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ACA Cadillac Tax: IRS Issues Next Installment of Preliminary Guidance

Originally posted by ubabenefits.com

In February, employers, administrators and others got to see some preliminary thoughts the Internal Revenue Service (IRS) has about the so-called “Cadillac Tax,” included in the Affordable Care Act (ACA). That initial glimpse came when the IRS issued Notice 2015-16. At the end of July, the IRS issued its second installment, Notice 2015-52. After considering the comments its receives in connection with both Notices, the IRS expects to issue proposed regulations, at which time comments will again be requested and considered before any final rules are imposed. If you would like to send comments to the IRS concerning any of the proposals in Notice 2015-52, email those comments to Notice.comments@irscounsel.treas.gov with “Notice 2015-52” in the subject line no later than October 1, 2015.

What is the “Cadillac Tax?”

The ACA added a new excise tax under section 4980I of the Internal Revenue Code (“Code”) that applies to tax years after December 31, 2017. The tax seeks to discourage high-cost health plans and applies, in general, when the aggregate cost of employer-sponsored coverage – referred to as “applicable coverage” – exceeds a statutory dollar limit. That excess is subject to a 40 percent nondeductible excise tax.

Notice 2015-15

IRS Notice 2015-16 describes potential approaches regarding a number of issues under Code § 4980I. These include (1) the definition of applicable coverage, (2) the determination of the cost of applicable coverage, and (3) the application of the dollar limit to the cost of applicable coverage to determine any excess benefit subject to the excise tax. Read a more detailed discussion of the contents of that notice.

Notice 2015-52

Notice 2015-52 builds on Notice 2015-16 by addressing additional issues under § 4980I, including:

  • Who is liable for the excise tax

The liability for the tax will fall on “coverage providers.” For insured plans, this generally will be insurance carriers. For coverage under HSAs or Archer MSAs, the coverage provider will be employers. The third category of coverage provider is “the person that administers the plan benefits.” This category will capture self-funded plans, but the IRS is not sure how it should be defined and seeks comments on two approaches discussed in the Notice.

  • Issues for employers that are part of groups of organizations under common control

The IRS recognizes that for employers that are part of controlled groups, a number of issues will have to be addressed. These include identifying (1) the coverage made available by employers in the group, (2) the employers that will be responsible to calculate and report the excess benefit, and (3) the employers liable for improperly calculating the tax. The IRS requests comments on all of these issues.

  • Pass-throughs and gross-ups concerning the tax

The IRS recognizes that coverage providers liable for the tax may, nonetheless, pass the cost of the tax along to others that may reimburse the coverage provider for having to pay the tax. The IRS addresses the tax treatment of these pass-throughs and reimbursement payments, including how to calculate gross-ups of those payments for tax purposes.

  • Notice and payment of the tax

Under Code § 4980I, employers must (1) calculate the excess benefit subject to the tax and the share of that excess benefit for each coverage provider, and (2) notify the IRS and the coverage providers of those amounts. The IRS is looking for input on the form and timing of those notice requirements, among other issues. Also, as with the PCORI fee, the IRS intends to designate Form 720 as the method to pay the tax.