The so-called “Cadillac Tax” is a hot topic of discussion in the employee benefits world – – will the controversial tax stick around or is it headed to the Junk Yard? It may be too early to tell, but the IRS has already started the process to get the regulatory wheels turning. On July 30, 2015, the IRS issued Notice 2015-52, a supplement to Notice 2015-16 issued in February 2015 describing potential approaches to the “Cadillac Tax” implementation. After considering comments on both notices, the Treasury and IRS intend to issue proposed regulations, followed by an opportunity to comment on the proposed regulations.

What is the Cadillac Tax?

The “Cadillac Tax” is a 40% non-deductible excise tax imposed on any excess benefit provided to an employee (including a former employee or retiree).

This tax, added under §4980I of the Internal Revenue Code, applies to taxable years beginning after December 31, 2017.

How is the tax calculated?

Generally, if an employee is covered under “applicable coverage” during a taxable period and there is an “excess benefit” with respect to the coverage, the excise tax applies. Under §4980I(b) “excess benefit” is defined as the excess of “(A) the aggregate cost of the applicable employer-sponsored coverage of the employee for the month, over (B) an amount equal to 1/12 of the annual limitation” for the employee for the applicable calendar year.

However, there are a number of additional factors that must be considered when determining the applicable annual dollar limit, including but not limited to:

• Application of dollar limit to employees with both self-only vs. other-than-self-only coverage;
• Adjustments for qualified retirees;
• Adjustments for high-risk professions; and
• Age and gender adjustments.

What is applicable coverage subject to the tax?

Section 4980I defines “applicable coverage” as coverage under any group health plan made available to the employee by an employer which is excludable from the employee’s gross income under IRC §106 (or would be excludable if it were employer-provided coverage).

Plans considered “applicable coverage” and subject to the tax include:

• Employer-sponsored group health plans;
• Health FSAs;
• Health Reimbursement Arrangements;
• HSAs and Archer MSA (employer contributions and employee pre-tax contributions only);
• Governmental plans;
• Retiree-only coverage; and
• Certain on-site clinics.

The following are not considered “applicable coverage” subject to the tax:

• Long-term care;
• Stand-alone dental or vision plans;
• Fixed indemnity plans;
• Employee post-tax HSA and Archer MSA contributions;
• Excepted benefits (including EAPs qualifying as excepted benefits); and
• On-site clinics providing only de minimis medical care.

How is aggregate cost determined?

The cost of applicable coverage is calculated on a monthly basis under rules similar to those for determining the COBRA applicable premium and is determined separately for self-only and other-than-self-only coverage. Interestingly, the IRS notes the unresolved issues regarding calculation of premiums under the COBRA rules and states that approaches adopted under the Cadillac Tax rules may be extended to the COBRA rules.

Notice 2015-16 outlines a potential approach for determining groups of similarly situated employees, detailed rules on employee aggregation and disaggregation, and requests comments on determining cost of coverage for self-funded plans (using actual current costs). Additionally, Notice 2015-52 requests comments on an approach under which contributions to account-based plans would be allocated on a pro-rata basis over the plan year regardless of the timing of the contributions (e.g. lump-sum contributions to an HRA at the beginning of the plan year would be allocated pro rata to each calendar month of the plan year).

Who is liable for the tax?

The coverage provider is liable for any applicable excise tax assessed. Who the coverage provider is depends on the type of coverage provided and is defined under the statute as follows:

• Insured Group Health Plan: the coverage provider is the insurance carrier;
• HSA and Archer MSAs: the coverage provider is the employer; or
• All Other Coverage (e.g. self-funded plans and Health FSAs): the coverage provider is “the person that administers the plan benefits.”

It should be noted that “the person that administers the plan benefits” is not defined in §4980I. As such, Treasury and IRS have offered two potential approaches to determining the liable party “the person that administers the plan benefits”. Under the first approach the liability falls on the person/entity that is responsible for performing the day-to-day functions of administering plan benefits (anticipated to generally be the third-party administrator for self-insured group health plans). However, under the second approach the liability falls on the person/entity with ultimate decision making authority with respect to the administration of the plan benefits, regardless of how regularly they exercise such authority or responsibility (anticipated to generally be the employer).

What happens now?

Will the Cadillac tax be enabled in the time established by the ACA? Will it be delayed? Will it be repealed? We don’t know yet. But we do know this – neither party likes it. This fact leads to a conclusion that a delay or repeal is possible, and there are a number of proposals being discussed at the Capital.

The laws and regulations outlined in this alert are complex and may affect organizations differently. The content herein is provided for educational and informational purposes only and does not contain legal advice. Please contact our office if you have any questions about the Cadillac Tax and how it may impact your organization.