As originally enacted, Sec. 4980I imposes a 40% excise tax on the difference between the aggregate cost of "applicable employer-sponsored coverage" and a statutory dollar limit for tax years that would have taken effect after Dec. 31, 2017. The Consolidated Appropriations Act, 2016, P.L. 114-113, enacted Dec. 18, 2015, delayed the effective date by two years. Thus, the so-called Cadillac plan excise tax is now scheduled to take effect in 2020.
The baseline dollar limits for 2018 (which remained subject to an adjustment for health care costs prior to 2018) would have been $10,200 for self-only coverage and $27,500 for other coverage. Prior law updated these thresholds for inflation at the consumer price index (CPI) plus 1 percentage point in 2019. The thresholds will be updated at CPI in 2020 and beyond. Medical costs generally are expected to increase faster than either of these inflation measures, meaning that a significant number of employers may find that the tax applies in 2020 if the law is not changed again before then.
Before Congress enacted the Consolidated Appropriations Act, 2016, the IRS published two notices in 2015 to begin the regulatory guidance process. Notice 2015-16 addresses issues primarily relating to: (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.
Key issues addressed by Notice 2015-52 include: (1) identification of the taxpayers who may be liable for the excise tax; (2) employer aggregation; (3) the allocation of the tax among applicable taxpayers; and (4) the payment of the applicable tax. It also addressed certain issues related to determining the cost of applicable coverage that Notice 2015-16 did not address.
Notice 2015-16 and Notice 2015-52 both describe potential approaches the IRS is considering with respect to certain issues and request comments on them. They also provide some interesting observations on various topics. However, neither notice provides official guidance that taxpayers can rely upon. Instead, the IRS intends to use comments received on both notices to help inform the development of proposed regulations that it will issue in the future. So far, the IRS has not indicated how the Consolidated Appropriations Act, 2016, may affect the timing of future guidance.
Notice 2015-52 also addressed the nondeductibility of the excise tax. In cases in which a health insurance issuer or third-party administrator is responsible for paying the excise tax, the IRS acknowledges that some or all of this cost may be passed on to the plan sponsor and that the issuer or third-party administrator might seek additional compensation (a gross-up payment) to cover the tax liability. This issue is now moot, however, because the tax is generally deductible pursuant to Division P, Title I, Section 102, of the Consolidated Appropriations Act, 2016.
The legislation also mandates that the comptroller general of the United States perform a study of the suitability of the current law's use of the Federal Employees Health Benefits Program's Blue Cross/Blue Shield standard benefit option as the basis for determining permitted age and gender adjustments to the high-value tax's dollar thresholds. The comptroller general must report the results to the Senate Finance Committee and the House Ways and Means Committee within 18 months after the legislation's enactment.
Alex Brosseau is a senior manager in the Tax Policy Group of Deloitte Tax LLP’s Washington National Tax office.
For additional information about these items, contact Mr. Brosseau at 202-661-4532 or firstname.lastname@example.org.
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