An excise tax will be levied on high cost employer-sponsored health coverage effective for taxable years beginning after December 31, 2019 (a new law provides a two-year delay to the original ruling). The tax is governed by Internal Revenue Code (IRC) section 4980I and is commonly called the "Cadillac tax".
What is the Cadillac tax?
The Cadillac tax is enforced if:
- An employee is covered under any "applicable employer-sponsored coverage" at any time during a taxable period, and
- There is any excess benefit with respect to the coverage.
The tax is equal to 40% of the excess benefit.
Updates to the Cadillac Tax
IRS Notices 2015-52 and 2015-16 define possible approaches regarding a number of issues defined in section 4980I, which might be integrated in future proposed regulations, and invite comments on these possible approaches. The issues outlined in the notices principally relate to:
- The characterization of taxpayers who may be accountable for the tax;
- Employer aggregation rules;
- The distribution of the tax among relevant taxpayers; and
- The definition of "applicable employer-sponsored coverage";
- The determination of the cost of applicable employer-sponsored coverage;
- The application of the annual statutory dollar limit to the cost of applicable employer-sponsored coverage;
- Payment of the tax.
The Treasury and IRS are expected to publish proposed regulations under section 4980I after considering comments on both pieces of guidance.
What is Applicable Employer-Sponsored Health Coverage?
Applicable employer-sponsored coverage generally means, with respect to any employee (including any former employee, surviving spouse, or other primary insured individual), coverage under any group health plan made available to the employee by an employer which is excludable from the employee's gross income. Coverage will be treated as "applicable employer-sponsored coverage" without regard to whether the employer or employee pays for the coverage.
The following types of coverage (among others) are NOT included in the definition of "applicable employer-sponsored coverage":
- Coverage only for accident, or disability income insurance, or any combination thereof;
- Workers' compensation or similar insurance;
- Automobile medical payment insurance;
- Long-term care coverage; or
- Other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits.
What is the Excess Benefit?
The cost of plan benefits generally cannot exceed the threshold of $10,200 for self-only coverage and $27,500 for family coverage, with exceptions for certain types of coverage.
The threshold amount is increased by $1,650 for individual coverage and $3,450 for family coverage in the case of an individual who:
- Is a qualified retiree; or
- Participates in an employer-sponsored plan where the majority of employees covered by the plan are engaged in a high-risk profession or are employed to repair or install electrical or telecommunications lines.
Who is Liable to Pay the Tax?
The Cadillac tax is imposed proportionately on each coverage provider:
- If the employer-sponsored coverage consists of health coverage under an insured group health plan, the health insurance issuer is liable to pay the tax.
- If the employer-sponsored coverage consists of employer contributions to an Archer MSA or a health savings account (HSA), the employer is liable to pay the tax.
- In the case of any other applicable employer-sponsored coverage, the "person that administers the plan benefits" is liable to pay the tax.
- Note: IRS Notice 2015-52 acknowledges that section 4980I does not define the term "person that administers the plan benefits," and therefore describes potential approaches to clarify this term on pages 3-5 of the guidance.
How do you Responsibly Calculate the Tax?
Each employer generally must:
- Calculate the excess benefit for each taxable period and the applicable share of such excess benefit for each coverage provider, and
- Notify the Secretary of Treasury and each coverage provider of the amount so determined for the provider, at such time and in such manner as the Secretary may prescribe.
In the case of applicable employer-sponsored coverage made available to employees through a multiemployer plan, the plan sponsor must make the required calculations and provide the notice.
Note that employers or plan sponsors may be penalized if they undervalue the insurance cost subject to the Cadillac tax.
As federal agencies have yet to issue proposed regulations with respect to the Cadillac tax, employers are strongly advised to analyze the individual provisions of the law and IRS notices in conjunction with knowledgeable tax counsel to determine specific compliance responsibilities.
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