IRS Releases Guidance on the Cadillac Tax: What Employers Need to Know
The excise tax on employer-sponsored health plans, more commonly referred to as the “Cadillac tax”, is a 40% nondeductible excise tax on the “excess benefit” being offered to employees. The excess benefit is considered to be plan costs that exceed certain annual dollar thresholds. The Cadillac tax becomes effective for taxable years beginning 2018.
On February 23, 2015, and July 30, 2015 the IRS released Notice 2015-16, and Notice 2015-52 respectively. These Notices indicate that the IRS has finally begun to discuss the complex issues involved with implementing this tax. Although these Notices do not provide definitive answers, the IRS is beginning to shine light where employers have been left in the dark:
What Coverage will be Subject to the Tax?
Coverage under a group health plan, that is made available to an employee by an employer, which is excludible from the employee’s gross income that is paid by the employer, will be subject to the Cadillac tax. A short list of other coverages that will be subject to the tax are: Flexible Spending Accounts (FSA’s), Health Savings Accounts (HSA’s), Health Reimbursement Accounts (HRA’s), group wellness plans, governmental plans, and retiree coverage.
The statute does exempt certain types of employer-sponsored coverage from the tax: Dental, Vision, Long-term Care, and Disability Income Insurance to name a few.
How Will the Cost of Coverage Be Determined?
The cost of coverage under a group health plan will likely be determined the same way that “applicable premium” cost under COBRA is calculated. The applicable premium under COBRA is based on the cost of coverage for similarly situated non-COBRA beneficiaries. This cost includes both the employer and employee contributions to the cost of coverage.
What Will the Annual Dollar Thresholds Be?
In 2018, the first year that the Cadillac tax will be imposed, the annual dollar limits will be $10,200 for individual coverage and for $27,500 for family coverage. These thresholds will be adjusted for inflation annually.
Who Will Be Responsible For Paying the Tax?
The IRS is indicating that the “coverage provider” will pay the tax. The coverage provider for fully insured plans would be the health insurer. The coverage provider for self-insured plans would be the employer. The coverage provider would also be the employer for FSA’s, HSA’s and HRA’s. It is worth noting that although the health insurer will be considered the coverage provider for fully insured plans, the cost of the tax will ultimately be passed back to the employer through premium increases.
This is a guest post from Matt Lovendusky of Brown & Brown of New York. Along with designing and implementing plans for employers, works with clients to provide solutions to the challenges of Health Care Reform and compliance.
Connect with Matt MattL@bbinsnyc.com, http://bbinsnyc.com/
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