To prepare for the new excise tax on so-called Cadillac high-cost health insurance plans, the IRS is asking for comments on proposed approaches to creating guidance on issues involving the tax when it becomes effective in 2018 (Notice 2015-16). The notice focuses on the definition of “applicable coverage,” how to determine the cost of applicable coverage, and applying the annual dollar limit to the cost of applicable coverage. The notice does not discuss calculation or assessment of the tax, but the IRS says that, before issuing proposed regulations, it expects to release another notice that will invite comments on those issues.
Sec. 4980I, enacted as part of the Patient Protection and Affordable Care Act, P.L. 111-148, imposes an excise tax on insurers (including employers with self-funded plans) if the aggregate value of employer-sponsored health insurance coverage for an employee (including, for purposes of the provision, any former employee, surviving spouse, and any other primary insured individual) exceeds a threshold amount. The tax is equal to 40% of the excess benefit, i.e., the aggregate value that exceeds the threshold amount. For 2018, the threshold amount is $10,200 for individual coverage and $27,500 for family coverage, multiplied by the health cost adjustment percentage (as defined in Sec. 4980I) and increased by the age and gender adjusted excess premium amount (also defined in Sec. 4980I).
Sec. 4980I(d)(1)(A) provides that applicable coverage means coverage under any group health plan the employer makes available to the employee that is excludable from the employee’s gross income under Sec. 106 (or would be if it were employer-provided coverage). The cost of applicable coverage is determined under the same rules that apply to Sec. 4980B for COBRA continuation coverage.
The IRS explained that, to determine the cost of applicable coverage, it anticipates that employer contributions to health saving accounts (HSAs) and Archer medical savings accounts (Archer MSAs), including salary reduction contributions, will be included in applicable coverage, and employee after-tax contributions to those accounts will be excluded.
In addition, the cost of on-site medical clinics will be included in applicable coverage only if they provide benefits beyond first aid to employees during working hours, although the IRS is requesting comments on how to determine whether the costs of these clinics should be included.
The IRS is also requesting comments on its proposal to exercise its regulatory authority to exclude the cost of employee-assistance programs from the cost of applicable coverage under Sec. 4980I, even though they are not specifically excluded under the statute.
Finally, the notice contains an in-depth discussion of how to determine the cost of applicable coverage under the proposed rules, which will be similar to the rules for determining the cost of coverage under COBRA. The cost of that applicable coverage for an employee will be based on the average cost of that type of applicable coverage for similarly situated employees.