When 2018 rolls around, who will be responsible for paying any “Cadillac” excise tax duties – the insurance carrier? Third-party administrator? The employer? And what employer entities and benefit plans will have to be combined for purposes of determining any excise tax liability?
These are a few of the practical questions that the regulation-writers at the IRS are grappling with. Late last week they issued Notice 2015-52, a notice “intended to continue the process of developing regulatory guidance regarding the excise tax on high-cost employer-sponsored health coverage,” according to the announcement. The IRS said it would incorporate input into the regulations it ultimately issues on these topics.
“This is our first taste of the nuts and bolts of implementing the tax,” says Adam Solander, a member of the Epstein, Becker & Green law firm. “The Cadillac tax could get even more expensive,” he warned, for in scenarios in which the TPA winds up being the taxable entity.
That’s because in reimbursing TPAs for the excise tax liability they might sustain on the employer’s behalf, the reimbursement itself would be taxable income to the TPA, subjecting the TPA to additional tax. Thus employers will need to “gross up” the reimbursement amount to offset that incremental tax liability, Solander says.
The tax code section added by the Affordable Care Act (ACA) containing the Cadillac tax provision, § 49801, states that the “coverage provider” is the entity responsible for paying the tax. For fully insured plans, the health insurance issuer is that provider.
The employer is deemed to be the coverage provider with respect to contributions it makes to HSAs and medical savings accounts. For other applicable coverage, the “coverage provider” is “the person [a legal entity] that administers the plan benefits,” according to Notice 2015-52.
The IRS is considering to ways of determining which entity is the “coverage provider.” Under one approach, the provider would be the entity “responsible for performing the day-to-day functions that constitute the administration of benefit plans, such as receiving and processing claims for benefits, responding to inquiries, providing a technology platform for benefits information.” In other words, that would generally mean, for self-insured employers, the TPA.
The other approach would be to define the coverage provider as “the person that has ultimate authority or responsibility … with respect to the administration of plan benefit … regardless of whether that person routinely exercises that authority or responsibility.” That is, the employer.
Are all divisions of a company combined for purposes of assessing the excise tax liability? The general answer is yes. But Notice 2015-52 asks for comments “on practical challenges presented by the application of those aggregation rules.”
For example, companies with many employees in high cost areas could effectively be penalized if they offer the equivalent health benefits to other employees elsewhere where costs are lower. Would it be fair, the IRS is asking, that the same benefit is given Cadillac status in one region, but not in another, due to varying costs?
The ACA included a general mechanism to allow Cadillac tax thresholds to be adjusted according to plan age and gender demographic variations. The idea is that, for example, an employer with an older and average workforce – and thus higher health benefit costs – could have its excise tax threshold adjusted upwards to avoid an otherwise disproportionately high Cadillac tax bill. Notice 2015-52 lays out various ways regulators are thinking about defining that adjustment mechanism.
October 1 is the deadline for submitting comments on the issue the IRS has raised.
A plea to Congress
Meanwhile, Congress has been on the receiving end of criticism of the Cadillac tax provision. Last Friday the Business Roundtable, representing about 200 of the country’s largest employers that collectively employee 40 million Americans, sent a letter to the chairmen and ranking members of Congress’ two tax committees.
The letter warned that tax “will have broader implications than anyone anticipated at the time this provision was drafted” and “distort the employer-sponsored health care marketplace, leading to dramatic changes in the benefits offered to employees.”
Among other things, the group urged that the cost of wellness programs, on-site medical clinics, employee contributions to employee contributions to HSAs, HRAs and FSAs, and any “excepted benefits” (e.g., vision and dental care) be excluded from health costs used to assess excise tax liability.
“Employers should be allowed broad flexibility in how they average benefit costs across their portfolio of plans, including the flexibility to aggregate or disaggregate all plans or plan options, as plans may vary in cost but not necessarily in value,” the letter argued.