteristics of all employees of an individual s employer (the employer s premium cost), over the premium cost for providing this coverage if priced for the age and gender characteristics of the national workforce (the national premium cost). The distribution of men and women in different age groups must also be accounted for. In Notice , IRS proposes using a Table A-8a published annually by the Department of Labor Bureau of Labor Statistics to establish the age and gender characteristics of the national workforce. This table provides the number of individuals participating in the labor force by fiveyear age-bands and the ratio of male to female workers in each age-band. This data would be the foundation for separate adjustment tables that that IRS would create and that employers would then use to calculate the age and gender adjustment based on its population s demographics. For an employer to determine the age and gender characteristics its population, IRS is considering a requirement that an employer use the first day of the plan year as a snapshot data. However, Notice also requests comments on whether employers should be
5 permitted to choose a different date that may be more representative of the employer s population. Organizations that want to submit comments must do so by October 1, You can link to the full text of Notice , including instructions on submitting comments, here. Compliance Alert is presented by the Compliance Practice Group of Alliant Employee Benefits CA License No. 0C Alliant Employee Benefits, a division of Alliant Insurance Services, Inc. All rights reserved.
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