IRS Issues Guidance on ‘Cadillac Tax’ and Account-Based Plans

The guidance addresses calculating the valuing of HSAs, FSAs and HRAs

Stephen Miller, CEBS By Stephen Miller, CEBS August 11, 2015

The IRS issued Notice 2015-52, the agency's second request for information related to the upcoming excise tax on high-value health plans, often called the "Cadillac tax." The notice was issued on July 30, 2015.

Starting in 2020 (delayed from 2018), the Affordable Care Act (ACA) will impose a 40 percent nondeductible tax on employer-sponsored coverage above an established value threshold—$10,200 for employee-only and $27,500 for family coverage—which after 2018 will be indexed for inflation. The threshold includes total premiums paid for health plan and wellness program benefits, including employer- and employee-paid (via salary deferral) contributions to health savings accounts (HSAs) and flexible spending accounts (FSAs), and employer contributions to health reimbursement arrangements (HRAs).

Earlier this year, the IRS issued Notice 2015-16, which dashed hopes that employee contributions to these accounts would be excluded from the excise tax threshold. The notice stated that Section 4980I(d)(2)(C) of the ACA “provides for HSAs … that the cost of applicable coverage ‘shall be equal to the amount of employer contributions under the arrangement.’ For this purpose, employer contributions include salary reduction contributions.”

That view is affirmed in IRS Notice 2015-52, which focuses, in part, on the valuation of account contributions.

‘Byzantine’ Issues

Notice 2015-52 addresses what the Lockton Benefits Group, a national insurance brokerage, calls the “byzantine tax administration issues” regarding the 40 percent excise tax.

“For account-based plans, such as health FSAs, HRAs and HSAs, contributions to the account would be ratably allocated over the months in the plan year, regardless of the timing of actual contributions,” explains Lockton’s August 2015 compliance services alert. “For example, for an HRA with a $1,200 annual maximum, $100 would be allocated to each calendar month, regardless of how much is actually contributed or reimbursed in a given month.”

Notice 2015-52 also proposed that “the cost of applicable coverage of an FSA for any plan year would be the greater of the amount of an employee’s salary reduction or the total reimbursements under the FSA.”

“Health FSAs, HRAs and pre-tax HSA contributions count when determining whether the value of coverage is over the Cadillac tax threshold. And each additional program contributing to a Cadillac tax calculation makes administration of the tax much more difficult,” Elizabeth Vollmar, JD, vice president of Lockton Benefit Group’s compliance services practice, told SHRM Online. “Eliminating these programs is likely to be one of the first solutions an employer will try to prevent a Cadillac tax problem,” she warned.

Triggering the Excise Tax

An August 2015 analysis by the Kaiser Family Foundation shows, assuming annual premium increases of 5 percent and taking into account plan premiums plus employer contribution to HSAs and HRAs, then:

In 2018, 16 percent of U.S. employers would have at least one health plan hitting the $10,200 Cadillac tax threshold for single-only coverage. But if contributions to FSAs are included under the threshold, then 26 percent of employers would exceed that threshold.

In 2023, when the threshold rises to $11,800 for single-only plans, 22 percent of employers would hit the threshold if FSAs were not factored into the calculation, but 30 percent of employers would if FSAs are considered.

In 2028, with a threshold of $13,500 for single-only plans, 36 percent of employers would trigger the threshold if FSAs were not included but 42 percent would if FSAs are considered.

FSA Rollover Questions

An online post by the Employers Council on Flexible Compensation (ECFC), which represents account-based benefit plan sponsors, also pointed out issues the IRS raised concerning how the excise tax would treat allowable amounts carried over in an FSA from year to year:

To avoid the double counting associated with taking salary deferral amounts that are carried over from one year to another year into account in determining the cost of coverage in both the year of contribution and the subsequent year, which would be the result under the general rule outlined above, Treasury and IRS are considering providing a safe harbor. Under this safe harbor, the cost of applicable coverage for the plan year would be the amount of an employee’s salary reduction without regard to carry-over amounts.

“Employers are looking at all options to keep the health plans they offer below the threshold for triggering the excise tax on high-cost health plans,” Bill Sweetnam, ECFC’s legislative and technical director, told SHRM Online.

“Since FSAs, HSAs and other defined contribution health plans are counted toward the excise tax threshold, employers may stop offering these types of health arrangements as a means of avoiding the excise tax, instead of further reducing benefits under the employer’s traditional indemnity health plan,” he noted. “This would be an unfortunate result for employees, since these [accounts] are an effective way for employees to pay for health care costs that they may have to shoulder due to higher deductibles and co-pays.”

Looking Ahead

A growing coalition is supporting a bill to repeal the Cadillac tax,” and Vollmar said Lockton is “cautiously optimistic that may actually happen. If the tax were repealed, employers would be spared the financial and administrative agony associated with it.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

Related SHRM Article:

Business–Labor Coalition Seeks to Repeal ‘Cadillac Tax,’ SHRM Online Benefits, July 2015

Cost Control, Behavior Change Top Health Agendas for 2016, SHRM Online Benefits, August 2015

Related Resources:

IRS Again Solicits Input on Cadillac Tax: Procedural and Payment Issues, Lockton Benefit Group, August 2015

ACA Cadillac Tax Guidance Addresses Health FSAs and More, Practical Law/Thomson Reuters, August 2015

IRS Issues Additional Cadillac Tax Guidance, Buck Consultants, August 2015

IRS Issues Second Guidance on Cadillac Tax, Ballard Spahr LLP, August 2015

The “Cadillac Tax”: A Tankful of Issues, McGuireWoods LLP, August 2015

IRS Notice Provides Additional Information on Cadillac Tax, Employers Council on Flexible Compensation, July 2015​


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