Troas Bible College (TBC) is a private university. Their CFO went to a conference and heard horror stories about excise taxes TBC might owe beginning in 2018 on any “Cadillac” health plans they have in place at that time. They call in a panic, asking, “How do we know if our plans are “Cadillacs”? How much taxes might we owe? How will we report and pay the taxes? What do we need to be doing now?”
First, we say, the “Cadillac” excise tax is in effect for tax year beginning after December 31, 2017. Second, the excise tax is a hefty 40% of excess coverage benefits per employee, if applicable. Third, IRS has not yet issued final (not even proposed) regulations on these plans. Ultimately, these excise taxes are covered in Internal Revenue Code section 4980I. The Service has issued two notices (Notices 2015-15 and 2015-52) that provide some initial insight and ask the public for comments on what the proposed regulations should look like. Having said that, your institution may want to begin reviewing your “applicable coverage” for health payments now.
Internal Revenue Code section 4980I(d)(2) provides specific guidance on determining the cost of certain types of coverage. The most common applicable coverage is a major medical plan, but applicable coverage is much broader than that. Many employers sponsor a health care flexible spending arrangement (health FSA), which constitutes applicable coverage. In addition, employers may provide a health savings account (HSA) or Archer medical spending account (Archer MSA). An HSA or an Archer MSA will generally constitute applicable coverage. In Notice 2015-16, the IRS says that the proposed regulations will provide that employer contributions to HSAs and Archer MSAs, including salary reduction contributions to HSAs, are included in applicable coverage; however, employee after-tax contributions to HSAs and Archer MSAs are expected to be excluded. It would appear that health reimbursement arrangements (HRAs) meet the general definition of applicable coverage and, as such, are not excluded. It will be up to each employer to determine how to allocate the cost of the applicable coverage.
How Much is the Tax?
The employer will account for each employee’s potential “excess benefit” each month. This amount would be the amount by which the total monthly payments for “applicable coverage” (using a calendar year) exceed the annual IRS set amounts divided by twelve months. The excise tax attributable to an employee’s applicable coverage is 40% of the employee’s “excess benefit.” The IRS has hinted that the proposed regulations would state that annual or quarterly payments into various “applicable coverage” component “plans” would be divided by twelve and not lumped into the month(s) they are actually paid. Note that the IRS has stated that applicable coverage includes the coverage(s) in which the employee is enrolled rather than coverage that is merely offered.
Who Owes the Tax?
Under I.R.C. section 4980I(c)(1), the “coverage provider” is liable for the tax. For an insured plan, this would be the health insurance issuer. For an HSA or an Archer MSA, it would be the employer. For all other coverage, the coverage provider is “the person that administers the plan benefits,” which is not defined anywhere in the Code. Note that it would be logical that the “coverage provider” – if other than the employer – would pass the cost of the tax on to the employer. And, get this, the “Cadillac” tax is not deductible, so they may pass along an amount “grossed up” for the additional taxes they’d pay.
What is the Annual Limit for “Applicable Coverage”?
Statutory dollar amounts, set by the IRS and subject to certain adjustments, define the annual limitation on each employee’s applicable coverage. Initially, the dollar amounts are $10,200 for “self-only” coverage and $27,500 for coverage “other than self-only”. There are higher limits applicable for “qualified retirees” and participants in “high-risk professions.” The annual dollar amounts are subject to several adjustments: a health cost adjustment percentage; a cost-of-living adjustment; the qualified retirees or high-risk professions adjustment; and the age and gender adjustment. We can presume that the IRS will periodically provide updates on the amounts and give us tables or formulas for calculating the adjustments.
When to Report and Pay the “Cadillac” Excise Taxes
It appears that the IRS is considering the use of Form 720, Quarterly Federal Excise Tax Return, to report and to pay the tax annually even though Form 720 usually is filed quarterly. Under this approach, the IRS would designate a particular quarter of the calendar year to file Form 720 in order to pay the excise tax.
As with most requirements of the Affordable Care Act, the “Cadillac” tax is new and confusing. At least we have a little bit of time (until tax years beginning after December 31, 2017) to figure this one out! Although the IRS has included some helpful guidance its 2015 notices, many issues remain to be resolved through the proposed regulations. “Tax Tips” will be here to keep you updated. Film at 11. Always consult with a tax professional if you are considering activity of this kind. He or she can walk you through the regulations and help you determine the course of action that is most beneficial to your organization — and help ensure you’re complying with the spirit of the law.
Specific questions? Email Dave Moja
The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.