IRS Issues Initial ‘Cadillac’ Excise Tax Guidance

The IRS and the Treasury Department issued a notice on the so-called “Cadillac Tax”—a 40 percent excise tax to be imposed on high-cost employer-sponsored health plans beginning in 2018 under the Affordable Care Act (ACA).

Notice 2015-16, released on Feb. 23, 2015, discusses a number of issues concerning the tax and requests comments on the possible approaches that ultimately could be incorporated in proposed regulations. Specifically, the guidance states that the agencies anticipate that pretax salary reduction contributions made by employees to health savings accounts (HSAs) will be subject to the Cadillac tax.

Background

In 2018, the ACA provides that a nondeductible 40 percent excise tax be imposed on “applicable employer-sponsored coverage” in excess of statutory thresholds (in 2018, $10,200 for self-only, $27,500 for family). As 2018 approaches, the benefit community has long awaited guidance on this tax. While many employers have actively managed their plan offerings and costs in anticipation of the impact of the tax, those efforts have been hampered by the lack of guidance. Among other things, employers are uncertain what health coverage is subject to the tax and how the tax is calculated.

Particularly, Notice 2015-16 addresses:

• Definition of applicable coverage
• Determination of cost of coverage
• Application of dollar limits

The agencies are requesting comments on issues discussed in this notice by May 15, 2015. They intend to issue another notice that will address other areas of the excise tax and anticipates issuing proposed regulations after considering public comments on both notices.

Applicable Coverage

Of most immediate interest to plan sponsors is the specific type of coverage (i.e., “applicable coverage”) that will be subject to the excise tax, particularly where the statute is unclear.

Employee Pretax HSA Contributions
The ACA statute provides that employer contributions to an HSA are subject to the excise tax, but did not specifically address the treatment of employee pretax HSA contributions. The notice says that the agencies “anticipate that future proposed regulations will provide that (1) employer contributions to HSAs, including salary reduction contributions to HSAs, are included in applicable coverage, and (2) employee after-tax contributions to HSAs are excluded from applicable coverage.”

Note: This anticipated treatment of employee pretax contributions to HSAs will have a significant impact on HSA programs. If implemented as the agencies anticipate, it could mean many employer plans that provide for HSA contributions will be subject to the excise tax as early as 2018, unless the employer limits the amount an employee can contribute on a pretax basis.

Self-Insured Dental and Vision Plans
The ACA statutory language specifically excludes fully insured dental and vision plans from the excise tax. The treatment of self-insured dental and vision plans was not clear. The notice states that the agencies will consider exercising their “regulatory authority” to exclude self-insured plans that qualify as excepted benefits from the excise tax.

Employee Assistance Programs
The agencies are also considering whether to exclude excepted-benefit employee assistance programs (EAPs) from the excise tax.

Onsite Medical Clinics
The notice discusses the exclusion of certain onsite medical clinics that offer only de minimis care to employees, citing a provision in the COBRA regulations, and anticipates excluding such clinics from applicable coverage. Under the COBRA regulations an onsite clinic is not considered a group health plan if:

• The health care consists primarily of first aid provided during the employer’s work hours for treatment of a health condition, illness or injury that occurs during work hours.
• Health care is only available to current employees.
• Employees are not charged for use of the facility.

The agencies are also asking for comment on the treatment of clinics that provide certain services in addition to first aid:

• Immunizations.
• Allergy injections.
• Provision of nonprescription pain relievers, such as aspirin.
• Treatment of injuries caused by accidents at work, beyond first aid.

In Closing

With the release of this initial guidance, plan sponsors can gain some insight into the direction the government is likely to take in proposed regulations and can better address potential plan design strategie

IRS Bars Employers from Dumping Workers Into Health Exchanges

Many employers originally thought they could shift health costs to the government by sending their employees to a health insurance Exchange/Marketplace with a tax-free contribution of cash to help pay premiums, but the Obama administration has squashed this idea in a new ruling. Such arrangements do not satisfy requirements under the Affordable Care Act (ACA), the Obama administration said, and employers could now be subject to a tax penalty of $100 a day — or $36,500 a year — for each employee who goes into the individual Marketplace/Exchange for health coverage.

 

The ruling this month, by the Internal Revenue Service, prevents any “dumping” of employees into the exchanges by employers.

 

Under a main provision in the health care law, employers with 50 or more employees are required to offer health coverage to full-time workers, or else the employer may be subject to penalties.

 

Many employers had concluded that it would be cheaper to provide each employee with a lump sum of money to buy insurance on an exchange, instead of providing employer-sponsored health coverage directly to employees as they had in the past.

 

But the Obama administration has now raised objections in an authoritative Q&A document recently released by the IRS, in consultation with other agencies.

 

The health law, known as the Affordable Care Act (ACA), was intended to build on the current system of employer-based health insurance. The administration wants employers to continue to provide coverage to workers and their families and do not see the introduction of ACA as an eventual erosion of employer provided coverage.

 

Employer contributions to sponsored health coverage, which averages more than $5,000 a year per employee, are not counted as taxable income to workers. But the IRS has said employers could not meet their obligations under ACA by simply reimbursing employees for some or all of their premium costs from the marketplace/exchange.

 

Christopher E. Condeluci, a former tax and benefits counsel to the Senate Finance Committee, said the recent IRS ruling was significant because it made clear that “an employee cannot use tax-free contributions from an employer to purchase an insurance policy sold in the individual health insurance market, inside or outside an exchange.”

 

If an employer wants to help employees buy insurance on their own, Condeluci said, they can give the employee higher pay, in the form of taxable wages. But in such cases, he said, the employer and the employee would owe payroll taxes on those wages, and the change could be viewed by workers as reducing a valuable benefit.

 

A tax partner from a large accounting firm has also said the ruling could disrupt reimbursement arrangements used in many industries.

 

For decades, many employers have been assisting employees by reimbursing them for health insurance premiums and out-of-pocket costs associated with their health coverage. The new federal ruling eliminates many of those arrangements, commonly known as Health Reimbursement Arrangements (HRAs) or employer payment plans, by imposing an unusually punitive penalty. The IRS has said that these employer payment plans are considered to be group health plans, but they do not satisfy requirements of the Affordable Care Act for health coverage.

 

Under the law, insurers may not impose annual limits on the dollar amount of benefits for any individual, and they must provide certain preventive services, like mammograms and colon cancer screenings, without co-payments or other charges.

But the administration has said that employer payment plans or HRAs do not meet these requirements.

 

This ruling was released as the Obama administration rushed to provide guidance to employers and insurers who are beginning to review coverage options for 2015.

 

The Department of Health and Human Services said it would provide financial assistance to certain insurers that experience unexpected financial losses this year. Administration officials hope the payments will stabilize medical premiums and prevent rate increases that are associated with the required policy changes as a result of ACA.

 

Republicans want to block these payments, however, as they see them as a bailout for insurance companies who originally supported the president’s health care law.

 

Stay tuned for more updates on ACA as they are released. Should you have any questions, please do not hesitate to contact our office.